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2021 Bargain Shares Portfolio Review

Simon Thompson reveals how his 2021 Bargain Share Portfolio trounced the Aim market, and updates his views on all 10 companies
2021 Bargain Shares Portfolio Review

My 2021 Bargain Share Portfolio has delivered a healthy 23.8 per cent total return to date, a respectable outcome given that the portfolio is full of Aim-traded small-cap companies and the FTSE Aim All-Share Total Return index declined 8.5 per cent during the same 53-week holding period. The portfolio outperformed its benchmark FTSE All-Share index by four percentage points, too.

2021 Bargain Shares Portfolio Performance
Company nameTIDMMarketOpening offer price 05.02.21Bid price 09.02.22 DividendsPercentage change (%)
Vietnam Holding*VNHMain201.4p322p0.0p71.0%
Duke RoyaltyDUKEAim29p41p2.25p49.1%
San Leon EnergySLEAim27.5p40.75p0.0p48.2%
WynnstayWYNAim424p560p15.0p35.6%
Ramsdens RFXAim142.8p173p0.0p21.1%
Canadian General InvestmentsCGIMain3,611c4,282c88c21.0%
Springfield PropertiesSPRAim135.6p148p5.75p13.4%
AnexoANXAim136.9p147p1.5p8.5%
Downing Strategic Micro-Cap DSMMain69p70p0.8p2.6%
Arix BioscienceARIXMain177p119p0.0p-32.8%
Average      23.8%
FTSE All-Share Total Return  7,1358,518 19.4%
FTSE Aim All-Share Total Return  1,3841,267 -8.5%

*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

 

Vietnam Holding (VNH)

Main: Share price: 324p

Bid-offer spread: 322-326p

Market value: £95.8mn

Website: vietnamholding.com

Vietnam Holding (VNH) was a little known closed-end fund listed on the Main Market of the London Stock Exchange when I spotted its potential 12 months ago. The investment manager’s expertise certainly came to the fore in 2021, when the fund produced a 63.9 per cent increase in net asset value (NAV) per share, so outperforming the Vietnam All-Share index by more than 10 percentage points.

The eye-catching returns have been made by holding a concentrated portfolio of 20 to 25 mid- to small-cap companies to play three specific secular growth trends in Vietnam:

■ Industrialisation (best-in-class manufacturers, international logistics).

■ Urbanisation (purposeful real estate, transportation, clean energy and clean water).

■ Domestic Consumerism and its enablers (sustainable retail, domestic logistics, products and finance).

The portfolio manager, Dynam Capital, follows a GARP investment process using both top-down and bottom-up analysis in its stock selection. It has appealed to both foreign investors and domestic retail investors alike as funds flowed into a country that generated 6.5 per cent GDP growth last year, and one that has been a beneficiary of the trade dispute between China and the US.

Dynam has made some astute decisions, taking gains on some banking stocks and recycling capital into smaller caps in the thriving brokerage and real estate sectors. The wider property market is expected to continue to perform well in 2022 as government-supported investment in infrastructure is accelerated. As Vietnam’s capital markets expand, this should benefit brokerage firms.

Vietnam Holding portfolio weighting by sector  
Sector weightsPortfolio weighting 31 Dec 2021Portfolio weighting 31 Dec 2020Change
Banks24.6%29.8%-5.2pp
Real estate20.3%11.0%9.3pp
Financial services17.5%3.0%14.5pp
Industrial goods and services11.4%25.7%-14.3pp
Retail10.3%9.7%0.6pp
Telecommunications8.7%9.1%-0.4pp
Food & beverage1.4%4.6%-3.2pp
Technology2.1%0.0%2.1pp
Construction and materials0.2%0.0%0.2pp
Basic resources0.0%0.0%0.0pp
Chemicals0.0%2.1%-2.1pp
Utilities0.0%2.1%-2.1pp
Cash3.4%2.8%0.6pp
Total100.0%100.0% 
Source: Vietnam Holding portfolio summary 31 December 2021, Edison Investment Research.

