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Five Bargain Shares success stories

The latest news from a selection of constituents of the market-beating 2020 Bargain Shares Portfolio
May 11, 2020

Cambridge-based Xaar (XAR:55p), a leader in the development of inkjet technology and maker of piezoelectric drop-on-demand industrial inkjet printheads, has released annual results and details of the new strategic direction the group is pursuing under a new management team.

The adoption of a customer-centric business model focused on original equipment manufacturers (OEMs) is at the core of Xaar’s four-pronged strategy to reinvigorate its fortunes. Xaar will now only sell to them directly to avoid a previous conflict of interest in aftermarket sales that arose through its dual distribution model. It has re-engaged with OEMs to regain their trust, and successfully so, and is sensibly targeting sales in areas where it has a competitive advantage and offers a differentiated product.

For example, the group’s bulk printhead technology can improve specification, ink quality, reliability and also reduce costs for ink companies and OEMs, as well as providing features that are not possible with rival printhead products. The technology is particularly relevant to the following segments of the printing market: ceramics, labels, 3D and advanced manufacturing. The other benefit of this streamlined approach is that it mitigates the risk of doubtful debts and asset write-downs arising, a major recurring issue with the group’s previous management and the reason why Xaar’s underlying pre-tax loss of £9.8m in 2019 ballooned to a net loss of £71m.

I am also reassured by the focus on tighter working capital management. Inventories have halved to £16.2m, and net current assets of £37.7m (which includes net cash of £25.2m, or 35p a share) are significantly below the 2018 closing balance of £66.2m. Sweating the balance sheet, investing in the right areas, reducing costs (£8m annualised cost savings have been made and more are earmarked), and targeting segments of the print market offering strong end-user demand should help Xaar to return to profitability.

There is hidden value in the group’s balance sheet, too. That’s because Xaar holds a 55 per cent stake in Xaar 3D, the cutting-edge 3D printing business it developed. Stratasys, a leading 3D printing company, owns the balance, having paid Xaar $10m (£8m) last autumn to purchase a further 20 per cent equity stake. Stratasys has a call option (expiring in December 2022) to buy out the rest of Xaar’s shareholding for $33m (£26.6m). Xaar 3D has net assets of £15m, of which £9.3m is included in Xaar’s equity shareholder funds of £63.9m (88.5p a share).

In other words, there is potential for Xaar to create £17.3m (24p a share) of additional value for shareholders assuming Stratasys exercises its call option. I wouldn’t bet against it. And if it does Xaar will also be entitled to 2 per cent of Xaar 3D’s revenue for a period of 15 years, capped at $10m.

I suggested buying Xaar’s shares, at 36.4p, when my 2020 Bargain Shares Portfolio was published online (magazine price 38.5p) based on the group’s recovery potential. I am not the only one that sees the value on offer. Schroders star fund manager, Andy Brough, has been on a buying spree, raising the fund’s holding from 6.23 per cent to 27.36 per cent since my portfolio was launched three months ago.

The bottom line is that, at 55p, Xaar’s market capitalisation of £43m is more than 80 per cent backed by £25.3m net cash and the £9.7m carrying value of the Xaar 3D stake, so you are getting a free ride on a chunk of inventories and property assets (worth over £30m), and a valuable option on Xaar 3D being bought out at £26.6m. As operating losses narrow, and more investors become aware of Xaar’s recovery potential, the 38 per cent share price discount to book value of 88.5p should narrow markedly. Buy.

 

Exploit Metal Tiger’s hidden value

Metal Tiger (MTR:1.38p), an Aim-traded investment company primarily focused on undervalued natural resource opportunities, has announced a raft of positive newsflow since I included the shares in my 2020 Bargain Shares Portfolio.

The most interesting is the announcement from Australian Stock Exchange-listed Sandfire Resources (Aus:SFR), a A$740m (£390m) market capitalisation mining and exploration group, in relation to its exciting T3 Copper-Silver copper exploration and development project in the Kalahari Copper Belt, Botswana. Metal Tiger owns 6.57m Sandfire shares worth A$27.2m and retains a US$2m capped net smelter royalty (NSR) over T3, and a 2 per cent uncapped NSR over the rest of the Sandfire licences which includes the A4 Dome discovery (located five miles west of the T3 Project).

Bearing this in mind, the latest drilling results from the A4 Dome discovery have recorded the “best single assay result generated to date... clearly demonstrating potential for high-grade copper discoveries in the Kalahari Copper Belt”, according to Sandfire chief executive Karl Simich. Assay results are pending for half of the 25 holes drilled, and a further six holes when drilling was suspended as a safety precaution due to Covid-19.

The point being that once Sandfire recommences drilling, it will be able to publish an inferred resource estimate that “will finally pin a value on our 2 per cent net smelter royalty”, says Metal Tiger’s chairman Charles Hall. He adds that “the A4 Dome results also give a massive boost to our holding in the nearby Kalahari Metals Project, indicating that Kalahari are drilling in the right stratigraphy".

Interestingly, Metal Tiger has invested a further $1.5m in Kalahari Metals to raise its stake from 59.8 per cent to 62.2 per cent and was granted a 2 per cent net smelter royalty over seven wholly owned licences as part of the investment. A valuation of £2,100 sq km for the 8,595 km Kalahari Metals Project licensing area, in line with similar transaction values in the area, implies that Metal Tiger’s $4.2m cash investment could be worth three times as much. Add to that the smelter royalties and these are significant sums for a £21.5m market capitalisation company. Clearly, Metal Tiger’s chief executive, Michael McNeilly, recognises the value on offer. In the past three months, he has raised his holding from 4m to 6.5m shares.

