Since the UK post Covid-19 stock market rally peaked in September 2021, the FTSE Aim All-Share index has lost half its value. It has created a mismatch between the market valuations of hundreds of small- and micro-cap companies and the intrinsic value of their assets. Some shareholders have had enough.
The directors of Starvest (SRV:8p), a micro-cap investment company, are proposing a wind-up of the company to return surplus cash to shareholders as well as in specie distribution of its shareholings in Greatland Gold (GGP:8.1p) and Ariana Resources (AAU:2.1p). Greatland is developing the Havieron gold-copper project in Australia, and Ariana is a gold exploration and production company with activities in Turkey. Starvest’s shares have been trading materially below the read-through valuations of the two holdings for years. Shareholders will receive 1.33 Greatland shares and 0.199 Ariana shares for every share held. They have a combined value of 11.2p a share, a 124 per cent premium to Starvest’s share price prior to the announcement.
The pricing anomaly in Fireangel Safety Technology (FA.:6.75p) has been even more extreme. In fact, 17.4 per cent shareholder Intelligent Safety Electronics Pte has offered a 252 per cent share price premium to buy out other shareholders. The cash offer values Fireangel at £27.7mn. It has helped boost the net asset value (NAV) per share of Downing Strategic Micro-Cap Investment Trust (DSM: 57.5p) from 70.3p to 73.8p. Its shares trade on an unwarranted 22 per cent discount to NAV and on an even deeper discount to the intrinsic value of its investee companies.
Lock in Record’s chunky dividend yield
Equity risk aversion is such that even when a company downgrades guidance modestly, its share price gets hammered. Currency manager Record (REC:65.4p) is a case in point as its share price has fallen 12 per cent since releasing its second-quarter trading update. It’s an overreaction.
In the three months to 30 September 2023, the group’s AUMe inflows of $1.5bn from clients was completely wiped out by an identical negative movement resulting from weaker stock and other markets, which impacts the size of client mandates being hedged. In addition, the US dollar rallied strongly in the quarter, leading to $1.9bn of negative foreign exchange movements on client hedges. The net $1.9bn decline in AUMe to $84.5bn was $1.2bn higher than house broker Panmure Gordon had forecast.
Analyst Rae Maile also notes that the “hostility of markets and pressures on clients” is having an impact on the launch of the group’s Infrastructure Equity Fund. Under the leadership of chief executive Leslie Hill, the business has been reinvigorated by targeting multiple organic growth initiatives, diversifying its product mix into higher-margin scaleable products and acting as currency manager to asset managers. The new fund is targeting AUMe of more than $1bn, but it is taking longer to launch in current market conditions.
So, although Maile has increased the contribution from performance fees by £0.5mn to £2.5mn in the financial year to 31 March 2024, he has also reduced estimated management fees by £2mn to £41.6mn. The upshot is that total annual revenue is now expected to be flat at £44.4mn. However, with operating costs £1.3mn higher, it means that annual pre-tax profits are forecast to dip from £14.9mn to £13.6mn. On this basis, expect full-year earnings per share (EPS) of 5.24p, down from 5.92p in the 2022-23 financial year and 7 per cent below Panmure’s previous 5.62p forecast.
The broker has conservatively reduced EPS forecasts by 11 per cent to 5.79p for the following year, too. This is based on full-year pre-tax profit of £15mn being delivered on projected revenue of £48.1mn. Panmure’s estimates embed closing AUMe of $85.8bn (31 March 2024) and $88.8mn (31 March 2025), so are likely to prove conservative in more benign financial market conditions. Indeed, Maile notes that “with multiple avenues of growth, we believe that in due course our [revised] earnings estimates will be exceeded”.
But even ignoring that possibility, the 30 per cent share price reversal since Record’s annual results (‘Record offers impressive results and a dividend hike’, 4 July 2023) is completely out of sync with the 12 per cent EPS reversal expected in the current financial year and 11 per cent EPS downgrade for next year when the group should return to earnings growth.
Cash-rich and high payout ratio
It’s also worth noting that, with the benefit of a cash-rich balance sheet – net cash of £17.4mn (8.7p) should still deliver double-digit growth over the course of the 2023-24 financial year – the board can maintain its policy of paying out all net profit as dividends as Panmure predicts. On this basis, the shares are rated on a modest current-year prospective price/earnings (PE) ratio of 12.5 and offer a dividend yield of 8 per cent. The forward price/earnings (PE) ratio falls to 11.3 and the dividend yield rises to 8.9 per cent the year after.
From my lens, this is a repeat buying opportunity ahead of the interim results on 17 November 2023 and one that should augment the long-term gains since I included the shares in my 2018 Bargain Shares Portfolio. Including dividends of 19.8p a share, the holding has delivered a 96 per cent total return (TR) during which time the FTSE Aim All-Share TR index has shed 31.4 per cent of its value. 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 at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.