The investment manager’s high-conviction strategy (the top 10 stocks account for 60 per cent of the portfolio) has delivered over the long term, too. The fund's 10-year total net asset value (NAV) return of 457 per cent has beaten the benchmark Vietnam All-Share Index by almost 99 percentage points. So, with the fund outperforming, the economic backdrop favourable and the shares priced on an attractive 15 per cent discount to NAV of 381.5p a share, the pullback from last month's highs (360p) represents a repeat buying opportunity. Buy.

 

San Leon Energy (SLE)

Aim: Share price: 40.75p (suspended)

Market value: £183mn

Website: sanleonenergy.com

San Leon Energy (SLE), a Nigeria-focused exploration and production company, is in the process of increasing its 10.6 per cent interest to 44.1 per cent in the Eroton-operated 1,035 sq km Niger Delta licence, OML 18, located 500 km from Lagos, via a major capital reorganisation. OML 18’s other shareholder is Nigeria state oil company NNPC.

OML 18 could produce 50,000 barrels of per day (bopd) when a new subsea 100,000 bopd capacity Alternative Crude Oil Evacuation System (ACOES) export pipeline becomes fully operational. The ACOES pipeline runs from within the OML 18 acreage to a dedicated Floating Storage and Offloading (FSO) vessel in the open sea, approximately 50 kilometres offshore. Oil barging operations from OML 18 to the FSO commenced in late September 2021 (while awaiting availability of the pipeline), with the full ACOES – including the pipeline – expected by Eroton to become operational early this year. It will be a real gamechanger; deliveries have been running at a fraction of their full capacity due to downtime and losses due to theft and vandalism on the existing Nembe Creek Tunnel line to the Bonny Terminal.

Furthermore, OML 18 has estimated 1P and 2P (proven) reserves of over 1bn barrels of oil equivalent, so output could be maintained for 30 years or more. Eroton has an offtake agreement with Shell whereby oil is sold at spot prices with Bonny Light and Brent Crude key benchmark grades for pricing purposes. It's worth noting that Brent crude is trading at seven-year highs of US$94 (£69) a barrel, or four times OML-18's estimated cash operating costs of US$23 a barrel. It is set to generate substantial cash flows and dividends for its owners even after accounting for a 20 per cent federal government royalty on sales.

OML 18 reserves estimates
OML 18gross reserves
1P2P3P
Oil Condensate (mmbls)389576777
Gas (bcf)3,1193,2135,080
Source: San Leon Energy annual accounts.

The proposed transaction will consolidate Midwestern Oil and Gas's current shareholdings in San Leon and Midwestern Leon Petroleum Limited (MLPL) into a single holding in the former. San Leon currently has a 40 per cent equity interest in MLPL, with the remaining interest being owned by Midwestern. MLPL has a 98 per cent economic interest in Eroton which in turn owns 27 per cent of OML 18. As part of the transaction, the US$100mn loan note balance owed to San Leon by MLPL will be taken account of and eliminated from the resulting company structure.

At the same time, Eroton (in which San Leon currently has an indirect 39.2 per cent economic interest) has agreed terms with Africa Import Export Bank for a prospective US$750mn senior secured reserve-based lending facility. It will be used to refinance Eroton’s existing US$196mn debt and provide funding to acquire an additional 18 per cent interest in OML 18 from two other partners. In my analysis 12 months ago, I estimated that San Leon’s 10.58 per cent interest in OML 18 was worth US$353mn (58p a share), a valuation that’s not far off the read-through valuation of Eroton’s proposed acquisition of an additional 18 per cent stake in OML 18.

It’s clearly a highly complex transaction, hence why San Leon’s shares have been suspended since last summer pending completion of what is a reverse takeover. Indeed, the consideration for San Leon acquiring all the outstanding shares in MLPL, Midwestern's indirect debt and equity interest in Energy Link Infrastructure (the operator of the export pipeline), will be satisfied by the issue of a substantial number of new shares in San Leon to Midwestern, such that it will become the majority shareholder of San Leon.

The board expects to publish an Aim admission document for the proposed transaction by the end of February, after which trading in the shares will be restored. The capital reorganisation is well worth carrying out, as the resulting company will effectively hold a direct 44.1 per cent stake in Eroton, so bringing into sharp focus the chronic undervaluation of San Leon’s interests in OML 18 and the export pipeline, as well as its loan note holdings. Cumulatively, I estimate these are worth around US$500mn (82p a share). Buy.

