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Bargain shares: On the M&A beat

Our small-cap stock picker is playing the M&A upside on Abrdn's bid approach for interactive investor, and sees upside potential from three other holdings, too.
Bargain shares: On the M&A beat

Global investment group Abrdn (ABDN:257p) is in talks to acquire the J.C. Flowers backed share trading service interactive investor (II) in a rumoured £1.5bn deal. Discussions are ongoing between the parties, although II also has the option of going down the IPO route.

Augmentum Fintech (AUGM:157p), the first publicly-listed fintech fund in the UK and a constituent, at 102p, of my 2019 Bargain Shares Portfolio, holds a 3.8 per cent stake in II that was last valued at £32.6m (18p a share), representing 14 per cent of the fund’s pro-forma net asset value (NAV) of £237m (131p) following a £55m equity raise in June. A £1.5bn takeover of II would represent a 75 per cent premium to Augmentum’s read through valuation of £858m. It looks justified.

II almost doubled underlying pre-tax profit to £45.5m on revenue of £133m in 2020, and has grown revenue by almost a fifth (11 per cent underlying growth) to £76m in the first half of 2021 when net new business flows of £3.8bn lifted assets under administration to £55bn from II’s 400,000 plus retail customers. Augmentum’s shares are a low-risk way of playing the M&A upside from II, while also offering investment potential from its other fintech holdings.

 

Litigation Capital’s eye-catching gains

  • 255 per cent return on investment in a single arbitration case in only 26 months.

Litigation Capital Management (LIT:112p), a provider of litigation financing that enables third parties to pursue and recover funds from legal claims, has announced a major court award in an international arbitration case.

Funded entirely from the group’s balance sheet, Litigation Capital will receive £9.8m in revenue, a huge return on the £2.8m capital invested in the case. Moreover, it has been generated in only 26 months, in line with the litigation funder’s 10-year average project length. It’s worth noting that a further 17 of the 43 remaining cases in the directly held portfolio are now 25 months or longer in duration.

The case supports analysts’ top-of-the-range expectations that point towards pre-tax profit and earnings per share (EPS) more than doubling to A$37.7m and 23.8¢ (12.7p) on revenue of A$57.1m (£31m) in the 12 months to 30 June 2022. I maintain my 150p target price, having included the shares, at 77.5p, in my 2019 Bargain Shares Portfolio. Buy.

Simon Thompson's 2019 Bargain Shares portfolio performance
Company nameTIDMOpening offer price 01.02.19Bid price 08.11.21 or exit price (see notes)DividendsPercentage change
TMT Investments (note one)TMT250¢925¢20¢598.1%
Futura Medical (note two)FUM14.85p34p0p129.0%
Bloomsbury PublishingBMY229p363p35.6p74.1%
Augmentum FintechAUGM102.4p154.5p0p50.9%
Litigation Capital ManagementLIT77.5p111p0.71p44.1%
InlandINL57.75p56p0.85p-1.6%
Ramsdens HoldingsRFX165p150p7.5p-4.5%
Mercia Asset Management (note three)MERC29.57p27.5p0p-7.0%
Driver GroupDRV74p65p3.50p-7.4%
Jersey Oil & GasJOG205p155p0p-24.4%
Average     85.1%
FTSE All-Share Total Return index6,8528,269 20.7%
FTSE AIM All-Share Total Return index1,0231,431 39.8%

Note 1: Simon advised taking profits on TMT Investments at 580c a share to bank 140 per cent gain including dividend of 20c ('Takeovers, tender offers and taking profits', 9 September 2019), and subsequently advised buying back the shares at 318c ('On the hunt for recovery buys', 6 July 2020). 

Note 2: Simon advised taking profits on Futura Medical at 34p a share on Monday, 14 October 2019 ('Bargain Shares: golden opportunities', 14 October 2019). The selling price is used in the performance table. Current share price 35p.

Note 3: Simon advised selling Mercia Asset Management at 27.5p a share on Monday, 9 December 2019 ('Taking stock and profits', 9 December 2019). The selling price is used in the performance table. Current price 39p.

Source: London Stock Exchange opening offer prices at 8am on Friday, 1 February 2019 and latest bid prices or when Simon advised exiting the holding.

 

Bloomsbury’s tales

  • Pre-tax profit soars 225 per cent to £12.9m on revenue up 29 per cent to £100m, the best half-year results in the group’s history.
  • Confident of achieving consensus full-year estimates (pre-tax profit of £19.3m and revenue of £193m).

