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Bargain Shares: Exploiting information voids

Our small-cap companies expert highlights a quartet of value plays in his favoured hunting ground.
Bargain Shares: Exploiting information voids

Efficient Market Theory dictates that markets are efficient, leaving no room to make excess profits by investing since everything is already fairly and accurately priced. But it breaks down in the under researched small and micro-cap segments of the stock market.

A good example is Anexo (ANX:133p), 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. That’s because investors have yet to fully cotton on to Volkswagen’s £193mn out-of-court settlement for the Therium class action brought against the German carmaker by 91,000 emission scandal claimants.

Indeed, an out-of-court settlement looks a racing certainty for Anexo’s own action against VW (on behalf of 13,000 claimants) well before January’s court date. Arden Partners believe the £155mn market capitalisation company could earn pre-tax profit of £20mn-£25mn (after litigation funding and marketing costs) based on £3,000 to £4,000 per claim. Moreover, the proceeds secured can then be recycled into a potentially larger class action against Mercedes Benz, as well as deleveraging Anexo’s balance sheet. The windfall gains are simply not factored into current earnings estimates which already underpin bargain basement forward price/earnings (PE) ratios of 6.7 (2022) and 5.9 (2023).

 

Wynnstay’s value opportunity

  • Pre-tax profit estimates upgraded by 18 per cent at last trading update
  • Fertiliser commodity prices remain elevated
  • Further trading update scheduled for late June/early July

Shareholders in specialist agricultural products supplier Wynnstay (WYN: 610p) are guaranteed another strong trading update when the group reports interim results at the end of June/early July. It’s certainly not being priced in.

As consumers doing their weekly food shop are all too aware, the price of agricultural produce has been rising following Russia’s invasion of Ukraine. The conflict has not only led to a surge in natural gas prices (used to produce ammonium nitrate fertiliser), but disruption to supplies from Russia, a global producer of the key fertiliser ingredient, has led to fertiliser prices trebling in the past year.

They remain at elevated levels, so much so that Wynnstay prompted analysts to push through significant earnings upgrades five weeks ago. House broker Shore Capital raised its current year pre-tax profit and earnings per share estimates by 18 per cent to £13mn and 49.6p, respectively, having previously pushed through a 3 per cent earnings upgrade in March. The latest upgrade also reflects the heightened commodity price inflation the group continues to see across all its product categories.

But Wynnstay’s share price has yet to react, trading in line with the level at my last update ('Profit from soaring commodity prices’, 24 March 2022), albeit the holding has still produced a 47.5 per cent total return since I selected the shares in my 2021 Bargain Shares Portfolio. Perhaps, investors believe that the good news is baked into a current year PE ratio of 12, free cash flow yield of 9 per cent, enterprise valuation to cash profit multiple of 6.4 times and prospective dividend yield of 2.7 per cent.

I would beg to differ as the war in Ukraine has brought into sharp focus the need for domestic food security, and shorter and more reliable supply chains, positives for the UK farming industry and the core feed, arable and merchanting segments Wynnstay services. The group is also well placed to make further strategic bolt-on acquisitions, having completed the £11.5mn complementary poultry and point-of-lay pullets acquisition of Hampshire-based Humphrey Feed & Pullets. Shore Capital lowered their closing net debt forecast from £3.6mn to £2mn to factor in the higher profits expected this year.

I maintain my 685p conservative target price ahead of the next trading update. Buy.

2021 Bargain Shares Portfolio Performance
Company nameTIDMMarketOpening offer price 05.02.21Bid price 06.06.22 DividendsPercentage change (%)
Vietnam Holding (see note one)VNHMain201.4p316p0.0p67.8%
San Leon EnergySLEAim27.5p40.75p0.0p48.2%
Wynnstay GroupWYNAim424p600p25.5p47.5%
Ramsdens RFXAim142.8p203p0.0p43.0%
Duke RoyaltyDUKEAim29p35.5p2.95p32.6%
Canadian General InvestmentsCGIMain3,611c3,620c134c4.0%
AnexoANXAim136.9p132p3.0p-1.4%
Springfield PropertiesSPRAim135.6p123p7.25p-3.9%
Downing Strategic Micro-Cap DSMMain69p64p0.8p-6.1%
Arix BioscienceARIXMain177p112p0.0p-36.7%
Average      19.5%
FTSE All-Share Total Return  7,135 8,527  19.5%
FTSE AIM All-Share Total Return  1,384 1,142  -17.5%

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 

Tekcapital’s portfolio valuation gains undervalued

  • $2.5mn (£2mn) placing to fund investee companies
  • Portfolio company Microsalt receives investment from Spanish venture fund

Tekcapital (TEK:26p), an investment company focused on food technology, autonomous vehicles, smart eyewear and respiratory medical devices, has raised £2mn in a placing, at 25p a share, to fund its portfolio companies.

