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Bargain Shares: A trio of Ben Graham Value plays

A UK and Netherlands focused energy group, a venture capital group and a distributor of sports, leisure and mobility equipment offer deep value investors an edge.
Bargain Shares: A trio of Ben Graham Value plays

·       First-half operating profit of £1.9mn as revenue trebles to £4.6mn

·       Net cash of £1.7mn from operating activities

·       Pro-forma net cash of £19.3mn (17.6p a share) following post period-end windfarm acquisition

·       Analysts upgrade pre-tax profit estimates from £3.8mn to £6.4mn, rising to £7.6mn in 2022/23

Parkmead (PMG:51p), a well-capitalised UK and Netherlands focused energy group, is ideally positioned to profit from the European energy crisis and the UK government’s pressing need to improve the country’s energy security, too.

Dutch Title Transfer Facility (TTF) gas prices more than trebled to an average of €73 per megawatt hour (MWh) in the second half of 2021, peaking at €160 per MWh earlier this month. This has had a dramatic impact on the profitability of the group’s unhedged low-cost onshore gas portfolio in the Netherlands. With the benefit of a low operating cost of $8.6 per barrel of oil equivalent (boe), and average netbacks of $73 per boe, this business reported a gross profit of £3.8mn on revenue of £4.6mn in the latest six-month period.

Post results, analysts at house broker finnCap raised their gas price assumptions from €50 to €70 per MWh, which largely explains why they upgraded their group revenue estimate from £8.6mn to £11.55mn and pre-tax profit estimate by 69 per cent to £6.4mn. However, Dutch TTF prices have settled at a spot price of €108 per MWh, more than 50 per cent above the level embedded in those forecasts. As Europe looks at alternative sources of LNG to wean itself off Russian gas imports, then wholesale prices are likely to stay at elevated levels.

Furthermore, Parkmead and its Dutch partners are planning a low-cost two-well drilling campaign (€2mn-€3mn net combined cost) which has a high geological chance of success (40 to 49 per cent) and is targeting 37.3bn cubic feet of gross gas reserves. If successful, the prospects offer a fast-track tie-in opportunity.

In addition, the economics of Parkmead’s Greater Perth Area (GPA) project in the UK Central North Sea has dramatically improved following the 45 per cent oil price surge to $115 per barrel this year. With the potential to deliver 75mn-130mn boe on a P50 basis, the net present value of the project increases by £130mn (115p per share) for every $10 per barrel increase in the long-term $60 per barrel oil price assumption.

Bearing this in mind, the directors are assessing draft commercial offers for a tie-back of the GPA project to the Nexen-operated Scott platform which would reduce the capital expenditure required and lower operating costs.

It’s worth noting, too, that Parkmead’s newly acquired Kempstone Hill Wind Farm in Scotland will benefit from a new power purchase agreement from the third quarter this year, so will profit from the large increase in electricity prices through an attractive index-linked Feed-in Tarriff.

Strip out net cash (£19.3mn), Kempstone Windfarm (£4.3mn) and Pitreadie Farm in Aberdeenshire (£6.2mn), and Parkmead’s operational businesses are in the price for £25mn, or 3.5 times annual operating profit forecasts. The shares have rallied 20 per cent since I highlighted the opportunity (‘On a war footing’, 28 February 2022), and a revisit to last autumn’s highs (64p) and beyond looks a distinct possibility. Buy.


Time to buy into a value opportunity

  • Net asset value (NAV) per share up 47 per cent to 900¢ in 2021
  • NAV of $283mn at 31 December 2021 includes $103.4mn stake in Bolt
  • Backblaze shareholding worth $43.1mn at current prices
  • Five-year internal rate of return (IRR) of 38 per cent
  • $18.6mn cash reserves at 22 March 2022

TMT Investments (TMT:490¢), a venture capital company with a portfolio of high-growth, internet-based companies, is trading on a massive 50 per cent discount to end 2021 NAV of $283mn (900¢). This is despite its investment managers delivering substantial value creation for shareholders since IPO in 2010. In fact, the portfolio has returned an internal rate of return (IRR) of 38.2 per cent over the past five financial years which compounds up to an eye-catching 404 per cent return.

