In times of extreme market volatility and high risk aversion indiscriminate selling takes place for multiple reasons. For instance, traders may have to raise capital to meet margin calls by selling their most liquid holdings. Other investors may become so risk averse that they exit holdings even after recording hefty losses in a short period. Add to that the general uncertainty surrounding the economic impact of Covid-19 on corporate profits, and I see this as an opportunity to exploit the unwarranted risk premium embedded in valuations of lowly rated well-financed companies with a view to realising material medium-term upside in due course.
Cash in on a free ride
For instance, Aim-traded UK and eastern European property fund manager and investor First Property (FPO:26p) has shed a third of its value since I covered the interim results (‘Bargain basement property play’, 25 November 2019) and is now only capitalised at £28.5m.
At the end of September 2019, the company had cash on its balance sheet of £8.5m and €76.3m of non-recourse euro-denominated debt secured against its portfolio of nine commercial properties in Poland and Romania, the largest of which is a 50.3 per cent interest in the CH8 Tower in Warsaw. CH8 accounted for €40m of the portfolio’s last reported open market valuation of €108.8m.
That’s worth noting because just before Christmas the company entered a contract for the disposal of its stake in CH8 for €44m (£40m), representing a €4m premium to its independently assessed market value. As part of the transaction, First Property will guarantee the rental and service charge income and fit-out costs on the residual vacant space, but the sale should still result in a profit before tax of €3.5m (£3.2m). The buyer’s identity is confidential, but “is part of a well-known group in central Eastern Europe and the purchase obligations of the buyer have been guaranteed by another company”. First Property’s chief executive, Ben Habib, confirmed that he expects the purchase to complete by the end of April.
The point is that after the repayment of the bank loan secured against CH8, First Property will receive €19.6m (£17.8m) of cash proceeds to boost its pro-forma cash pile to £26.4m, a sum that is only £2m shy of the company’s market value of £28.5m. Non-recourse borrowings will be slashed to around €52m (£47.3m), secured against the remaining eight directly held properties, which are worth €70m (£63.6m). Effectively, you are getting a free ride on the £16.3m equity in the eight remaining directly held properties even though they generate an annualised yield of around 10 per cent on market value – significantly higher than the 1.84 per cent average annual interest charged on the debt, so produce strong cash flow.
You also have a free ride on First Property’s investments in 10 of the 13 funds it manages and associates. These are worth a further £30.3m. The depressed market capitalisation also fails to attribute any value whatsoever to the asset management business, which should generate an operating profit of £2m on £4m of management fee income in the 12 months to 31 March 2020. First Property manages £602m of third-party assets, of which two-thirds is held in five UK commercial property funds, 31.7 per cent in five funds invested in Poland, and 1.5 per cent in two Romanian property funds.
So, after factoring in the valuation uplift on the disposal of CH8, and the recent depreciation of sterling, which enhances the sterling value of the high-yielding overseas properties, I estimate that First Property’s current net asset value (NAV) is 66p per share, or 10 per cent higher than at the end of September 2019 and 2.5 times the current share price. The shares also offer a dividend yield of 6.3 per cent, with the annual payout covered three times over by recurring net profits. That’s a miserly rating given First Property’s track record since I included the shares, at 18.5p, in my 2011 Bargain Shares Portfolio. Adjusted NAV has quadrupled to £66m without recourse to any equity fundraising, and the board has paid out cash dividends of more than £13m, or 12.1p a share.
Mr Habib clearly sees value in the company, having spent almost £100,000 buying shares (at 23.85p and 39.11p) since early March to lift his stake to 14.94m shares, or 13.5 per cent of the issued share capital. His lead is worth following. Buy.
Augmentum priced for material upside
Augmentum Fintech (AUGM: 57.5p) became the first publicly listed fintech fund in the UK when it listed its shares on the London Stock Exchange, at 100p a share, in early 2018. The shares were flatlining around that mark when I updated my 2019 Bargain Shares portfolio last month, but have drawn down sharply in the market rout to value the company’s equity at only £67m. That’s almost half last reported NAV of £131m (112.2p a share) even though Augmentum is debt-free and holds cash of £14m. The ‘margin of safety’ here is huge, and points to a very favourable outcome.
Indeed, the directors revealed in this week’s trading update that portfolio companies representing more than 40 per cent of NAV are “experiencing heightened demand for their products and services, and are growing far quicker than in normal conditions”. For instance, Interactive Investor (ii), a leading UK investment platform in which Augmentum holds a 3.7 per cent stake, continued to “see strong trading volumes in the first quarter and that has not diminished in the past two weeks”. The stake was last valued at £14.7m, since when ii has agreed to purchase Share plc in a deal that places a value of £675m on ii, implying a £5.9m (4.5p a share after carried interest) uplift to Augmentum’s stake.
BullionVault, which offers private investors cheap access to investment-grade bullion, has seen trading volumes surge almost fivefold in the past week alone. BullionVault users – almost 90 per cent of whom live in North America or Western Europe – own more than $2bn-worth of gold bullion, physical silver and platinum between them. The holding accounts for 7.6 per cent of Augmentum’s NAV.
