Join our community of smart investors

Four bargain shares where good news is rewarding investors

No fewer than four of Simon Thompson’s small-cap picks for 2023 have made important announcements, all of which support his investment thesis
February 23, 2023

There has been a raft of positive newsflow from companies in my 2023 Bargain Shares Portfolio.

Chip designer and maker CML Microsystems (CML: 545p) has just been granted planning permission at its 29-acre site located at Oval Park, Maldon. Last autumn, the group signed contracts (contingent on planning permission being granted on 13 acres of surplus land) with Maldon Crystal Salt and Tecniq, a designer of engineered, high-value products for high-end cars, to relocate to the site, thus providing the cornerstone of the development of Oval Park. The planning news has been well received; shares in the £86mn market capitalisation company have now kicked on 10 per cent on my entry level in this year’s portfolio.

However, they are still only rated on a cash-adjusted price/earnings (PE) ratio of 13 for the 12 months to 31 March 2024, after factoring in a 143p-a-share net cash pile and the likely windfall from the land at Oval Park. Importantly, the rerating should have further to run, especially as we can expect further robust trading updates for the 2023 financial year, and beyond, driven by the secular organic growth drivers of CML’s business. These include increasing demand for data to be transmitted faster and securely, the upgrading of telecoms infrastructure, and growing demand for commercial wireless networks for voice and data communications. Buy.

 

LDG’s buy-back programme is a sensible move

  • Board asking for authority to buy back up to 20 per cent of the shares in issue
  • Net cash equates to 92 per cent of market capitalisation
  • £35.4mn value of three listed investments in the price for only £7.5mn

Investment company Logistics Development Group (LDG: 15.85p) will ask shareholders at a general meeting on 6 March 2023 to approve a net asset value (NAV) per share accretive buy-back programme of up to 20 per cent of the 561.8mn shares in issue, but is limiting the buy-back to £15mn.

It makes sense to do so given that LDG has net cash of £81.5mn (14.5p), a sum equating to 92 per cent of its market capitalisation of £89mn, which means that shareholdings in Finsbury Foods (FIF), Alliance Pharma (APH), and a see-through 11.1 per cent stake in SQLI S.A. (FR:SQI), a leading pan-European digital transformation business, are in the price for £7.5mn, or 79 per cent less than their combined valuations of £35.4mn (6.3p). That’s harsh given that DBay, the group’s investment manager and shareholder, is making some astute calls, as I highlighted in my recent analysis.

Furthermore, if the board spends £15mn repurchasing 94mn shares at the current offer price, of 16p, then it would add 1p a share to spot NAV of 20.8p, thus creating value for LDG’s remaining shareholders as well as providing support for the share price. LDG’s share price is up 8.5 per cent on my entry level in this year's portfolio and I expect the 24 per cent share price discount to NAV to continue to narrow. Buy.

 

Cash-rich and too lowly rated

  • Net cash rises 67 per cent to £21mn since 31 July 2022
  • Net fee income (NFI) up 5.1 per cent in latest six-month trading period

Shares in Gattaca (GATC:83p), the specialist science, technology, engineering and mathematics (Stem) recruitment business, are 15 per cent higher than my advised buy-in price earlier this month, valuing the company at £26.8mn. It’s more than warranted. A first-half pre-close trading update revealed that improved working capital management has driven up net cash by two-thirds to £21mn (65p) since 31 July 2022, a sum equating to 78 per cent of Gattaca’s current market capitalisation.

Net fee income (NFI) increased 5.1 per cent to £22.7mn in the latest six-month period, split 68 per cent between contract placements and 32 per cent for permanent positions. Infrastructure, defence, energy and mobility segments, which accounted for 65 per cent of NFI in the 2022 financial year, all posted double-digit growth. This helped to mitigate more sluggish performance from Gattaca’s overseas, rail site and technology skills segments.

True, the permanent hiring business is now showing some signs of weakness. Analysts at Equity Development expect NFI to rise by 5.3 per cent to £46.5mn for the full year, below their 8.6 per cent previous growth rate. However, it still means that annual operating profit should quadruple to £2mn, albeit that is below the previous forecast of £2.7mn. The valuation is hardly exacting given that the operational business is in the price for £5.8mn, or less than three times operating profit estimates.

Moreover, the current rating fails to factor in ongoing restructuring benefits being realised and potential for NFI to make further headway to support a doubling of profits in the 2023-24 financial year for the operationally geared group. Buy.

 

Checkit’s recurring revenue and cash position beat estimates

  • Annual recurring revenue (ARR) up 28 per cent to £11.5mn, well ahead of consensus (£10.8mn)
  • Expansion in the US delivers 91 per cent higher ARR of £2.8mn
  • Net cash of £15.6mn, or £0.4mn higher than consensus

Cambridge-based technology group Checkit (CKT:28p) continues to increase its annual recurring revenue (ARR), growing this key metric by 30 per cent for the third consecutive year, as it transitions to a high-margin subscription-based model. The group’s workflow management software platform offers customers data-driven remote monitoring and automated systems surveillance to manage their teams of deskless workers. 

Contract wins with biopharma and casino customers helped Checkit’s ongoing expansion in the US. In the six-month period, the US operation increased ARR by 91 per cent to £2.8mn (to account for a quarter of the group total) and is well on track to become the largest contributor to the group. Increasing recurring revenue to the inflexion point whereby gross profit covers all cash overheads is key to driving a rerating as is careful cash management. So, it was reassuring to see Checkit’s year-end net cash position of £15.6mn (14.4p) exceed analysts forecasts.

Trading around my entry point in this year’s Bargain Shares portfolio (using the opening offer prices on Friday, 10 February), the pre-close trading update supports my investment thesis and I remain a buyer ahead of the annual results and next trading update at the end of April. Buy.

 

■ 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 £3.95 [UK].

Promotion: Subject to availability, the books can be purchased for the promotional price of £25 plus £5.75 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.