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Bargain shares: On the results and M&A beat

Our small-cap stockpicking expert highlights four investment opportunities including two bid targets
Bargain shares: On the results and M&A beat

One of the strongest drivers of share prices is positive earnings momentum.

Liverpool-based Anexo (ANX:146p), a provider of a litigation claims processing focused on the recovery of credit hire and repair costs for impecunious non-fault motorists involved in road traffic accidents, fits the bill. Analysts not only upgraded full-year earnings estimates ahead of the half-year results last September, but a bullish pre-close update has prompted low double-digit earnings per share (EPS) upgrades to 16.7p, 19.9p and 20.6p for the 2021 to 2023 financial years, too.

A sustained recovery in Anexo’s core credit hire division (driven by strong growth in motorcycle courier market and withdrawal of rivals due to Covid), and the reopening of courts (which has enabled faster settlement of claims) means both units are trading well ahead of previous runs rates. The group is also actively engaged with 15,000 claimants who are pursuing claims against German carmaker VW in relation to the emissions scandal. Panmure Gordon estimate these claims could generate £16m of operating profit for Anexo, a sum that’s not embedded in forecasts for the £172m market capitalisation company.  

I continue to see upside to my 200p fair value target, having included the shares, at 136.9p, in my market beating 2021 Bargain Shares Portfolio


2021 Bargain Shares Portfolio Performance

Company nameTIDMMarketOpening offer price 05.02.21Bid price 24.01.22 DividendsPercentage change (%)
Vietnam Holding (see note one)VNHMain201.4p312p0.0p65.7%
San Leon EnergySLEAim27.5p40.75p0.0p48.2%
Duke RoyaltyDUKEAim29p37.5p2.25p37.1%
Wynnstay GroupWYNAim424p530p15.0p28.5%
Ramsdens RFXAim142.8p173p0.0p21.1%
Springfield PropertiesSPRAim135.6p152p5.75p16.3%
Canadian General InvestmentsCGIMain3,611c4,100c88c16.0%
Downing Strategic Micro-Cap DSMMain69p67p0.8p-1.7%
Arix BioscienceARIXMain177p123p0.0p-30.5%
Average      20.8%
FTSE All-Share Total Return  7,1358,160 14.4%
FTSE Aim All-Share Total Return  1,3841,252 -9.5%

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. Latest prices at 3.15pm on 24 January 2022.


Ignore opportunistic bid for CIP Merchant Capital

  • 55p a share mandatory cash offer pitched 37 per cent below NAV

CIP Merchant Capital (CIP:56p), a Guernsey-based closed investment company that takes a private-equity-style approach to investing, has received a mandatory 55p a share cash bid from Corporation Financière Européenne S.A. (CFE) after the company’s largest shareholder raised its stake from 29.8 to 31.8 per cent. It’s easy to ignore given the offer is pitched 37 per cent below CIP’s last reported book value of 87.73p a share.

CFE now controls 17.5m of the 55m shares in issue and is trying to acquire the remaining 37.5m shares for £20.6m even though they are backed by net assets worth £32.9m. Moreover, I estimate CIP’s net asset value (NAV) of £48.2m includes £8.3m of cash following profitable realisations; a £7.6m stake in CareTech (CTH) , a heavily asset-backed provider of social care services; a £6.8m stake in Milan-based digital marketing company Alkemy S.p.A. (It:ALK); a £2.7m shareholding in EKF Diagnostics (EKF:83p), a £320m market capitalisation point-of-care business; and £3.1m investment in Orthofix (US:OXIX), a US$640m (£475m) market capitalisation medical devices company. 

Effectively, CFE could sell those four liquid stakes and use the proceeds to fully fund the mandatory offer, leaving CFE with £27.7m worth of CIP’s assets (including £8.3m cash), or three times the amount CFE bought its own stake for. If CFE wants to buy out CIP’s shareholders, then it should raise its cash offer to a sensible level and one that accurately reflects the value of CIP’s underlying investments.

Admittedly, the shares are still trading around the entry point in my market-beating 2020 Bargain Shares Portfolio, and are unchanged since I reiterated that advice last autumn (‘Bargain shares: Exploiting valuation anomalies’, 5 October 2021). Value will out itself in the end and I continue to rate the shares a buy.


Driver reined in profit growth expectations

  • Annual pre-tax profit declines a fifth to £2m, but annualised pre-tax profit hits £3.5m in the fourth quarter
  • 2021/22 EPS forecast to rise from 2.3p to 4p to support a 16 per cent hike in the payout to 1.75p a share
  • Net cash of £6.5m (12.5p a share) and untapped £5m debt facilities

Consultancy group Driver (DRV:46.5p) delivered annual results that were well flagged up in a pre-close trading update, and has made a relatively positive start to the 2021/22 financial year.