It’s worth flagging up, too, the update from Aim-traded Greatland Gold (GGP) in relation to its farm-in agreement with a wholly owned subsidiary of Newcrest Mining (ASX:NCM) to explore and develop Greatland's Havieron gold-copper discovery in the Paterson region of Western Australia. Shares in Greatland have trebled in value since my portfolio was launched three months ago, placing a value of £765,000 on Metal Tiger’s shareholding. There has also been positive news from Australian Stock Exchange-listed Cobre Pty (Aus:CBEXX), a company offering exposure to the Perrinvale copper project in Western Australia, and one in which Metal Tiger holds a £2m stake.

I maintain my thesis that Metal Tiger’s shares, which are up 14 per cent on an offer-to-bid basis since I suggested buying in early February (opening offer price of 1.18p), are worth my sum-of-the-parts valuation of 1.95p a share, and considerably more in the event of success in the projects it has invested in Botswana and Australia. Buy.

 

Northamber’s ‘margin of safety’ worth exploiting

Half-year results from Northamber (NAR:60p), one of the largest UK-owned trade-only distributors within the IT equipment industry, brought into focus the strong balance sheet support and recovery potential I highlighted when I included the shares, at 55p, in my 2020 Bargain Shares Portfolio.

Following the disposal of its distribution centre in Weybridge, the company retains net cash of £14.7m (54p a share), owns unencumbered and conservatively valued properties worth £5.2m, and holds inventories of £4.4m. Receivables of £8.1m exceed trade payables of £7.4m, the only liability. This means that net asset value (NAV) of £25m (91.3p) exceeds Northamber’s market capitalisation by 50 per cent even though the share price is 90 per cent backed by cash.

Furthermore, Northamber’s first-half underlying pre-tax loss of £217,000 on revenue up 8 per cent to £26.3m was almost 40 per cent lower year on year, driven by the strategic move into more profitable audio-visual solutions products. Since the half-year end, the company has completed the £2.1m acquisition of audio-visual distributor Audio Visual Materials (AVM), a company that reported a pre-tax profit of £300,000 in its previous financial year. The profit contribution from AVM aside, it will help drive higher growth for IT and audio visual resellers in areas such as professional displays and video conferencing. 

I also like the fact that the board have acted to narrow the 34 per cent share price discount to book value, purchasing 100,000 shares since the half-year end. The half-year dividend of 0.3p a share will be paid on 15 May 2020. Buy.

 

Chenavari’s hefty cash return

Chenavari Capital Solutions (CCSL:40p), a Guernsey-registered closed-end investment company that is in the process of winding itself up and returning cash to shareholders, has completed a £10m cash return through the compulsory repurchase of 34.73 per cent of the issued share capital at 85.72p a share. If you followed my advice to buy the shares, at 61.4p, in my 2020 Bargain Shares Portfolio, then for every 10,000 shares purchased at a cost of £6,120 you will have now received a cheque for £2,977 and retain 6,527 shares with a break-even of 48.1p.

The company’s NAV of £18.7m (85.42p) is broken down as follows: net cash of £2.4m, residential mortgages (£2m), corporate loans (£3.8m) and two Spanish non-performing property loans (£8.6m and £1.9m, respectively). The reason why the share price is trading on a 53 per cent discount to NAV is because Chenavari’s investment manager is assessing the exact impact of Covid-19 on the recovery value of the Spanish loans, and points to a range of “uncertainty of up to 25 per cent [in their value]”, implying potential for an asset write-down of £2.6m.

However, it’s more than priced in. That’s because Chenavari’s market capitalisation of £8.8m is £8.2m backed by cash, residential and corporate loans, so the Spanish loans are effectively in the price for £0.6m, or a thumping 94 per cent below their carrying value of £10.5m. Even if their value is written down by 25 per cent to £7.9m, then Chenavari’s NAV would still be 73.5p a share, or 83 per cent above the current share price. I see a positive outcome as total cash returns should still exceed your initial capital outlay by quite some margin. Buy.

 

Planting the seeds of growth

Anglo-Eastern Plantations (AEP:452p) is weathering the Covid-19 downturn better than the market gives it credit for. The group’s 16 palm oil plantations, mills and offices across Indonesia and Malaysia are operating close to normal with no reports of Covid-19 infections.

In the first quarter, production of fresh fruit bunches increased by 3 per cent to 246,600 metric tonnes (mt), and crude palm oil (CPO) output of 88,600 mt was marginally higher year-on-year. The CPO price averaged US$731 per mt, up 36 per cent on the average price in the first quarter of 2019, although below US$878 per mt at the start of the year.

Palm oil prices remain volatile as demand is affected by the economic lockdown amongst importing countries as they battle against the Covid-19 pandemic. For instance, European Union palm oil imports have fallen by 15 per cent in the 2019-20 season to date. However, countries in Europe and Asia are starting to ease lockdown restrictions to restart their economies, so one would expect demand to pick up, and the crude oil price has doubled off its April lows, thus making CPO more attractive for biodiesel. Also, in 2018 when the CPO ex-Rotterdam price averaged $595 per mt, AEP was still operating profitably, reporting pre-tax profits of $33.2m (£27m) on revenue of $251m.

There are no financial concerns as net cash of US$77m covers all liabilities and property assets of $350m (£282m) are worth 58 per cent more than AEP’s £179m market capitalisation. So, although the shares, at 452p, are down on the 550p level at which I suggested buying in this year’s portfolio, I still see scope for a profit recovery and one that is not priced in. 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 £3.25 [UK].

Special offer: Both books can be purchased for the special price of £25 plus discounted postage and packaging of only £3.95. The books 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, too. Details of the content of both books can be viewed on www.ypdbooks.com.

Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.