Bargain Shares: A trio of value plays

A good example is Palace Capital  (PCA:284p), a high-yielding regional commercial property Reit with a portfolio bias towards regional offices, industrial warehouses and retail warehouses. A key bull point when I initiated coverage, at 218p, was the potential for Palace to deleverage its balance sheet through asset sales at favourable prices (Alpha Research: ‘A Reit royal value play’, 11 March 2021).

By realising £31.5mn of proceeds through the sale of 14 commercial properties in the 12 months to 31 March 2022, Palace’s management has overdelivered on their £30mn target. Moreover, the disposals have been made 20 per cent above book value, highlighting conservative carrying values.

Sales at the group’s Hudson Quarter residential development in York have outperformed, too, realising £27.4mn from 80 apartments in the 12-month period. A further nine flats are under offer (aggregate value of £3.7mn) which leaves 38 remaining. Group net debt has been slashed 38 per cent to £73.6mn, implying a net loan-to-value ratio of 28 to 30 per cent. The outperformance doesn’t end there.

Palace delivers royal performance

• Analysts upgrade full-year pre-tax profit and earnings per share (EPS) estimates by 21 per cent to £7.5mn and 16.3p
• Annual dividend per share of 13.25p declared, 10 per cent ahead of forecast, and 15.2p payout forecast in 2022/23

Another bull point is the active management of the portfolio. Palace has not disappointed on that score, completing 55 lease events on 319,000 square feet (sq ft) of space at an average of 11 per cent above estimated rental value (ERV). This helped boost European Public Real Estate Association (EPRA) occupancy rates from 86.4 to 88.5 per cent, with 97 per cent of rent collected in the period.

The combination of asset sales and acquisitions – Palace recycled £10.25mn of cash to purchase a 21,852 sq ft refurbished office building in Maidenhead on a 6.83 per cent net initial yield – means that the group now has 36 properties with a greater weighting to higher-quality assets.

The aim now is to rebalance the portfolio as follows: core assets offering rental and capital growth potential (50 per cent weighting); value add/asset management properties (40 per cent); and development assets (10 per cent). The current split is 30 per cent core, 58 per cent value and 12 per cent development. A major benefit of the repositioning will be to drive a progressive covered dividend – Arden Partners has raised its dividend forecast by 10 per cent to 15.2p in the new financial year. Two high-quality income producing assets have been identified in accordance with this strategy.

Sensibly, the board is looking at closing the 24 per cent share price discount to EPRA net asset value (NAV) of 370p (Arden Partners and Shore Capital estimates) and is considering a range of strategic options including a return of capital to unlock value in the business. Add to that a prospective dividend yield of 5.4 per cent, and it’s not difficult to see why the shares have passed through the 280p target I outlined six months ago (‘Reit time to back a value property play’, 10 October 2021).

The re-rating should have further to run – Arden Partners edged up its target to 335p and Shore Capital has fair value at 364p. Halfway in between seems a sensible objective, so 350p is my new price target. Buy.

Augmentum in the grove

• Latest fundraise by portfolio company Grover implies £24.1mn valuation uplift on Augmentum’s stake
• Acquisition of investee company interactive investor by Abrdn to complete in current quarter

Augmentum Fintech (AUGM:138.5p), the first publicly-listed fintech fund in the UK, has delivered yet more portfolio gains from its portfolio of 24 investee companies.

Grover, the Berlin-headquartered technology rentals platform, raised €60m (£50mn) in a Series B funding round in April 2021 and has now completed a Series C funding round, raising a total of $330m (£253mn) in debt and equity.

Augmentum first invested €6mn in Grover in October 2019, and has since made a further €3mn investment. The latest funding round implies the stake is now worth £42.7mn (23.5p a share), an uplift of £24.1mn on the £18.6mn carrying value at 30 September 2021/

Augmentum’s chief executive, Tim Levene, highlights the strong operational progress being made by Grover, noting that the company is the pioneer and leader in technology rental subscription in Europe – it now has 1mn registered users – so has been ideally placed to benefit from a major shift in the way that consumers are using and accessing technology, driven both by economics and the circular economy. Proceeds from the fundraise will be used to expand Grover’s range of devices and to encourage more businesses onto its platform. The business is also expanding in North America.

In combination with the pending £1.5bn acquisition of share trading service interactive investor (II) by Abrdn (ABDN), which is expected to complete in the current quarter and realise £36.7mn of cash for Augmentum, the implied valuations represent an increase of 14.3p a share over the group’s last published NAV of 142.1p per share (after performance fees) at 30 September 2021.

For a company that has delivered an unrealised internal rate of return (IRR) of 21.5 per cent per year on invested capital since IPO, the 11.5 per cent discount to spot NAV per share is harsh. Moreover, there should be additional valuation uplifts from some of Augmentum’s other 22 portfolio companies when the group reports annual results in June.

I included the shares, at 102p, in my market-beating 2019 Bargain Shares Portfolio, and view the 14 per cent share price pullback since the half-year results (‘Primed for material uplifts’, 22 November 2021) as a repeat buying opportunity. Buy.

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

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. 

Note 4: Simon advised selling Driver's shares at 27p a shares ('On the results beat', 29 March 2022). The selling price is used in the performance table. 

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.

Inland land sales overshadowed by departure of MD

• Managing director Gary Skinner has employment contract terminated
• Two land parcel sales complete

Shares in Inland Homes (INL:42p), a south-east England-focused housebuilder and brownfield land developer, have been knocked by news that group managing director (MD), Gary Skinner, has had his employment contract terminated. Skinner held the position for six years and has been a board member for the past four years. The board is not elaborating further.

The news overshadowed positive developments in deleveraging Inland’s balance sheet. The group has completed the sale of a 206-plot land parcel at the former Telephone Exchange in Staines to a private housebuilder and a 74-plot parcel of land at its Garden Park Village in Basildon, too. Inland’s net debt reduced from £148mn to £118mn last year and analyst Adrian Kearsey at house broker Panmure Gordon expects it to fall below £100mn by 30 September 2022, implying a far more comfortable level of gearing in relation to EPRA net tangible assets of £246.4mn (107.84p a share).

Kearsey also expects current year pre-tax profit to rise from £13.3mn to £14.4mn to produce EPS of 5.1p, having reined in profit expectations (from £19.9mn) following the 2021 annual results due to ongoing cost inflation on contract margins. This means that the shares are rated on a forward price/earnings (PE) ratio of eight and trade 60 per cent below tangible NAV. On both measures this is a low rating, so much so that Inland could be a bid target.

I included the shares, at 57.75p, in my 2019 Bargain Shares Portfolio, and last reiterated that advice at the same price when I expected a strong profit recovery and further reductions in debt levels to spark a re-rating (‘Built on solid foundations’, 5 January 2022). However, the combination of the earnings downgrade and the MD’s departure has clearly knocked confidence and it may take time for investors to regain their nerve. Hold.

■ 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.