However, analysts at house broker Singer Capital Markets reined back current year pre-tax profit estimates from £3.2m to £2.7m to factor in some level of Covid-19 disruption and a typical lag between new hiring and revenue generation. That still represents 35 per cent year-on-year profit growth, but the outcome will be weighted to the second half to 30 September 2022 which increases risk.

That said, having rationalised the cost base of the group’s two problematic divisions (Asia Pacific and The Middle East), realigning headcount to revenue after both businesses were impacted by clients holding back on projects during the pandemic, finance director David Kilgour is budgeting for current year break-even in Asia Pacific (from an operating loss of £0.4m) and a modest profit in The Middle East (from a loss of £0.7m). Furthermore, by refocusing on U.A.E. and hiring additional expertise in the oil & gas sector for specific projects, The Middle East division is building on a pipeline of projects that are now maturing into live work.

A recovery in both regions is important as they have held back the group result and overshadowed what remains an impressive performance from Europe and The Americas. For example, Driver’s new operation in Madrid has enabled the group to take on work from Spanish speaking Latin America in conjunction with its new profitable office in New York. Operations in Paris, Holland and Germany continue to perform well, too. The division increased segmental annual operating profit (pre-central overheads) by a quarter to £4.9m on 10 per cent higher revenue of £34.2m.

The key is to get the top line moving in a meaningful way so that Driver can benefit from the operational leverage of its business, which now has a greater focus on lucrative high-margin dispute resolution work. However, investors appeared to have cooled on this possibility as the shares have succumbed to profit taking after rallying from 55p to a high of 69p following the pre-close trading update (‘Bargain Shares: Operationally geared for a strong profit recovery’, 21 October 2021).

At the current price, Driver’s shares are rated on a modest forward price/earnings (PE) ratio of 11.5 and offer a prospective dividend yield of 3.8 per cent. If management delivers on the reined back forecasts then expect a strong re-rating to unfold, the caveat being that with profits second-half weighted the price is likely to move sideways until the next trading update. Hold.


Arcontech in bargain basement territory

  • Loss of two customers leads to earnings downgrades
  • Analysts expect EPS to fall by from 7.9p in 2020/21 to 6p
  • £4.4m enterprise value equates to 5.5 times operating profit

Shares in Aim-traded financial software provider Arcontech (ARC:74p) have been massively de-rated since the company issued a profit warning in late November after one customer decided to scale back its market data spend and another decided not to renew its contract because it is switching to a solution in a legacy, bundled contract.

The two changes are unrelated, but in terms of revenue they account for £0.3m of Arcontech’s last reported annual revenue of £3m. House broker finnCap lowered its revenue estimates by 6 and 11 per cent to £2.8m and £2.9m, respectively, for the 12 months to 30 June 2022 and 2023.

Furthermore, the company’s incremental operating margin on new sales is around 60 per cent, so any contract wins or losses have an accentuated impact on profits. This explains why finnCap cut its current year pre-tax profit estimate by 17 per cent to £0.8m and now only expects a flat result in the 2022/23 financial year. On this basis, EPS to fall by from 7.9p in 2020/21 to 6p.

Arcontech’s strong defensive characteristics (recurring licence fees account for 93 per cent of annual revenue) had been a major bull point, so the loss of two customers has clearly undermined investor confidence. The timing is incredibly frustrating, too. That’s because the company’s small sales team has been strengthening the qualified pipeline of potential prospects, and the directors note “renewed client interest in new business projects”. Travel restrictions during the Covid-19 pandemic had made converting the robust pipeline of opportunities difficult in the near term, but as these restrictions are now being lifted that should augur well for the company to make up the lost ground. This is still a realistic possibility in my view.

Furthermore, the de-rating has been so savage since I covered the half-year results (‘Bargain shares: On the hunt for value’, 6 September 2021), that Arcontech’s £5.4m (40.5p) net cash pile now equates to more than half its £9.8m market capitalisation. This means a business that is still making £0.8m operating profit and generating free cash of £0.6m a year is being valued on a cash-adjusted PE ratio of 5.5. FinnCap is pencilling in a current year annual payout of 3p a share, which gives a prospective dividend yield of 4.1 per cent. The free-cash-flow yield is more than 6 per cent.

The shares are now firmly in bargain basement territory and the company is a bid target as well given Arcontech’s £4.4m enterprise value equates to only 5.5 times operating profit estimates. Recovery buy.


■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at, 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].

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