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Three under priced opportunities

Our stock picking expert highlights a trio of value picks in his small-cap hunting ground.
April 26, 2021

I always carry out sum-of-the-parts valuations during my research on a company to ascertain whether there is a pricing anomaly to exploit. I also try and identify share price catalysts to narrow the valuation gap, and assess when they are likely to materialise.

BigBlu Broadband, a provider of alternative superfast broadband products, is a prime example. Last autumn, Christopher Mills, founder of Harwood Capital and non-executive director of BigBlu, splashed out £2.26m buying shares in the company, almost all of which was on behalf of North Atlantic Smaller Companies Investment Trust, the fund he runs. Harwood owns a 27.7 per cent interest in BigBlu’s shares.

At the time, I suggested that the growth in BigBlu’s Quickline subsidiary was being seriously underpriced and the stake had potential to be worth as much as the company’s own market capitalisation (‘Exploiting valuation anomalies’, 15 October 2020). That prediction was not far off the mark following BigBlu’s disposal this week. Moreover, it follows last summer’s sale of BigBlu’s UK and European satellite broadband businesses for £37.8m – a 50 per cent premium to the prices paid the company. Even though BigBlu’s share price has risen 30 per cent in the past six months, investors have yet to fully factor in the financial implications of both transactions.

 

BigBlu Broadband’s eye-catching disposal

  • Disposal of Quickline stake for up to £48.6m.
  • Ongoing interest in Quickline through convertible loan notes.
  • Expansion in Australasia and Nordics.

Aim-traded BigBlu Broadband (BBB:122p), a provider of alternative superfast satellite, fixed wireless and 4G/5G broadband products, has announced the disposal of its 52.7 per cent-owned Quickline subsidiary for a maximum consideration of £48.6m. That sum equates to 5.8 times the company’s investment, a return that has been produced in less than four years.

Quickline is building its own fixed wireless access networks, supported by increasing amounts of fibre infrastructure, to address the ‘digital divide’ in the UK. The fast-growing business targets poorly served parts of Lincolnshire and Yorkshire and its investment prospects are attractive enough for private equity group Northleaf Capital Partners to pay a multiple of 23 times forecast cash profit to enterprise valuation.

On completion BigBlu will receive £31.1m cash and £5.6m convertible loan notes (CLNs) yielding 4.5 per cent in the acquisition vehicle. In addition, the company is expected to receive a cash earn-out of £10.1m and a further £1.8m in CLN’s based on Quickline’s financial performance in the 12 months to 31 March 2022. Post completion, BigBlu’s cash and cash equivalents of £32.8m will equate to 48 per cent of its own market capitalisation. The combined £7.4m CLNs can convert into 8 per cent equity in the acquirer’s holding company, thus offering potential for further value accretion to BigBlu’s shareholders.

BigBlu focus is now on its two overseas businesses: SkyMesh, a leading Australian satellite broadband provider with 45,000 customers; and a Nordic satellite and fixed wireless broadband business that aims to expand its geographic footprint into Sweden and Finland.

In Australia, SkyMesh targets customers in rural areas outside of the fibre footprint, who only receive a low-speed and low-quality service from traditional fixed telecom broadband suppliers. The aim is to grow the customer base by 10,000 per year through organic channels, and expand the offering into New Zealand. The operation is forecast to report both cash profit and operating free cash flow over £3m this year and has potential for an IPO or disposal, too.

In the Nordics, BigBlu is investing £2m upgrading its fixed wireless network (8,900 subscribers), and should benefit from greater satellite capacity (currently 2,300 subscribers) from the world's leading satellite operators Eutelsat (NYSE /Euronext: ETL) and ViaSat (NSQ: VSAT) to support expansion into Sweden and Finland over the next two years. The Nordics operation is forecast to report a cash profit of £2.2m in the 2021 financial year.

BigBlu’s share price is up 11 per cent since my last buy call (‘Three high growth small-cap plays’, 11 January 2021), and there is still compelling value on offer. Adjusting for cash on the balance sheet and the deferred cash and VLN earn-outs, BigBlu’s enterprise valuation equates to only eight times finnCap’s operating profit estimate of £3.1m for the 2021 financial year. I am raising my target price from 165p to 175p. Buy.

 

Record’s mandates hit a record

  • Assets under management equivalent (AUMe) hit all-time high.
  • Client numbers rise 17 per cent to 89 in 12-month period.
  • Launch of new currency Impact/ESG fund imminent.

Currency manager Record (REC:83p) continues to gain momentum under the leadership of chief executive Leslie Hill, who was appointed last year. AUMe surged 37 per cent to an all-time high of US$80.1bn in the 12 months to 31 March 2021, buoyed by US$7.6bn of higher margin dynamic and multi-product mandates and US$2.1bn inflow from lower margin passive hedging. In the last two quarters, Record has reported average AUMe net inflows of US$5bn.

Record looks set to continue to gain traction. For instance, the company has developed a market-first Dublin-based Currency Impact/ESG fund [in collaboration with a European wealth manager]. The initial fund size is US$200m to US$300m with launch scheduled for the current quarter. Although analysts at house broker Panmure Gordon have embedded US$200m of net flows from the new fund in their 2021/22 forecasts, implying a revenue contribution of under £0.3m based on conservative margin estimates, they point out that there is “scope for each of these assumptions to be materially increased.”

