A recurring theme in my annual Bargain Shares Portfolios are companies with hidden balance sheet value. Of course, you need a catalyst to narrow the gap between a company’s market capitalisation and much higher sum-of-the-parts valuations.
That’s relevant right now because one of the constituents of this year’s portfolio, Tekcapital (TEK:32p), an investment company focused on food technology, autonomous vehicles, smart eyewear and respiratory medical devices, offers multiple share price catalysts.
Tekcapital’s share price trades 20 per cent below my net asset value (NAV) estimate of 40p using historic valuations at the last funding rounds of its investee companies. However, SP Angel calculates that the “true value of Tekcapital’s shares today is certainly at least 50p and in the near term is projected to be closer to 60p.”
A successful Nasdaq IPO of e-glasses company Innovative Eyewear would help to materially narrow the valuation gap. Innovative Eyewear’s SEC filing on 29 March 2022 indicates a pre-IPO valuation of $34mn-$46mn and $42-58mn post IPO. This implies a $27mn-$37mn (15p to 20p a share) value for Tekcapital’s shareholding, a massive premium to the $16mn valuation at the last funding round. It’s not the only catalyst, either.
Tekcapital’s portfolio upside revealed
- Salarius SaltMe! crisps now being sold across 2,400 Kroger stores
- Portfolio company Guident signs deal with Perrone Robotics
- Investee company Innovative Eyewear issues IPO prospectus
Tekcapital (TEK:32p) has announced positive news from two other portfolio companies, too.
Firstly, Salarius, a food technology business that holds a patented process to produce, Microsalt, a new natural, non-GMO, kosher, low-sodium nanoparticle-sized salt, has expanded its roll-out of SaltMe! crisps across 2,400 Kroger stores in the US. The company also reports “significant sales growth through Amazon”, and is now rolling out its offering to foodservice operators. TekCapital’s 76 per cent stake in Microsalt was worth around $4.37mn based on the last funding round, and its stake has since risen to 87 per cent.
In addition, portfolio company Guident, a developer of remote monitoring and control software that improves the safety of autonomous vehicles (AV) and land-based delivery robots, has entered a strategic alliance with Perrone Robotics, a provider of AV kits and full autonomy software. The plan is to integrate Guident’s remote monitoring and teleoperation solution with Perrone’s TONY kit for highly AVs.
It makes both strategic and commercial sense to do so. Deployment of safe & reliable AVs requires a fast, reliable network coupled with low-latency, remote monitoring and control software, to facilitate fleet level management of multiple, concurrently operating AVs. By combining the two technologies, it will enable municipalities and fleet operators to commercially deploy Level-4 autonomy AV shuttles across a wide variety and quantity of vehicles.
Analysts at Allied Market Research estimate that the global AV market is set to grow at a compound annual growth rate (CAGR) of 39 per cent to be worth $556bn by 2026, buoyed by the accelerated roll-out of land-based delivery drones and demand for lower cost deliveries. The Covid-19 pandemic is driving demand for contactless delivery, too. The total value of Guident’s patents is $28mn, although they were last valued at $22mn in TekCapital’s accounts, so monetising their value in this way will help to narrow the valuation gap.
TekCapital’s has risen 8 per cent since I included the shares in my 2022 Bargain Shares Portfolio, and I can see 50 per cent more upside from this point. Buy.
| Simon Thompson's Bargain Shares Portfolios Performance (2016-2022) | |||
| Portfolio | Portfolio total return to date | FTSE All-Share total return to date | FTSE Aim All-Share total return to date |
| 2016 | 105.6% | 64.2% | 64.4% |
| 2017 | 162.0% | 31.2% | 25.7% |
| 2018 | 82.4% | 5.9% | 3.7% |
| 2019 | 56.7% | 24.2% | 20.0% |
| 2020 | 57.5% | 9.1% | 11.4% |
| 2021 | 24.5% | 19.2% | -11.3% |
| 2022 | 10.5% | -0.2% | -2.4% |
Source: London Stock Exchange, FTSE Russell, Bargain Shares Portfolio total return calculated on offer-to-bid basis with dividends un-invested. Latest prices at close of trading on 19 April 2022.
Profiting from the green agenda
- More than £300mn raised for funds in the first quarter
- Baronsmead and Mobeus VCT fundraises reach their maximum fundraising targets
- Exits small-cap equity fund Rockwood Realisation and makes small acquisition in Ireland
Gresham House (GHE:990p), a fund manager specialising in renewable energy generation (solar power, wind, and battery storage farms), forestry, infrastructure, and public and private equity investment strategies, has reported a robust first-quarter trading update that sent its shares to an all-time high.