 

Duke Royalty (DUKE)

Aim: Share price: 41.5p

Bid-offer spread: 41-42p

Market value: £148mn

Website: dukeroyalty.com

Duke Royalty (DUKE), an Aim-traded company that makes its money by providing capital to companies in exchange for rights to a small percentage of their future revenues, has enjoyed a sharp re-rating in the past 12 months. It has been underpinned by a strong profit rebound and astute recycling of the £32mn cash proceeds from last April’s equity raise (at 35p a share) into new portfolio companies.

In the six months to 30 September 2021, Duke produced cash revenue of £7.8mn, up 78 per cent from the prior period, made a 50 per cent higher net profit of £6.2mn, and generated free cash flow of £4.6mn. Adjusted earnings per share (EPS) of 1.39p comfortably covered the cash dividend of 1.1p a share.

Having invested £23mn in three new royalty partners in the six-month period, Duke has since secured two additional royalty partners and completed three follow-on investments into existing royalty partners, investing £38m in the final quarter of 2021 alone, a period in which it also produced record cash revenue of £3.9mn. Normalised cash revenue is around £4.4mn in the current quarter, prompting house broker Cenkos Securities to predict full-year cash revenue will double to £15.2mn to deliver EPS of 2.5p in the 12 months to 31 March 2022. Analysts have upgraded their 2022/23 forecasts, too, which point to cash revenue of £19.3mn, EPS of 3.1p and a sharp rise in the payout from 2.35p to 2.9p a share. As a sign of the directors’ confidence, the board increased the 0.55p a share quarterly dividend to 0.6p a share in the final quarter of 2021.

On this basis, the shares are trading on a forward price/earnings (PE) ratio of 13.2, offer a prospective dividend yield of 7.1 per cent and are rated on a modest 1.2 times book value, at the bottom of the historic valuation range (1.1 to 1.4 times). Moreover, with the potential for positive resets on monthly royalty payments from partners as their businesses recover from the Covid-19 pandemic, there is scope for upward revaluations in the carrying values of the portfolio companies. Buy.

Duke Royalty financial results and estimates
Year end 31 Mar 2020A2021A2022E2023E
Cash revenue (royalty/loans/equity)£10.2mn£10.9mn£15.2mn£19.3mn
Net cash from operating activities£6.8mn£8.9mn£10.4mn£14.6mn
Net debt£11.2mn£15.5mn£28.8mn£46.6mn
Adjusted earnings per share2.4p2.7p2.5p3.1p
Dividend per share3.0p2.1p2.4p2.9p
NAV per share30.9p33.3p34.0p34.5p
PE ratio17.115.216.413.2
Dividend yield7.3%5.1%5.9%7.1%
Price-to-book value1.31.21.21.2
Source: Company data, Cenkos Securities estimates (1 February 2022)

 

Wynnstay (WYN)

Aim: Share price: 570p

Bid-offer spread: 560-580p

Market value: £77mn

Website: wynnstayplc.co.uk

Specialist agricultural products supplier Wynnstay (WYN) produced a record first-half trading performance last year and one underpinned by three key factors: a strong recovery in farmer confidence, driven by higher farmgate prices; clarity provided by the EU settlement and the landmark Agriculture Act; and the benefits of having a broad spread of activities, supplying both livestock and arable farmers.

The buoyant trading prompted analysts at house broker Shore Capital to push through 15 per cent upgrades to their 2021 and 2022 pre-tax profit estimates (to £9.6mn and £10mn, respectively) last summer. Analysts then raised their 2021 pre-tax profit estimate by a further 15 per cent shortly after the 31 October 2021 financial year end.

The eye-catching trading performance was supported by a return to more normalised levels of tonnage and crop yields (which gave a boost to the group’s arable activities after a poor harvest in 2020); strong grain prices (which incentivises farmers to plant more crop to take advantage of higher prices); and higher-than-expected fertiliser volumes, partly as farmers forward purchased given the volatility in gas and fertiliser prices.