To put the scale of the share price discount to NAV into perspective, TMT’s 1.3 per cent holding in international taxi and food delivery company Bolt – worth $103mn holding following a €628mn (£523mn) fundraising round in January 2022 – 9.9 per cent stake in Nasdaq-quoted cloud storage group BackBlaze (US:BLZE) – worth $43mn at latest prices, albeit $20mn below end 2021 book value – and $18mn of balance sheet are worth seven per cent more than TMT’s market capitalisation of $153mn. Both holdings could be readily sold. Factor in another $4.6mn of post year-end portfolio write-downs on eight investee companies identified as a result of the military conflict in Ukraine, and you are still getting a free ride on $99mn of investments in my pro-forma spot NAV of $258mn (822¢).

The bargain basement valuation is at odds with the potential for further realisations and valuation uplifts from TMT’s diversified portfolio of more than 50 investments. For example, TMT reported uplifts or cash exits from 14 investee companies last year including $21.8mn cumulative gains on its stakes in UK-based challenger bank 3S Money Club, SaaS provider for the field service industry Workiz, and automation and contract management software provider PandaDoc. Combined these holdings are worth $28.4mn.

I included TMT’s shares, at 250¢, in my market-beating 2019 Bargain Shares Portfolio and banked dividends of 20¢ a share, too. Having last rated the shares, at 560¢, a hold (‘Bargain hunting in the tech carnage’, 21 February 2022), I feel bottom fishers should be rewarded. Buy.


Tandem beats forecasts, but downgrade hits share price

  • Annual revenue up 10.4 per cent to £40.9mn produces 20 per cent higher pre-tax profit of £4.86mn
  • EPS of 84.1p more than 13 per cent ahead of forecasts
  • Dividend per share raised 16 per cent to 10p
  • Slower start to 2022 financial year leads to earnings downgrades and 20 per cent share price decline

Birmingham-based Tandem (TND:400p), a designer, developer, distributor and retailer of sports, leisure and mobility equipment, comfortably exceeded analyst annual earnings estimates and the board hiked the annual payout 16 per cent, too.

However, house broker Cenkos has pulled back 2022 estimates after the group reported a decline in current year orders and revenue. The downgrade reflects the impact of prevailing economic conditions and the cost of living crisis on discretionary consumer spending. Also, Tandem sources more than 70 per cent of stock from China, a country that continues to be impacted by Covid-19. In addition, travel restrictions have made it more difficult to negotiate better prices face-to-face with suppliers on existing products. Analysts have taken note and expect 2022 pre-tax profit of £3.5mn (a downgrade from £4.7mn) on revenue of £38mn to produce earnings per share (EPS) of 56.7p (from 77.6p).

That said, Tandem’s current order book of £16.4mn is still three times higher than at the same stage in 2020, albeit it is down on last year (£27.4mn) when back orders were exceptionally high. In the first 11 weeks of the 2022 financial year, revenue of £4.4mn is 7 per cent higher than in 2020, but 43 per cent down on 2021. Bicycles sales (25 per cent of group revenue) have been slower this year, but Tandem is still generating good growth from Squish, the lightweight junior bikes.

The directors also see a big opportunity in eMobility (electric bikes, mobility scooters, golf trolleys and e-scooters), a segment that increased revenue 56 per cent to £7mn (17 per cent of annual revenue) in 2021. In home and gardens, better marketing of Tandem’s own websites (25 per cent of divisional sales of £7.2mn) has reduced reliance on third-party websites, is enhancing margins and should lead to higher trading activity as the weather improves.

Admittedly, the consumer backdrop has deteriorated since I last commented (‘Tandem’s value opportunity’, 1 February 2021), as inflationary and energy price pressures make consumers more cautious. However, Tandem is still highly profitable, cash generative, boasts a heavily property-backed balance sheet and should retain net cash of £1.3mn even after factoring in its Birmingham warehouse expansion (completion in final quarter of 2022).

Following the post results markdown, Tandem’s shares trade on price-to-book value parity and a forward price/earnings (PE) ratio of seven that is half the rating of other consumer-facing competitors such as toy distributor Character (CCT). The bad news is priced in. Recovery buy.

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