In the first three months of the financial year, the group completed more than £300mn of fundraises across institutional, wholesale, and private client distribution channels. Gresham House’s Strategic Equity division accounted for £140mn of the total raised, split evenly across its VCT business – both Baronsmead and Mobeus VCT fundraises reached their maximum fundraising targets – and open-ended equity funds.
Other notable fundraises include Gresham House Forestry Fund VI Limited Partnership, which held a first close with commitments of £75mn from institutional clients, and £80mn raised for the group’s affordable housing funds (Gresham House Residential Secure Income LP and Residential Secure Income (RESI)).
Ultimately, it’s investment performance that pulls in investors. A good example is the LF Gresham House UK Multi Cap Income Fund that is co-managed by star fund manager Ken Wootton. Despite a challenging backdrop for equity markets, the fund has trebled in size to £260mn in the past 12 months, a reflection of the fund’s 52 per cent total return since inception in June 2018, a massive 34 percentage point outperformance of the IA UK Equity Income benchmark sector.
Gresham House Energy Storage Fund (GRID), the largest listed specialist fund in UK energy storage projects, is clearly delivering value to investors who backed the IPO, at 100p, in November 2018. Not only are they earning a 7p a share dividend, but the £512mn fund increased NAV per share by 13.5 per cent to 116.86p in 2021, and produced a NAV total return of 20.3 per cent. The shares are now trading at 153p. The fund has secured a 180MW pipeline in the Republic of Ireland, which is expected to commission in 2024, thus offering international expansion opportunities too.
Analysts expect Gresham House’s pre-tax profit to rise 30 per cent to £26.3mn this year based on assets under management (AUM) increasing by £1bn to £7.5bn in 2022, a conservative looking assumption in my view given the strong momentum in the business. Furthermore, Gresham House has recently exited its holding in small-cap equity fund Rockwood Realisations (RKW), the effect of which is to boost the group’s pro-forma net cash to £47mn (128p a share) after factoring in the €1.8mn (£1.5mn) paid for Dublin-based Burlington Real Estate, an independent commercial property asset and development management company with AUM of €340mn. Gresham House has other liquid assets worth £29.5mn (77p a share), too.
Effectively, the shares are trading on forward cash-adjusted price/earnings (PE) ratios of 14.8 and 12.8 for the 2022 and 2023 financial years, modest ratings given the earnings risk remains skewed to the upside. The shares have more than trebled in value since I initiated coverage in my 2016 Bargain Shares Portfolio, and have performed well since I reiterated my buy call, at 810p, when I covered the annual results (‘A green winner in the energy crisis’, 15 March 2022). I now feel that my 1,100p target is likely to be surpassed given the strength of the momentum across Gresham House’s businesses, so much so that I raise my target to 1,200p. Potential for 20 per cent additional capital growth aside, the 10p a share dividend is forecast to double by 2024. Buy.
End game for CIP Merchant Capital
- CFE controls 87.3 per cent of shares in issue, up from 57.3 per cent on 11 April and 29.8 per cent on 14 January
Corporation Financière Européenne S.A. (CFE) has succeeded with its low-ball cash offer of 60p a share for CIP Merchant Capital (CIP:52.5p), a Guernsey-based closed investment company that takes a private-equity-style approach to investing.
The final offer was pitched at a massive 30 per cent discount to CIP’s last reported NAV per share of 85.35p, but still received acceptances of 20.5mn (37.3 per cent) of the 55mn shares in issue by the final closing date on 14 April 2022. This means that CFE now controls 87.3 per cent of the shares in issue, up sharply from 58 per cent on 12 April 2022 and 29.8 per cent when the company launched the mandatory cash offer in mid-January 2022.
I previously recommended ignoring the derisory offers and have maintained that advice throughout the offer period, having included the shares, at 57p, in my market-beating 2020 Bargain Shares Portfolio. However, with CFE now controlling more than 75 per cent of the shares in issue and a cancellation of the listing of CIP’s shares likely, then you have little option but to sell. The alternative is to become a minority shareholder in a private company.
It’s a highly unsatisfactory outcome given that a simple liquidation of CIP’s listed portfolio would have returned substantially more than 60p a share to its shareholders. CFE’s owners are the only winners here. Sell.
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