Importantly, the inflationary backdrop and supply chain pressures have been well managed without any major disruption to the business. The backdrop for the industry remains positive, with agriculture set to receive the £3bn support package from the UK government until 2024, thus giving farmers ample time to prepare for the new Agricultural Bill which will provide incentives for sustainable farming practices.

Investors have cottoned onto the positive earnings cycle, hence why the holding has produced a 35.6 per cent total return in the past year. However, trading on a 2022 PE ratio of 13.9, offering a prospective dividend yield of 2.9 per cent and rated a modest 8 per cent premium to book value of 525p a share, the valuation is reasonable enough to suggest that a return to the 2014 and 2017 all-time share price highs (685p) could be a possibility if trading remains robust. Buy.

Wynnstay Group peer group comparisons
CompanyYear endShare priceMarket capitalisation12m forward PE ratio 12m forward EV/Ebitda12-month forward dividend yield
Wynnstay October£5.70£116mn13.96.52.9%
Carr'sAugust £1.55£145mn11.77.13.2%
NWFMay£1.96£96mn11.43.93.9%
Origin EnterprisesJuly€3.81€478mn9.46.43.1%
Average   11.66.03.3%
Source: London Stock Exchange; Shore Capital (Wynnstay), Edison (Carr's Group), Panmure Gordon (NWF), Numis (Origin Enterprises)

 

Ramsdens Holdings (RFX)

Aim: Share price: 175p

Bid-offer spread: 173-178p

Market value: £54.8mn

Website: ramsdensplc.com

Middlesbrough-based Ramsdens (RFX), a diversified financial services group whose main activities encompass foreign-currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service, offers solid prospects of a strong profit recovery in 2022.

The combination of a high gold price and the need for some customers to seek short-term cash flow in what could be challenging conditions for the less affluent over the next few years should support growth in the group’s £6.8mn pawnbroking book. Lending is well diversified, with the average pledge only a few hundred pounds and on prudent loan-to-value terms.

Moreover, in the absence of national lockdowns and restrictions on foreign travel, expect millions of UK holidaymakers to jet off once again in the summer without the need for expensive Covid tests. That’s really good news for Ramsdens’ foreign currency exchange business, which catered for the needs of over 600,000 customers before the pandemic. Rivals have since exited the market, so margins earned are higher now, too.

Ramsdens’ jewellery sales were already on an upward trajectory before the pandemic hit and continue to post strong growth, helped by investment in stock, better search engine optimisation and an improved website, and a greater awareness of the investment merits of premium watches as an asset class.

So, with Ramsdens’ pawnbroking income recovering strongly, foreign-currency exchange likely to benefit from the relaxation of travel restrictions, and higher instore footfall positive for precious metals trading, analysts at Liberum forecast a recovery in this year’s gross profit from £22.3mn to £35.7mn. In turn, this should feed through to a ninefold rise in pre-tax profit to £5mn on 43 per cent higher revenue of £58.4mn. On this basis, expect EPS of 12.4p, which covers the 6.2p a share forecast payout two times. Also, with an ungeared balance sheet and £13mn (41p) of net cash on hand, selective acquisitions could give a further lift to earnings.

Trading on a forward cash-adjusted PE ratio of 10.8 and offering a 3.5 per cent prospective dividend yield, Ramsdens’ shares should offer upside well above my initial 200p target if trading pans out as I anticipate it will this year. Buy.

Ramsdens profit forecasts and leverage ratios
     
Year to 30 Sep2020A2021A2022E2023E
Sales £76.9mn£40.7mn£58.4mn£66.9mn
Ebitda£17.0mn£4.7mn£9.1mn£11.5mn
Operating profit£10.0mn£1.0mn£5.5mn£8.0mn
Operating profit margin13.0%2.5%9.4%12.0%
Net interest-£0.8mn-£0.5mn-£0.5mn-£0.5mn
Pre-tax profit£9.2mn£0.6mn£5.0mn£7.5mn
Fully diluted earnings per share 23.1p1.2p12.4p18.5p
Dividend per share2.7p1.2p6.2p9.2p
     
Leverage 2021A2022E2023E2024E
Net cash£15.9mn£13.0mn£13.1mn£14.5mn
Net cash/Ebidta94%277%144%126%
Net cash/Market capitalisation34.5%28.2%28.4%31.5%
Source: Liberum Capital, Bloomberg. All numbers are stated on a post-IFRS 16 basis (eg, net debt includes finance leases). 2020 financial results for 18 months to 30 September 2020.