The equity raise was pitched at a discount to last reported net asset value (NAV) per share of 48.1c (38.5p) and prompted a 10 per cent share price mark down. It’s a massive overreaction, so much so that I see this is a strong repeat buying opportunity for multiple reasons, having included the shares, at 29.1p, in my 2022 Bargain Shares Portfolio.

Firstly, £0.4mn of the cash proceeds will be used to build commercial inventory of Microsalt and SaltMe! crisps. Salarius, a food technology business that holds a patented process to produce, Microsalt, a new natural, non-GMO, kosher, low-sodium nanoparticle-sized salt, has expanded its roll-out of SaltMe! crisps across 2,400 Kroger stores in the US. The business is generating significant sales growth through Amazon and is targeting foodservice operators, too.

Furthermore, Microsalt has just received an equity investment of $0.4mn from Spanish venture fund Tech Transfer Agrifood at a post-money valuation of $9.27mn. It means that Tek’s 73 per cent stake in Microsalt is now worth $6.8mn, or 56 per cent higher than in the company’s last accounts. Factoring in the valuation uplift and the placing, Tek has a proforma NAV of $73mn and NAV per share edges up to 48.8c (39p).

This implies the shares are trading on a 33 per cent discount, a valuation that completely ignores the potential for a bumper gain to be realised from the forthcoming Nasdaq IPO of Innovative Eyewear (US: LUCY), the US operating subsidiary of Lucyd, the first company to deliver prescription glasses with Bluetooth technology.

At the mid-point of the $5.50 to $7.50 per share valuation range, Tek’s 5.1mn shares in Innovative Eyewear are worth $33.2mn (as per Nasdaq filings on 27 May 2022 while I was on annual leave), including the conversion of a $1.2mn loan note into 0.19mn shares. In Tek’s 2021 annual accounts, the equity stake was held in the books for only $17.3mn. Even at the bottom end of the IPO valuation range, it is worth 56 per cent more than Tek’s carrying value, adding 5.5p a share to lift Tek’s proforma NAV per share to 44.5p. Buy.

 

PCF’s receives bid approach, but losses set to grow this year

  • Bid approach from Castle Trust Capital
  • Capital subscription to raise £4.2mn and open offer a further £6.85mn

The tortuous remediation process at Aim-traded specialist bank PCF (PCF:6p) is proving costly as new management put in place reporting and compliance procedures that the previous board failed to adhere to.

In the 2021 financial year, staff and operating expenses ballooned from £13.6mn to £21.2mn on relatively flat net interest income of £26.8mn. This reflected higher headcount, professional services fees and £3.6mn of expenses relating to the remediation of legacy issues, all of which contributed to a £3.1mn statutory pre-tax loss.

PCF’s loan book also reversed, falling 15 per cent to £364mn as new business was restricted to higher quality lending, hence the slight decline in net interest margin to 6.6 per cent. Unfortunately, a move into profit is not anticipated this year as the directors expect a similar level of remediation costs, and some near-term compression in lending margin due to the concentration of new lending in the top four credit grades during the Covid-19 pandemic.

To enable PCF to return to lending growth, new capital is being raised with 64.4 per cent majority shareholder Somers backing a £4.2mn capital subscription at 5p a share, a massive discount to NAV of 19.5p. Other shareholders are being offered the chance to invest £6.85mn on the same terms, too. Combined the share count could increase by 88 per cent which slashes proforma NAV to 12.6p a share on proforma equity shareholder funds of £59.9mn.

Sensibly, PCF’s directors are considering all their strategic options, and are in early-stage discussions with rival lender Castle Trust Capital in relation to an all-share offer. The caveat being that PCF’s shareholders would have a “small minority interest in the combined group”. Castle Trust Capital had equity shareholders’ funds of £92mn at its last year-end, so any offer is unlikely to be generous, if forthcoming. Holding shares in a standalone loss-making lender is an unappealing prospect, too, as the UK cost of living crisis impacts delinquency rates. In the circumstances, I downgrade my advice from hold to sell.

■ 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. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £4.50 [UK].

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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.