Moreover, with Record’s AUMe and revenue run-rate significantly higher than 12 months ago, expect a step change in profitability in the financial year to 31 March 2022. Panmure is pencilling in a 71 per cent increase in pre-tax profit to £11.2m on 30 per cent higher revenue of £33m, an outcome that also reflects the operational leverage of the business. On this basis, expect earnings per share (EPS) to rise from 2.7p to 4.6p with the board likely to pay out all net profits as dividends. The directors can afford to do so because Record’s debt free balance sheet includes cash of around £19m (9.7p a share) and the business is highly cash-generative.

Record’s share price has risen 63 per cent since I covered the third quarter results 11 weeks ago (Four potential small-cap bargains’, 7 February 2021), and has produced a 106 per cent total return since I included the shares in my market beating 2018 Bargain Shares portfolio, contributing to that portfolio’s 100 per cent total return. More importantly, priced on a cash-adjusted forward price/earnings (PE) ratio of 16, and offering a prospective dividend yield of 5.5 per cent, there is ample scope for further gains. I raise my target from 75p to 100p. Buy.

Simon Thompson's Bargain Shares Portfolios Performance (2016-2021)
PortfolioPortfolio total return to dateFTSE All-Share total return to dateFTSE Aim All-Share total return to date
201690.1%49.5%96.0%
2017124.9%19.4%49.8%
2018100.0%9.3%23.6%
201978.3%13.0%43.1%
202047.5%-0.5%33.2%
20219.9%8.6%5.8%
Source: London Stock Exchange, FTSE International, Bargain Shares Portfolio total return calculated on offer-to-bid basis with dividends un-invested. Latest prices at 2pm on 26 April 2021.

RBG’s earnings momentum builds

  • Convex Capital completes seven deals since start of 2021.
  • Analysts upgrade earnings forecasts.
  • Earnings accretive acquisition of Memery Crystal.

RBG (RBGP: 136p), a professional services group that owns law firm Rosenblatt, a nascent litigation funding arm LionFish and specialist finance boutique Convex Capital, has issued a robust set of annual results and made an earnings accretive acquisition.

Pre-tax profit of £7.7m was flat on 12 per cent higher revenue of £22.4m in 2020 as a robust showing from Rosenblatt was offset by previously flagged delays in converting Convex’s bumper pipeline of deals. Trading in both businesses is now buoyant. Convex has already completed seven deals generating revenue of £4.5m since the start of 2021, and has a pipeline of 33 deals of which six are at various stages of completion. Such is the momentum that house broker N+1 Singer has upgraded its 2021 revenue estimate for Convex from £3.4m to £6m, and even that looks on the light side.

Analysts are looking for Rosenblatt to edge up 2021 revenue to £21.3m, having seen the business report its best year ever in 2020 on the back of corporate instructions, dispute resolution and more contingent work. N+1 Singer expects LionFish to report 2021 revenue of £3.1m, a similar outcome to 2020. Factoring in the positive trading update, N+1 Singer upgraded their 2021 revenue estimate from £28m to £30.3m and expect pre-tax profit to rise to £8.2m to produce EPS of 7.6p. The board paid out a 3p annual dividend in February 2021, and N+1 Singer expect this to be hiked by 50 per cent, implying the shares offer a 3.4 per cent prospective dividend yield. Expect more upgrades, too.

That’s because alongside the annual results RBG announced the £30m acquisition of London-based Memery Capital, a legal services firm operating in corporate finance, real estate, dispute resolution and commercial law. On completion, RGB is issuing the vendors £11.2m in shares and paying them £12m of cash (funded through a new £10m three-year term debt facility), and will make a further £6.8m of deferred cash payments within the next 12-months. The 43-year old legal services firm’s 29 partners and 66 fee earners generated a profit of £8m (before profit shares and members’ remuneration) on revenue of £23.2m in the last financial year.

Bearing this in mind, N+1 Singer’s upgraded forecasts don’t take account of the acquisition, but given Memery’s profitability and the deal structure – RBG’s shares in issue will only rise 11 per cent and the annual interest cost on the debt facility is at most £315,000 – then expect some hefty upgrades to follow in due course. Indeed, I reckon that RBG’s £138m enterprise valuation equates to only nine times proforma annualised operating profit on the completion of the acquisition.

RBG’s shares have risen 43 per cent since I last suggested buying four weeks ago (Priced for a profitable outcome’, 30 March 2021), and have doubled in value since I initiated coverage last summer, at 68p (Alpha Report: ‘Back a winning legal team’, 2 June 2020). Ahead of likely 19 per cent upgrades for the 2022 financial year, implying EPS of 10.6p and a forward price/earnings (PE) ratio of 12.8, I continue to see re-rating potential and lift my target price from 140p to 175p. Buy.

Finally, I will be presenting a Stock Picking Masterclass webinar at 11am on Tuesday, 27 April, details of which can be found on the following link

 

■ 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].

Promotion: Subject to stock availability, both books can be purchased for the promotional price of £25 with free postage and packaging.

They 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. Details of the content can be viewed on www.ypdbooks.com.