 

Canadian General Investments (CGI)

Main: Share price: 2,500p (London); C$42.90 (Toronto)

Bid-offer spread: 2,480-2,520p (London); C$42.82-42.98 (Toronto)

Market value: £521mn/C$894mn

Website: mmainvestments.com

Nearly a century ago, former prime minister of Canada Arthur Meighen helped create what is today North America's second-oldest closed-end fund, Canadian General Investments (CGI). Shares in the company have been dual-listed on both the Toronto and London Stock Exchanges since 1995. It has stood the test of time.

By adopting a bottom-up approach to stock selection with a remit of generating better-than-average returns from a diversified portfolio of North American equities, investment manager Morgan Meighen & Associates has delivered a compound annual growth rate of 14.5 per cent over the past decade, in the process outperforming its S&P/Toronto Stock Exchange Composite Index benchmark by more than 5.5 percentage points each year. The C$1.2bn (£700mn) fund produced a 24.5 per cent total return last year, only marginally behind the benchmark.

The majority of the portfolio is invested in Canadian companies, although up to 25 per cent may be held in US equities. The IT sector accounts for 22.1 per cent of CGI’s portfolio, down from 28 per cent at start of 2021, as Morgan Meighen has taken significant profits on holdings to recycle into new investments, having ridden the tech boom in recent years.

For example, recent additions Interfor (CA:IFP), a play on the US housing boom (the US accounts for 80 per cent of its revenues), Brookfield Asset Management (CA: BAM.A), an alternative asset manager, and Canada’s third-largest pharmacy operator Neighbourly Pharmacy (CA:NBLY) have all proved cracking investments.

Prospects for the underperformers are looking good, too, especially for CGI’s four copper producers including new addition Copper Mountain Mining (CA:CMMC). The copper price is trading close to last year’s all-time highs and end-user demand is well supported globally by the scaling up of copper intensive green energy, transport and infrastructure programmes. That should be good news for profits and dividends, which can be recycled back to CGI’s shareholders. The fund pays out a quarterly dividend of 22¢, so the current dividend yield is 2.2 per cent.

Although CGI’s shares have performed well in recent years, the share price still trades on a 26 per cent discount to NAV of C$58, a harsh rating and one that is unwarranted given the investment manager’s outstanding track record and the portfolio’s 62.3 per cent exposure to sectors that should do well this year: real estate, energy, financials, industrials and materials. Buy.

Canadian General Investments portfolio sector weighting
Sector weightsPercentage
Information technology22.1%
Industrials19.9%
Materials18.8%
Consumer discretionary11.6%
Financials11.2%
Energy7.3%
Real Estate5.1%
Communication services2.1%
Healthcare1.3%
Cash & cash equivalents0.6%
Total100%
Source: Canadian General Investments portfolio summary 31 January 2022

 

Springfield Properties (SPR)

Aim: Share price: 150p

Bid-offer spread: 148-152p

Market value: £178m

Website: springfield.co.uk

Springfield Properties (SPR), a housebuilder focused on developing a mix of private and affordable housing in Scotland, continues to trade strongly, while the recent strategic acquisition of Tulloch Homes, a cash generative housebuilder with significant land ownership in the Scottish Highlands, looks a smart deal.

Tulloch strengthens the group’s foothold in an area of high demand, boosts the group’s private housing land bank – Springfield now controls 17,072 plots with a gross development value of £3.5bn, the equivalent of 14 years' output – and creates an opportunity for affordable housing. Importantly, Tulloch adds supply chain capabilities such as access to labour and subcontractors, no bad thing with UK labour markets tight.

The deal is earnings enhancing, too, one reason why analysts at Progressive Equity Research now expect Springfield’s EPS to increase 11 per cent to 15.9p in the 12 months to May 2022, and has pencilled in further rises to 19.2p (2023) and 20.6p (2024). Furthermore, with gearing levels comfortable – forecast net debt of £49.7mn equates to a third of NAV at May 2022 – and operational cash flow likely to more than double to £19mn next year, expect sharp hikes in the payout to shareholders. Analysts forecast dividends per share of 6.5p, 7.5p and 8p for the next three financial years.

