BATM Advanced Communications (BVC:41.5p), a provider of medical laboratory systems, cyber security and network solutions with extensive operations in Israel, has successfully developed a new diagnostics kit to detect COVID-19.
The kit has undergone testing by several central laboratories and hospitals that have now verified its ability to diagnose the virus. BATM has commenced production at its Adaltis facility in Rome and is working with academic and research institutions, mainly in Europe, to progress the product to make it at a price point suitable for large scale commercial production. Importantly, it supports all the Centers for Disease Control and Prevention (CDC) recommendations, and has received interest from customers in several countries. The kit can be used with the company’s diagnostic instruments and also with some competing diagnostic instruments.
It’s worth noting, too, that BATM holds a valuable 38 per cent stake in Ador Diagnostics, a company that is developing a new molecular diagnostic bench-top analyser that is able to probe 100 targets in a single proprietary carbon array, or 16 times more than existing products on the market. It is being targeted at screening for hospital-acquired infections such as MRSA and C. Diff, and to identify tropical infections in travellers returning home with fevers. Ador has received its first commercial order (for the identification of meningitis) from a leading Italian distributor of molecular and genomics products. It will be delivered in the second half of this year. COVID-19 is now included within the heavily patented Ador suite of testing kits, thus further enhancing its appeal.
The news adds further shine to BATM’s annual results which revealed a doubling of operating profit to US$5.3m on 3 per cent higher revenue of US$123m, buoyed by a barn storming second half that led to a substantial order backlog for 2020. The order flow has been strong since the year-end, too. BATM has announced a US$4m follow-on contract to an [undisclosed] government for additional hardware and software cyber security products.
The company has also won a US$1.3m contract for the supply and installation of its patented agri-waste treatment solution. The customer produces and distributes high quality fresh and frozen chicken throughout the Middle East, where it is based, as well as several countries in Asia. BATM won a US$4m contract award from a Taiwanese agri-food conglomerate at the end of last year, too. Demand for the solution can only increase following the outbreak of COVID-19 given that BATM’s proprietary solution enables the treatment of poultry remains onsite, and removes the environmental hazards associated with transporting them without the use of any harmful materials, chemicals or methods.
The shares have produced a total return of 129 per cent since I included them in my 2017 Bargain Shares Portfolio. I maintain my sum-of-the-parts valuation of £264m (60p a share) after factoring in BATM’s net cash of $44.8m (£34.7m); read-through valuations for the stakes in Ador (£17.2m) and Adaltis (£45m); property assets worth $16m (£12.4m); valuing BATM’s networking and cyber security division at $106m (£82m), or 20 times its 2019 operating profit of US$5.2m; and taking into account the value embedded in BATM’s partnership with Arm Holdings, and the group’s biomedical division, both of which are commercialising valuable IP. Buy.
| 2017 Bargain shares portfolio performance | |||||
| Company name | TIDM | Opening offer price on 03.02.17 (p) | Bid price on 09.03.20 (p) or exit price (see notes) | Dividends | Total return (%) |
| Kape Technologies (formerly Crossrider) | KAPE | 47.9 | 138 | 3.55 | 195.5 |
| BATM Advanced Communications (see note seven) | BVC | 19.25 | 41 | 0 | 128.7 |
| Avingtrans | AVG | 200 | 260 | 10.8 | 35.4 |
| Cenkos Securities (see note two) | CNKS | 88.425 | 106 | 9.5 | 30.6 |
| Manchester & London Investment Trust (see note three) | MNL | 291.65 | 377 | 3.0 | 28.4 |
| H&T | HAT | 289.75 | 311 | 27.1 | 16.7 |
| Chariot Oil & Gas (see note one) | CHAR | 8.29 | 1.8 | 0 | 3.9 |
| Management Consulting Group (see note five) | MMC | 6.183 | 6 | 0 | -3.0 |
| Bowleven (see note four) | BLVN | 28.9 | 5.5 | 15 | -6.1 |
| Tiso Blackstar Group (see note six) | TBG | 55 | 15.6 | 0.54 | -70.7 |
| Average | 35.9 | ||||
| FTSE All-Share Total Return | 6485 | 6239 | -3.8 | ||
| FTSE AIM All-Share Total Return | 977 | 917 | -6.1 | ||
| Notes: | |||||
| 1. Simon Thompson advised selling two-thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Return reflects the profit booked on this sale. Simon subsequently advised using some of the proceeds from the share sale to participate in the one-for-8 open offer at 13p a share in March 2018 which is taken into account in the total return ('On the earnings beat', 5 Mar 2018). Simon turned buyer of the shares at 4p on 17 April 2019 when he suggested using the profit banked to reinvest in the shares ('Chariot's North African adventure', 17 April 2019). | |||||
| 2. Simon Thompson advised selling the Cenkos Securities holding at 106p on 3 April 2017 and the 106p price quoted in the above table is the exit price on the holding ('A profitable earnings beat', 3 Apr 2017). | |||||
| 3. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017), and selling the remaining half at 377p ('Bargain shares second chance', 17 August 2017). The 377p price quoted in the table is the final exit price. | |||||
| 4. Simon Thompson advised banking profits on half your holdings in Bowleven shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019 and Simon then advised selling the balance of the holding at 5.5p ('Taking stock and profits', 9 December 2019). | |||||
| 5. Simon Thompson advised to sell Management Consulting's shares at 6p in February 2018 (‘How the 2017 Bargain share portfolio fared’, 2 February 2018). The price quoted in the table is the 6p exit price. | |||||
| 6. Tiso Blackstar has transferred its UK listing to the Johanesburg Stock Exchange. Price quoted is sterling equivalent bid price at current exchange rates. | |||||
| 6. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p, and running the balance for free ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018). Simon then advised reinvesting the profits back into the shares at 43.5p ('BATM armed for a re-rating', 11 July 2019). Total return takes into account these trades. | |||||
| Source: London Stock Exchange share prices. | |||||
Creightons cleans up
Creightons (CRL:36.5p), a small UK manufacturer of beauty and health care products and a constituent of my 2020 Bargain Shares Portfolio has stepped into the breach to fulfill the surge in demand for sanitant following the outbreak of Coranavirus. The Peterborough based company is one of the few high volume suppliers left in the UK and last produced sanitants in significant quantity in 2009-10 in response to the Swine Flu outbreak.