Last autumn’s €6m investment in Grover, the German technology rentals platform, has proved incredibly well timed. Demand is surging from both private customers and businesses to access Grover’s range of 2,000 tech products, including smartphones, laptops and virtual reality (VR) gear, as hundreds of millions of us are forced into home-working. Rentals are available through Grover’s online and offline partners. Subscriptions grew by 12 per cent in February and the positive trend has continued throughout March, so much so that year-on-year revenue is up almost 200 per cent. The holding accounts for 3.9 per cent of Augmentum’s NAV.
Of course, Covid-19 has led to unimaginable human tragedy across the world, a direct consequence being a surge in demand for online will writing. Farewill, a company that was awarded National Will Writing Firm of the Year 2019 at the British Wills and Probate awards, has seen 100 per cent growth in revenue in the first quarter of 2020. The holding accounts for 3.1 per cent of Augmentum’s portfolio.
Sensibly, Augmentum’s directors have started to use their authority to repurchase up to 10 per cent of the share capital. It makes sense to do so as they are effectively buying stakes in the underlying holdings at half their carrying value, thus increasing NAV per share significantly to the benefit of shareholders and removing any weak sellers in the process. Buy.
Pelatro worth dialling into
A reassuring trading update from Aim-traded Pelatro (PTRO:40p), a company that makes its money by providing telecoms operators with precision marketing software, has confirmed that the business has been unaffected by Covid-19, a point that makes the de-rating this year completely unwarranted. Indeed, having rallied 75 per cent after I advised buying the shares, at 40p (‘Pelatro’s bumper contract win and sales pipeline’, 2 December 2019), the price has given back all the gains in the market rout to offer another buying opportunity.
Pelatro’s software uses 'big data' analytics to reveal patterns, trends, associations and behavioural traits of their customers. These data-driven insights are used by telecom operators to become more customer-centric in their marketing approach and make relevant offers to end users, thus boosting retention rates, average revenue per user and share of spend from customers. Bearing this in mind, certain telecoms activities actually increase during 'stay at home' periods.
For instance, research from mobile payment platform Bango (BGO:103p) reveals that in the first week of the lockdown in Singapore, Taiwan, South Korea, Japan and Hong Kong, average consumer spend in key areas increased as follows: social gaming (up 21 per cent); online goods (21 per cent); streaming (25 per cent); and food delivery (40 per cent). In turn, higher user spending creates more targeted marketing activity for telecom operators and so drives even higher demand for Pelatro’s services. The message the company is getting from its telecom customers is very much "business as usual", adding weight to my view that Pelatro’s business is likely to prove far more defensive in the economic downturn than its modest rating suggests.
Moreover, Pelatro started 2020 with $4m of recurring revenue already secured (a mix of support and maintenance, managed services and gain share contracts), and an effective annual run-rate of $5m. Add to that conversion of at least some of its last reported $15m contract pipeline, and potential for higher demand from contracted work (existing customers account for a third of the bid pipeline), and FinnCap’s 2020 revenue estimate of $8m, up from $6.5m in 2019, should drive a strong rebound in pre-tax profits and EPS to $2.2m and 5.6¢ (4.9p), respectively. A 2020 PE ratio of 8 fails to capture that growth. Buy.
Venture upgrades again
Venture Life (VLG:36.5p), a Bracknell-based developer, manufacturer and distributor of products for the self-care market (including medical devices, food supplements and dermo-cosmetics), has reported a strong start to the 2020 financial year. In fact, house broker Cenkos Securities has raised its full-year revenue estimate by £1m to £25.3m, implying 25 per cent year-on-year growth.
Having rectified the packaging issues that impacted sales last year at its Chinese distributors, Venture has received €7m of orders since early January for Dentyl (mouthwashes, toothpastes, tooth whiteners and fresh breath beads) and other products in China alone. This has helped double the order book year on year, an acceleration on the 40 per cent run-rate at the end of 2019. Importantly, Venture’s Italian manufacturing facility has been allowed to continue operating as it is classed as an essential business. Venture is manufacturing hand gel sanitiser to satisfy high demand from retail customers, while also distributing it free of charge to local hospitals in the Lombardy region to help fight Covid-19.
Factoring in the revenue upgrade, analysts have lifted their 2020 adjusted EPS estimates by 9 per cent to 4.27p, up from 1.83p in 2019. Part of the eye-catching year-on-year growth also reflects the contribution from recent acquisition PharmaSource (‘Follow the insiders’, 24 February 2020). On this basis, Venture’s shares are priced on a forward price/earnings (PE) ratio of 8.5, a modest rating for a cash-rich company that is trading well through the Covid-19 crisis and is successfully targeting organic and merger & acquisition growth strategies. I maintain the 60p target price I outlined in my May 2019 Alpha Report. Strong buy.
Sanitiser order boost for Creightons
I am reliably informed that Peterborough-based Creightons (CRL:37p), a UK manufacturer of beauty and healthcare products, and a constituent of my 2020 Bargain Shares portfolio, has just opened a second production line to meet the surge in demand for sanitiser. The company is clearly performing well, a fact that a forward PE ratio of 7 fails to reflect. Strong 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].
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Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.
