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Targeting a glaring valuation disconnect

The massive share price discount to book value of an Aim-traded finance company that holds a valuable stake in a New York-listed fintech fund is well worth exploiting
March 9, 2022
  • ThinkSmart’s sum-of-the-parts valuation almost double its current share price.
  • Analysts have an average target 82 per cent above Block's depressed stock price

The technology sector rout has driven down shares in New York Stock Exchange-listed Block (SQ:NSQ), a $58bn market capitalisation fintech fund, by 40 per cent since the start of 2022. That’s relevant to Aim-traded finance company ThinkSmart (TSL: 27p) which holds 618,750 shares in Block. The holding is now worth $62mn (44.3p a share) compared with $88.5m in early January (‘Unravelling ThinkSmart’s share price decline’, 7 January 2022).

ThinkSmart has other net assets worth £6.2mn (6p a share) including pro-forma cash of £4.8mn, so has a sum-of-the-parts valuation of 50p a share. Effectively, the holding in Block is priced into ThinkSmart’s share price at less than half the market price in New York. Moreover, it’s not as if Block isn’t delivering. Its Square ecosystem, which includes Afterpay following the merger with the Australian listed fintech group this year, increased gross profit by 54 per cent to $2.3bn in 2021. Block’s cash app has more than doubled gross profit to $2.07bn in the past two years.

Analysts have an average target price of $182 on Block’s stock, albeit that’s well shy of the $270 level the stock was trading at last autumn. However, if the price recovers to that level it would value ThinkSmart’s stake at £86mn (80.75p a share). Furthermore, with the UK company winding down its legacy leasing business, then shareholders can realistically expect some of the value in the Block holding to be returned to them as soon as the US group’s stock price more accurately reflects the intrinsic value of its fast-growing businesses.

The disconnect between ThinkSmart’s share price (27p) and its sum-of-the-parts valuation (50p) is not only anomalous, but you could more than treble your money if Block’s stock price rises by 82 per cent to that $182 target. Buy.