With the company trading on a forward PE ratio of 9.4 and offering a prospective dividend yield of 4.3 per cent, the prospects of Springfield delivering 30 per cent cumulative earnings growth over the next two years and lifting NAV per share by almost a quarter to 150p by May 2024 are being seriously undervalued. Buy.

Springfield Properties earnings estimates
Year end 31 DecRevenueAdjusted pre-tax profit Earnings per shareDividend per sharePrice/ earnings ratioEnterprise valuation/ Ebidta ratioDividend yield
2020A£143.5mn£10.2mn8.2p2.0p18.312.61.3%
2021E£216.7mn£18.5mn14.2p5.8p10.67.83.9%
2022E£259.8mn£22.0mn15.9p6.5p9.46.74.3%
2023E£308.8mn£28.4mn19.2p7.5p7.85.35.0%
2024E£340.0mn£32.9mn20.6p8.0p7.34.65.3%
Source: Company data, Progressive Equity Research estimates (1 December 2021)

 

Anexo (ANX)

Aim: Share price: 149p

Bid-offer spread: 147-151p

Market value: £174mn

Website: www.anexo-group.com

Liverpool-based Anexo (ANX) is a provider of a complete litigation claims process focused on the recovery of credit hire and repair costs for the impecunious non-fault motorist involved in a road traffic accident. By offering both credit hire and legal services, Anexo has a competitive advantage over pure credit hire companies (who lack the in-house capacity to litigate a customer’s claim), and solicitors (who lack a vehicle fleet to offer to motorists).

The business has recovered strongly after taking a hit in 2020 when normal working practices for lawyers and law courts were impacted by the Covid-19 pandemic, and the spike in home working subdued road usage. Inevitably, this had effect on the ability of Anexo’s staff to agree settlements with counterparties which subdued cash collection rates.

However, the company is now motoring. A pre-close trading update revealed that both divisions are trading well ahead of previous expectations, buoyed by a sustained recovery in Anexo’s core credit hire division (driven by growth in motorcycle courier market and the withdrawal of rivals from the market), and the reopening of courts, which has enabled faster settlement of claims. In fact, analysts at Panmure Gordon pushed through low double-digit EPS upgrades of 16.7p, 19.9p and 20.6p for the 2021 to 2023 financial years.

Furthermore, those earnings upgrades exclude any contribution from Anexo’s investment in a claim on behalf of 15,000 claimants against German carmaker Volkswagen (VW) in relation to the emissions scandal. It could generate £16mn of operating profit for Anexo, and perhaps sooner than many realise. That's because The High Court in London ruled that VW's attempt to strike out the deceit element of the claims against it to be without merit. VW has already agreed a settlement with those affected by its actions in many other jurisdictions. It’s worth pointing out that Anexo is “investigating the pursuit of similar claims against other manufacturers which have potential to be of significant value to claimants and to the company".

Admittedly, Anexo’s share price has only made modest progress since I highlighted the investment potential despite the hefty earnings upgrades. However, on a 2022 forward PE ratio of 7.4 and underpinned by a near 2 per cent dividend yield, the earnings upgrade cycle is being woefully underrated. Buy.

Anexo upgraded earnings estimates
Year end 31 DecSales Pre-tax profit before amortisationEarnings per shareDividend per sharePrice/ earnings ratioEnterprise valuation/ Ebitda ratioDividend yield
2020A£86.8mn£16.1mn11.2p1.5p13.28.41.0%
2021E£106.8mn£24.4mn16.7p2.2p8.961.5%
2022E£119.5mn£29.0mn19.9p2.7p7.45.11.8%
2023E£126.2mn£31.8mn20.6p2.8p7.24.51.9%
Source: Company data, Panmure Gordon estimates (18 January 2022)

 

Downing Strategic Micro-Cap Investment Trust (DSM)

Main: Share price: 71p

Bid-offer spread: 70-72p

Market value: £35.9mn

Website: downing.co.uk

Shares in Downing Strategic Micro-Cap Investment Trust (DSM) performed well until early September, rising from my advised 67.5p entry point to a high of 89p. A 15.5 per cent rise in the trust’s NAV to 93.7p in the six months to 31 August 2021 explains why. The subsequent share price reversal partly reflects the 6 per cent decline in NAV per share to 88.1p since late summer, but mainly a dramatic widening of the share price discount to NAV from 5 to 19.5 per cent.

