Bargain shares: Primed for material uplifts

Augmentum Fintech (AUGM:162p), the first publicly-listed fintech fund in the UK, has delivered £25.8m of valuation gains in the latest half-year trading period, 90 per cent of which came from five of its top 10 investee companies.

Grover, the German technology rentals platform, raised €60m (£50m) in a Series B funding round in April, the result of which is that Augmentum’s 8.3 per cent stake is now worth £18.6m, up from £12.9m in March 2021, and has more than doubled in value since Augmentum first invested in September 2019.

The fintech fund also booked a £5.2m gain on its 5.4 per cent investment in Tide, an emerging force in the small- and medium-sized enterprises (SMEs) challenger banking sector that now has a 6 per cent market share and serves 350,000 SMEs, after the group completed a £80m Series C funding round in July. The stake has doubled to £26.3m in value since Augmentum led a Series B funding round two years ago.

The value of the group’s 3 per cent stake in the world’s first ever peer-to-peer (P2P) lending company, Zopa, increased 60 per cent to £15.2m following two funding rounds, the latter of which was led by Softbank post period end and raised £220m. Operational progress supports the higher valuations as Zopa bank has attracted £675m of deposits since launch in June 2020 and issued 150,000 credit cards, thus becoming a top 10 credit card issuer in the UK.

Although Augmentum’s 3.8 per cent stake in J.C. Flowers backed share trading service interactive investor (II) was revalued upwards by 12.3 per cent to £36.6m, this only implies a read-through valuation of £965m. However, global investment group Abrdn (ABDN) is in talks to acquire II at a rumoured £1.5bn valuation, which would add £20.3m (10.8p a share) to Augmentum’s net asset value per share (NAV) of 142.1p.

I also note that the fintech group has made a £10.2m investment in US-based crypto exchange Gemini, a company founded by Cameron and Tyler Winklevoss, the billionaire brothers and former US Olympic rowers who famously lost ownership of Facebook against Mark Zuckerberg in 2008, but had the foresight to invest $10m buying 1.25m Bitcoins in 2012. The price has since rocketed 7,175-fold. They founded Gemini in 2014 and the business entered the UK market last year, being only one of 10 companies to have achieved FCA Cryptoasset Firm Registration.

I included Augmentum’s shares, at 102p, in my 2019 Bargain Shares Portfolio, and maintained my positive stance (at 140p) at the annual results (‘Upgrading target prices’, 22 June 2021), while also highlighting the potential for a windfall from II (‘Bargain Shares: On the M&A beat’, 8 November 2021).

I have no reason to change my positive stance. Mark Augmentum’s stake in II to a realistic exit price and the shares are trading on a modest six per cent premium to adjusted NAV despite the fintech fund having scarcity value, and delivering an internal rate of return of 21.5 per cent on its investments since IPO. Buy.

Note 1: Simon advised taking profits on TMT Investments at 580¢ a share to bank 140 per cent gain including dividend of 20¢ ('Takeovers, tender offers and taking profits', 9 September 2019), and subsequently advised buying back the shares at 318¢ ('On the hunt for recovery buys', 6 July 2020). 

Note 2: Simon advised taking profits on Futura Medical at 34p a share on Monday, 14 October 2019 ('Bargain Shares: golden opportunities', 14 October 2019). The selling price is used in the performance table. Current share price 35p.

Note 3: Simon advised selling Mercia Asset Management at 27.5p a share on Monday, 9 December 2019 ('Taking stock and profits', 9 December 2019). The selling price is used in the performance table. Current price 39p.

Source: London Stock Exchange opening offer prices at 8am on Friday, 1 February 2019 and latest bid prices or when Simon advised exiting the holding.

Northamber on the road to recovery

• First-half adjusted operating profit of £0.38m reverses £0.74m loss in 2020
• Double-digit growth in both revenue and gross margin despite facing market headwinds
• Half-year dividend raised by a third to 0.4p a share

The key take for me in the latest results from Northamber (NAR: 67p), one of the largest UK-owned trade-only distributors within the IT equipment industry, was the impressive improvement in both gross margin and revenue.

Despite lockdown challenges, half-year revenue increased by 13 per cent from £52.8m to £60m, of which more than half (£3.86m) was organic with the balance reflecting a full six-month contribution from audio-visual distributor Audio Visual Materials (AVM). The £2.1m acquisition completed in February 2020 and is helping to drive higher-margin growth for IT and audio visual resellers in areas such as professional displays and video conferencing. Indeed, Northamber’s gross margin surged from 10.4 to 13 per cent year on year which, when combined with the double-digit revenue growth, added £2.3m to gross profit. This explains the eye-catching move back into underlying operating profitability.

Importantly, the well-funded company has a rock-solid balance sheet, retaining net cash of £7.4m even though the directors took the decision to raise stock levels (up from £5.9m to £8.5m) to maintain sufficient inventory to mitigate Covid-19 and Brexit-related logistic industry supply chain issues. A current ratio of 2.7 times highlights a strong working capital position. Northamber also owns three unencumbered freehold properties worth £7m.

The point is that with the shares, at 67p, trading on a 27 per cent discount to NAV of 92p, almost all the 27p a share cash pile is being thrown in the price for free. That looks anomalous given that Northamber is well placed to continue to grow profits as the UK economy bounces back from Covid-19, while the board has ample firepower to consider making further complimentary earnings-accretive acquisitions.

Northamber’s share price has risen 21 per cent since I included the company in my 2020 Bargain Shares Portfolio, and the re-rating has further to go. Buy.

Note 1. Chenavari Capital Solutions made a compulsory capital redemption of 34.73 per cent of the share capital at 85.72p a share in March 2020, and subsequent compulsory capital redemption of 21.9 per cent of the share capital at 72.93p a share in July 2020. The total return takes into account the capital redemptions. The company delisted its shares from AIM on 30 September at a closing bid-price of 35p. Approximately 17.9 percent of each holding was then redeemed on 9 November 2020 at 65.26p per share, and a further 67 per cent at 44.7p in May 2021. The board plans to make further compulsory capital redemptions in due course.

Note 2. Metal Tiger shares consolidated on the basis of one share for every 10 shares previously held on 1 July 2020.

Source: London Stock Exchange

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