Investments for the new ‘normal’

Buoyed by organic growth of 10 per cent (£283m), Gresham House boosted assets under management (AUM) by 17 per cent to £3.26bn in the first half to deliver 15 per cent higher operating profit of £5.2m. Three-quarters of AUM are in hard assets that generate uncorrelated returns to equity markets, and offer enticing yields, so are proving attractive to investors in a zero-interest rate policy environment. They have strong fundamentals, too.

For instance, tight industry pricing and ongoing demand from housebuilders were the drivers behind the 11 per cent annualised investment return from Gresham House’s forestry funds (43 per cent of AUM). Gresham House is capitalising on strong institutional interest in this area as Mr Dalwood revealed that first close of a newly launched forestry fund could raise £40m to £50m of AUM by year-end.

Gresham House is also capitalising on the investment opportunity in the shared ownership sector having acquired Trade Risks, a fund management business that has the £184m management contract of Residential Secure Income (RESI), an investment company that owns portfolios of shared ownership, retirement and Local Authority housing. RESI has reported resilient rent collection (over 99 per cent for June), and a modest upward valuation uplift, reinforcing the secure nature of its cashflows. It is growing, too, having recently acquired 39 shared ownership homes in north west England. Moreover, Gresham House is leveraging the experience of the Trade Risks team to launch a new shared ownership fund of its own to target first time buyers. Mr Dalwood says it could raise £100m as early as the year-end.

Gresham House Energy Storage Fund (GRID:112p), a £230m specialist fund in UK energy storage systems (ESS), is attracting interest, too, having raised £31m in a placing in March to fund the ramp up of UK battery storage capacity in the UK. Its bumper 534 MW pipeline across 10 projects could see the current 174MW portfolio double in size over the next 18 months, adding upside to a progressive dividend which offers an enticing 6.3 per cent yield.

Gresham House’s board is considering further complementary bolt-on acquisitions and cornerstone investments in new ventures. They certainly have ample firepower to do so as liquid assets and cash of £45m could exceed £50m (155p a share) by year-end. On this basis, the shares are rated on 15 times (ex-cash) Panmure Gordon’s 2021 EPS estimate of 38.3p, a multiple that offers scope to expand to achieve the 800p target price I outlined when I last suggested buying at 640p (‘Watchlist small-caps on the upgrade’, 20 July 2020), having included the shares, at 312p in my 2016 Bargain Shares Portfolio. Buy.

Exploit ThinkSmart’s valuation anomaly

Shares in Aim-traded finance company ThinkSmart (TSL:42p) have surged since I last suggested buying them at 30p (‘Targeting tech stocks’, 10 August 2020), and have now trebled in value after initiated coverage, at 14p, in my April 2020 Alpha Report. Today’s interim results not only highlight why the rerating is warranted, but reveal why it’s highly likely to continue.

That’s because ThinkSmart holds a valuable 10 per cent stake (6.5 per cent fully diluted) in Clearpay, a fast-growing UK payment platform that enables consumers to split the cost of their retail purchases into manageable interest-free payments. Afterpay Touch (APT:ASX), a A$21bn (£11.8bn) market capitalisation Australian Stock Exchange-listed technology group owns the other 90 per cent of Clearpay and has a call option to buy out ThinkSmart’s minority stake. Likewise, ThinkSmart has a put option to sell to Afterpay. The agreed principle in determining the valuation being the market capitalisation of Afterpay. And that has been soaring. This explains why ThinkSmart booked a £53.7m unrealised gain on its Clearpay stake in the first six months of this year.

However, that valuation was based on Afterpay’s June 2020 closing share price of A$61. It is now 21 per cent higher, implying a spot value of £65m (61p a share) for the Clearpay stake alone. Moreover, ThinkSmart has been successfully winding down its legacy finance lease business which contributed to operating cash inflow of £1m in the first half. Net cash increased by almost a quarter to £8.8m (8.3p a share) and this excludes a post period-end £1.45m payment from Dixons Carphone. This means that proforma net cash is now around 10p a share. Add to that £4m of other net assets on ThinkSmart’s balance sheet, mainly finance lease receivables, and I arrive at a sum-of-the-parts valuation of £79.3m (74p a share), or 20 per cent higher than the interim reported net asset value of £66.5m. There is even the possibility that Afterpay may try to acquire ThinkSmart’s minority interest early due to the eye-catching progress Clearpay is making (see my August article). It would be small change for the Australian fintech giant.