The main reason for the decline in Downing’s NAV is the performance of electronics equipment group Volex (VLX). The fund’s holding of 1.99m shares accounted for 17 per cent of NAV at 31 August 2021, but only 12.5 per cent now. Shares in Volex had rocketed from 75p to 495p after Downing’s manager Judith MacKenzie first invested, the performance driven by earnings upgrades. However, the company’s share price has weakened significantly since the autumn, shedding 45 per cent of its value. The de-rating in both Downing’s and Volex’s share prices looks overdone from my lens.

Firstly, Volex’s is trading on a modest PE ratio of 14 for the 12 months to 31 March 2022, falling to 12.8 the year after, even though the business is showing resilience in its key sectors, high utilisation rates and appears to be navigating supply chain issues well. Increased volumes and an expanding product range are boosting sales into the electric vehicle sector, Volex’s med-tech division has returned to pre-Covid levels of activity (due to pent-up demand and less restricted access to hospitals), and the consumer electricals business is benefiting from a recent acquisition.

Secondly, around 20 per cent of Downing’s portfolio is invested in three companies I am especially keen on: Hargreaves Services (HSP), a diversified industrial services group and brownfield land developer that is now reaping the upside from a strategic transformation over the past four years, and 2021 Bargain Shares constituents Ramsdens (RFX) and Duke Royalty (DUKE). In addition, 2.7 per cent of the fund is invested in Venture Life (VLG), a developer, manufacturer and distributor of products for the self-care markets that offers material recovery potential.

I also note that Downing had £6mn of cash at the last balance sheet date. The board have used £0.5mn of that cash pile to make NAV per share accretive share buybacks, but that still leaves around £5m of the current NAV of £44.5mn (88.1p per share) in cash to hunt down bargains following this year's market sell-off. Buy.

 

Arix Bioscience (ARIX)

Main: Share price: 119.5p

Bid-offer spread: 119-120p

Market value: £154mn

Website: www.arixbioscience.com

Arix Bioscience (ARIX), a global venture capital company, is the laggard in the portfolio after investor sentiment was hit by a reversal in the share prices of several of its Nasdaq-quoted investee companies. Major management changes may have unsettled investors, too.

Using the latest market prices, Arix’s listed portfolio is currently worth £51mn (39.5p a share), a sum that accounts for less than a quarter of my spot NAV estimate of £239mn (185p a share). The unlisted portfolio has a pro-forma valuation of £60mn (46.5p a share) and Arix has net cash of around £127.8mn (99p a share) after accounting for £30mn of investments made in the second half of 2021, estimated operating expenses of £2.5mn during the six-month period, and £3.5mn of share buybacks. This means that the cash pile backs up 83 per cent of the company’s £154mn market capitalisation, so the unlisted and listed portfolios are in the price for only £26mn even though they have a combined value of £111mn.

That’s a harsh valuation considering the potential for upside from a number of investments that have been announced since Arix’s managing director, Mark Chin, rejoined the company last summer. Chin previously led exits of portfolio companies VelosBio (acquired by Merck for $2.75bn) and Amplyx Pharmaceuticals (acquired by Pfizer) during his previous spell as the company's investment director.

Other board room changes include the appointment of Sir Michael Bunbury as non-executive director. Formerly chairman of HarbourVest Global Private Equity, BH Global and JP Morgan Claverhouse Investment Trust, Bunbury brings a wealth of experience to Arix. In addition, former chief operating officer Robert Lyne, who joined the company in April 2017, became interim chief executive in April 2021 and took on the role permanently last October. In the same month, David Cristina joined Arix as a secondee from Fosun International where he was head of Fosun's European healthcare investment team.