For commercial reasons the company is unable to disclose volumes or customers (both new and existing), but it’s clearly good news and adds weight to my expectations of a 20 per cent increase in pre-tax profit to £3.5m for the 12 months to 31 March 2020, and mitigates earnings risk for the 2020/21 financial year, too. On 7.5 times likely earnings, the shares rate a buy.
Mpac’s strong order book mitigates Coronavirus threat
I previewed annual results from Mpac (MPAC:215p), a small-cap niche packaging engineering business supplying customers in the pharmaceutical, healthcare, nutrition and beverage industries, after the company upgraded guidance for the fifth time in less than a year (‘On the upgrade’, 13 January 2020).
I raised my target price to 330p at the time and the share price subsequently rallied 40 per cent to a 16-year high of 377p, or more than double the 156p entry level in my 2018 Bargain Shares Portfolio. The sharp retracement since late February has been driven by concerns that the outbreak of COVID-19 will impact Mpac’s business. Those fears are unfounded.
That’s because having doubled revenue to £88.8m in 2019, including like-for-like growth of 24 per cent once you strip out the contribution from Tadcaster-based Lambert Automation, a provider of automation solutions, Mpac started 2020 with a closing order book of £52m spread across a diversified customer base. Orders are biased towards the higher margin healthcare segment (accounting for three quarters of annual sales) and the US (58 per cent sales weighting), thus mitigating risk. Moreover, only 8 per cent of sales actually come from Asia, the region most affected by COVID-19 and one where the outbreak is now abating.
This means that once you take into account repeat service orders of £2m per month, then almost 80 per cent of Equity Development’s 2020 revenue estimate of £95m is already covered. If anything Mpac could be a beneficiary of COVID-19 as some rivals are based in Northern Italy, a region in lock down, so the company could pick up orders at their expense.
Strip out net cash of £18m from Mpac’s market capitalisation of £43.4m and the business is being valued on only three times 2019 operating profit of £7.7m, a rating that implies a collapse in earnings this year and one that is at odds with the strong order book coverage, and geographic and sector spread of customers. Buy.
Gresham House earnings beat prompts upgrades
Aim-traded shares in Gresham House (GHE:660p), a fund manager that specialises in renewable energy generation, solar power, wind, forestry, infrastructure funds and public and private equity investment strategies, have proved a best seller since I included them, at 312p, in my 2016 Bargain Shares Portfolio. The share price has also risen by 18 per cent since my last article (‘Profit from green energy’, 21 October 2019). The latest annual results explain just why as the board outlined its five year financial targets of doubling assets under management (AUM) to £6bn, maintaining return on invested capital (ROIC) of 15 per cent and increasing operating margin to more than 40 per cent
Last year, Gresham House’s AUM increased by more than £500m to £2.8bn, or £300m ahead of Canaccord Genuity’s forecast, all of which was organic growth. Furthermore, it’s increasingly profitable business as highlighted by the surge in underlying operating profit from £3m to £10.3m (Canaccord forecast £9.1m) on revenue of £32.9m which resulted in a 125 per cent rise in fully diluted earnings per share (EPS) to 34.3p. Operating margin increased by half to 31.3 per cent and the 50 per cent hike in the dividend per share to 4.5p smashed analyst estimates, too. Demand for the group’s fund offering remains strong across the board.
Gresham House Energy Storage Fund (GRID:106p), a specialist in UK energy storage systems (ESS), raised £107m of new equity in 2019, and a further £31m last month, the proceeds of which will nearly double portfolio capacity to 334MW. The structural need to ramp up battery storage capacity to enable the UK government to hit its green energy targets is driving investor demand, as are the high returns (the shares offer a prospective 2020 dividend yield of 6.6 per cent). Gresham House has been successfully investing its own balance sheet capital, too, in ESS projects and will continue to do so.