Trading 40 per cent below my spot sum-of-the-parts valuation of 74p, ThinkSmart shares continue to rate a buy.

Checkit’s monitoring technology a winner in the new ‘normal’

Technology group Checkit (CKT:45p) halved operating losses to £1.5m on slightly higher normalised revenue of £6.4m in the six months to 31 July 2020, a solid result in the circumstances. Tight cost control meant that net cash only declined £0.9m to £14.3m (21.6p a share). The recently announced disposal of non-core Elektron Eye Technology, a developer of portable analysers for detection of age-related macular degeneration, will bring in £800,000 of cash proceeds over the next two years, helping to offset Checkit’s operating losses as its businesses scale up towards profitability.

These operations are focused on two core activities: high-end service-based temperature monitoring for healthcare and life sciences, and data-related building energy management systems; and a proprietary work management ‘software as a service’ (SaaS) business which replaces paper-based systems with a centralised, interactive cloud-based way of managing the multitude of tasks that staff carry out daily.

Checkit’s wireless monitoring technology should be in even greater demand in the new ‘normal’ working world given the requirement for increased management of fragmented workforces through data-driven remote monitoring, a greater reliance on automated systems surveillance, and a need to save costs. Targeted applications include supporting large franchises in food-to-go and takeaway operations, and storage and transport of temperature sensitive medical materials.

The company is strengthening its workflow management offering to take advantage of the business opportunity. For instance, it has been extended to a cloud capability, creating direct links between office, remote staff and operational teams both through mobile and cloud apps so that they can work together in an interactive way. Products are being prepared for international expansion, too.

The shares have ticked up slightly since last month’s pre-close trading update (‘Undervalued small-caps’, 24 August 2020), and I retain my 60p a share sum-of-the-parts valuation. Buy.

RBG’s legal eagles worth backing

Interim results from RBG (RBGP: 62p), a professional services group that owns law firm Rosenblatt, a nascent litigation funding arm and specialist finance boutique Convex Capital, prompted a 15 per cent share price reversal back to slightly below my summer buy call (‘Deep value buys’, 13 July 2020) and 10 per cent under my entry point (Alpha Report: ‘Back a winning legal team’, 2 June 2020). Investors have massively overreacted.

For starters, business is booming at Rosenblatt. Revenue from legal services soared 42 per cent to £11.7m, excluding £900,000 of work in progress, buoyed by dispute resolution (up 13 per cent to £7.1m) and corporate work (quadrupling to £3.3m). It’s highly lucrative work, too, as Rosenblatt’s legal eagles specialise in litigious/contentious work that enables the firm to bill clients by the hour and control the level of fees it charges. Indeed, revenue per fee earner was almost £500,000, up from £350,000 in 2019. Importantly, the trading backdrop remains favourable given that economic crises increase the need for the specialist legal advice the firm offers, and downturns lead to an increase in instructions on white collar crime & fraud.

Secondly, Convex completed over £1bn of transactions in the four year-period prior to RBG’s acquisition 12 months ago, earning an average fee of £700,000 on each transaction to generate annual revenue north of £8m. Deferral of almost all Convex’s transactions in the first half reduced cash profit by £1.1m and explains why group cash profits declined from £3.8m to £2.6m. But management “believe this is a timing issue, with deal completions expected in the second half”, and highlight a “strong pipeline”.

Thirdly, the absence of sales of participation rights in contingent cases (£2m of gains in the first half of 2019) is also a timing issue as the directors are “planning for a significant return of litigation sales in the second half”. The cash inflow aside, there is scope for material gains as RBG conservatively holds its £3.8m litigation investment portfolio of eight cases at cost even though the law firm has won 86 per cent of the 22 contingent cases that have concluded since 2011.

The other reason for the lack of participation rights sales is that RBG’s management spent time setting up and launching a branded litigation finance arm, LionFish, to fund cases run by third-party solicitors. It was worth the effort as it has got off to a flying start – £2.4m total commitment made across six cases – and has just launched a new product for insolvency claims, a market with strong prospects.

There are no earnings forecasts in the market, but I feel that a likely strong second half profit recovery is being underrated. RBG’s heavily oversold shares (14-day RSI below 20) are trading on a modest price-to-book value of 1.25 times, on a 12-month trailing price/earnings ratio of 10, and offer a near 5 per cent dividend yield. The board has a policy to pay out at least 60 per cent of earnings and a decision on the amount of the full-year dividend (3p a share in 2019) will be made at the financial year-end. 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.