Arix Bioscience investment portfolio (9 February 2022 estimates)
Investee company ValuationValue per share
Amplyx£1.2mn0.9p
Artios£25.3mn19.6p
Atox Bio£1.8mn1.4p
Aura (US:AURA)£20.0mn15.5p
Autolus (US:AUTL)£1.7mn1.3p
Depixus£8.0mn6.2p
Disc Medicine£8.1mn6.3p
Gensight (FR:SIGHT)£6.8mn5.3p
Harpoon Therapeutics (US:HARP)£9.3mn7.2p
Imara (US:IMRA)£2.1mn1.6p
LogicBio Therapeutics (US: LOGC)£1.5mn1.1p
Pyxis Oncology (US:PYXS)£9.6mn7.4p
Quench Bio£0.3mn0.2p
Sorriso Pharmaceuticals£9.8mn7.6p
STipe Therapeutics£2.9mn2.2p
Legacy assets£2.4mn1.9p
PORTFOLIO VALUE£111mn85.7p
Pro-forma net cash£128mn98.9p
TOTAL INVESTMENTS£239mn185.3p
Source: Arix Bioscience 2020 annual report, 2021 interim accounts, London Stock Exchange and Nasdaq filings. Investors' Chronicle estimates using latest open market prices of listed holdings and book values (30 June 2021) of unquoted private investments. 

 

New investee companies offer investment upside

The new management team has been busy investing Arix’s cash pile in some promising investments.

Last autumn, Arix invested £8.1mn in Disc Medicine, a clinical-stage company focused on developing novel therapies to treat serious and debilitating hematologic disorders. Based in Boston, Massachusetts, the company has built a portfolio of first-in-class therapeutic candidates with the potential to address a spectrum of hematologic diseases, ranging from severe orphan conditions to widely prevalent conditions.

Shortly before the 2021 financial year-end, Arix invested £9.8mn for a 26 per cent stake in Sorriso Pharmaceuticals, a biotechnology company that is advancing a pipeline of disease-modifying antibodies for the treatment of inflammatory disease, including Crohn's disease and ulcerative colitis. The Sorriso platform generates potent antibodies that can be delivered orally and are designed to maintain activity throughout the intestinal system. Sorriso is led by Ciara Kennedy, former boss of Amplyx Pharmaceuticals, a portfolio company of Arix until its acquisition by Pfizer in April 2021.

Arix also invested a further £6.3mn in portfolio company Artios Pharma’s oversubscribed $153mn Series C financing round last summer. Artios is developing precision medicines for the treatment of cancer and has attracted the attention of big pharma, having entered a research collaboration with Novartis to discover next-generation DNA damage response targets to enhance its Radioligand Therapies. Arix’s 8.8 per cent stake in Artios is worth £25.3mn. Artios’ management team is being backed by some shrewd investors, having previously been instrumental in AstraZeneca’s discovery of Lynparza, a treatment for advanced ovarian cancer.

In addition, Arix has invested a further £2.4m in Depixus, a biotechnology company that is developing a unique technology for the fast, accurate, and straightforward extraction of multiomic information from DNA, RNA, and proteins. Funds from the financing are being used to develop Depixus’ proprietary instrument system, workflows, and reagents towards commercial launch. At the tail end of last year, Depixus completed an oversubscribed Series A financing which raised €30.6mn (£26mn), implying Arix’s fully diluted 14.2 per cent stake is worth £9mn, or £1mn more than at the half-year end.

It’s worth noting, too, that not all the listed portfolio has headed southwards. In October 2021, investee company Aura Biosciences (US:AURA) listed its shares on the Nasdaq at US$14. They are now worth US$18.20 which values the stake at £20mn, implying a 70 per cent uplift on Arix’s last reported carrying value of £11.7mn. Aura is a clinical-stage oncology company that is developing a novel technology platform based on virus-like drug conjugates to target and destroy cancer cells selectively, while activating the immune system to create long lasting anti-tumour immunity.

 

Priced for a positive outcome

The bottom line is that cash in the bank and the valuable Artios stake back up all of Arix’s market capitalisation of £154mn, so you are getting a free ride on the whole listed portfolio worth £51mn and £35mn of other unlisted holdings, too. The de-rating has gone too far, and bottom fishers should be rewarded. Buy.

 

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