Bloomsbury Publishing (BMY:366p), the publisher of JK Rowling’s best-selling Harry Potter books, reported blow out half-year results after customers ordered much earlier than in previous years to ensure they have sufficient stock for Christmas and the start of the academic year. The UK’s well documented supply chain problems explains why they did so. Although analysts maintained their full-year forecasts, which factor in a modest £6.4m of second half pre-tax profit to hit consensus estimates, the earnings risk looks skewed to the upside.

More importantly, ongoing digital revenue growth has made Bloomsbury’s business more resilient as it repositions from being a consumer publisher to a digital business-to-business publisher in the academic and professional information market. The first-half pre-tax profit contribution from Bloomsbury Digital Resources (BDR) surged from £1.2m to £2.8m on 44 per cent higher revenue of £8m and the division is on track to deliver budgeted annual revenue of £15m and pre-tax profit of £5m. Bloomsbury’s 50 per cent organic growth target for BDR in the 2022/23 financial year underpins analysts’ 10 per cent earnings growth forecasts for the group.

Post results, Bloomsbury’s shares briefly hit my 400p target, having risen from the 340p mark at my last buy call (‘Targeting companies on the upgrade’, 3 June 2021). You will have also banked the final payout of 7.58p a share and a special dividend of 9.78p a share in August to lift cumulative dividend income to 35.6p a share since I included the shares, at 229p, in my 2019 Bargain Shares Portfolio.

On a cash-adjusted price/earnings (PE) ratio of 18, falling to 15.8 for the 2022/23 financial year, and underpinned by a prospective dividend yield of 2.5 per cent, run profits.

2021 Bargain Shares Portfolio Performance
Company nameTIDMOpening offer price 05.02.21Bid price 08.11.21 DividendsPercentage change (%)
Vietnam Holding (see note one)VNH201.4p328p0.0p74.2%
Duke RoyaltyDUKE29p44.5p1.65p59.1%
San Leon EnergySLE27.5p40.75p0.0p48.2%
Wynnstay GroupWYN424p480p15.0p16.7%
Canadian General InvestmentsCGI3,611c4,086c66c15.0%
Downing Strategic Micro-Cap DSM69p78.5p0.8p14.9%
Ramsdens RFX142.8p150p0.0p5.0%
Springfield PropertiesSPR135.6p140p1.3p4.2%
AnexoANX136.9p138p1.5p1.9%
Arix BioscienceARIX177p139p0.0p-21.5%
Average     21.8%
FTSE All-Share Total Return index7,1358,269 15.9%
FTSE AIM All-Share Total Return index1,3841,431 3.4%

Note One: Simon recommended tendering 30 per cent of holdings in Vietnam Holdings at US$4.4528 (322.3p) a share, and tendering 3.9 per cent in the excess application ('Exploiting a tender offer', 4 August 2021), with a view to buying back the tendered shares at the lower market price (284p offer price on 13 and 14 September 2021) when the cash distribution was made during the week of 13 September 2021. Total return reflects these transactions which have reduced the entry point to 188.3p a share.

Source: London Stock Exchange.

 

Aura IPO highlights hidden value in Arix’s unquoted portfolio

  • Arix’s holding in Aura Biosciences soars on Nasdaq IPO.

The Nasdaq IPO of Aura Biosciences (US:AURA) raised $75.6m at $14 a share and has been well received. The stock is now trading at $18.69 to value the company at $531m.

This is important for UK venture capital group Arix Bioscience (ARIX:140p), the laggard in my market-beating 2021 Bargain Shares Portfolio, which holds 1.52m shares in Aura. The stake is now worth $28.4m (£21m), a 75 per cent premium to the valuation in Arix's half-year accounts, and accounts for 30 per cent of the group's listed portfolio of mainly Nasdaq biotech stocks. This means that Arix’s £181m market capitalisation is 15 per cent less than the combined value of its £139m (108p) cash pile and the £73m (56.5p) listed portfolio. You are also getting a free ride on the group’s £53m (41p) unlisted portfolio even though it includes a conservatively valued £25.3m 8.8 per cent dilluted stake in Artios, a developer of precision medicines for the treatment of cancer that raised $153m from investors in a Series C financing round in July 2021.

Artios could receive discovery, development, regulatory and sales-based milestones of up to $1.3bn under a collaboration agreement (April 2021) with Novartis, and $860m of milestones per target from last December’s agreement with Merck. It’s more likely, though, that one of the pharma giants will bid for the company if its development programmes are successful.

Arix shares are being harshly rated, trading almost a third below spot NAV. Buy.

 

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

Promotion: Subject to stock availability, the books can be purchased for the promotional price of £10 each plus £3.25 postage and packaging, or £20 for both books plus £3.95 postage and packaging

They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.