Gresham House is clearly reaping benefits from its 2018 acquisitions of FIM, an alternative fund manager specialising in forestry and renewable energy, and the fund and the investment management business that incorporates Baronsmead VCTs, LF Livingbridge UK Micro Cap Fund and UK Multi-Cap Income Fund. Livingbridge and Gresham House’s Strategic Public Equity investment teams now operate as a combined unit, as do FIM and Gresham House’s original forestry business. Both are delivering on their 15 per cent ROIC targets and Gresham House has captured in excess of £1m of annualised savings and synergy benefits (such as up-selling the funds offering across the enlarged client base) to complement ongoing demand (Baronsmead undertook £44m of top-up fundraisings last year and FIM raised £35m).
| Simon Thompson's Bargain Shares Portfolio 2016 performance | |||||
| Company name | TIDM | Opening offer price (p) 05.02.16 | Bid price (p) 09.03.20 or exit price (see notes) | Dividends (p) | Total return (%) |
| Bioquell (see note one) | BQE | 125 | 590 | 0 | 372.0% |
| Volvere (see note six) | VLE | 419 | 1150 | 0 | 188.2% |
| Gresham House | GHE | 312.5 | 650 | 3 | 109.0% |
| Oakley Capital | OCI | 146.5 | 245 | 13.5 | 76.5% |
| Gresham House Strategic | GHS | 796 | 1150 | 43.35 | 49.9% |
| Bowleven (see note two) | BLVN | 18.935 | 5.5 | 15 | 43.2% |
| Juridica (see note three) | JIL | 36.1 | 14 | 32 | 27.4% |
| Mind + Machines (see note four) | MMX | 8 | 7.5 | 0 | 2.8% |
| Walker Crips (see note five) | WCW | 44.9 | 23.2 | 5.59 | -35.9% |
| French Connection | FCCN | 45.7 | 17 | 0 | -62.8% |
| Average return | 77.0% | ||||
| FTSE All-Share Total Return | 5180 | 6239 | 26.0% | ||
| FTSE AIM All-Share Total Return | 747 | 917 | 28.0% | ||
| Notes: | |||||
| 1. Simon Thompson advised buying Bioquell's shares at 149p in February 2016. Bioquell bought back 50 per cent of shares in issue at 200p each in June 2016 through a tender offer and Simon recommended buying back the shares in the market at 145p to give an average buy in price of 125p (‘Bargain shares updates’, 22 June 2016). Company was taken over at 590p cash per share in January 2019. | |||||
| 2. Simon Thompson advised banking profits on half your holdings in Bowleven shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019 and Simon then advised selling the balance of the holding at 5.5p ('Taking stock and profits', 9 December 2019). | |||||
| 3. Simon Thompson advised buying Juridica's shares at 41.2p in February 2016. Juridica subsequently paid out a special dividend of 8p a share in June 2016 and Simon recommended buying shares in the market at 61p using the cash proceeds to take the average buy in price to 36.1p (‘Brexit winners', 1 August 2016). Juridica then paid out a special dividend of 32p a share in September 2016 and total return reflects this distribution. Simon advised selling the holding at 14p ('Taking Q1 profits and running gains', 4 April 2017), hence the price quoted in the table. | |||||
| 4. Simon Thompson advised buying Mind + Machines shares at 8p in February 2016. Mind + Machines subsequently bought back 13.22 per cent of the shares in issue at 13p a share. The total return reflects this capital distribution. Simon advised selling the entire holding at 7.5p which is the exit price stated in the table ('Strategic acquisitions', 9 May 2018). | |||||
| 5. Simon Thompson advised selling Walker Crips shares on Monday, 4 March 2019 at 25p ('Bargain Shares Portfolio updates', 4 March 2019). This is the exit price quoted in the table. | |||||
| 6. Simon Thompson advised rendering 41.18 per cent of your holdings back to company at 1290p a share. Tender completed 19 June 2019 ('Tenders, takover and hitting target prices', 3 June 2019), and balance of the holding at 1,150p ('Taking stock and profits', 9 December 2019). | |||||
| Source: London Stock Exchange share prices | |||||
Furthermore, with cash and liquid resources accounting for £41m (148p a share) of net assets of £90m (324p), the directors are targeting more earnings accretive acquisitions. Alongside the results, they announced the acquisition of TradeRisks, a fund management business and debt advisory services group to the housing and social infrastructure sectors.
TradeRisks is manager of Residential Secure Income (RESI), an investment company with AUM of £321m spread across portfolios of shared ownership, retirement and Local Authority housing. The company has a 19-year track record and made an operating profit of £1.8m on revenue of £5.6m in the 2019 financial year, a performance that justifies the initial £7m consideration (spilt 50:50 cash and shares) and a three-year performance related earn-out of £4m. The acquisition increases Gresham House’s AUM to over £3bn and enhances 2020 EPS by 11 per cent, and by 16 per cent on an annual basis.
Analysts are reviewing their earnings forecasts, but I can see Gresham House delivering fully diluted EPS of 38p to 40p this year, implying the shares are rated on a cash-adjusted PE ratio of 12.5. Worth noting, too, is that the vast majority of Gresham House's mandates produce uncorrelated returns to equity markets. I raise my target to 800p. 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.
