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2022 Bargain Shares Portfolio Review

Simon Thompson reveals how his 2022 Bargain Shares Portfolio trounced both Aim and the main market, and updates his view on all eight companies.
February 16, 2023

My 2022 Bargain Shares Portfolio has delivered a healthy 16.6 per cent total return over the past year, a performance that compares favourably with the 18.4 per cent loss suffered by the FTSE Aim All-Share Total Return index, which consists of small and micro-cap companies, too. The portfolio also handsomely outperformed the modest 5.5 per cent gain posted by the benchmark FTSE All-Share index during the same holding period.

Simon Thompson’s 2022 Bargain Shares Portfolio performance
Company nameTIDMMarketActivityOpening offer price 11.02.22Latest bid price 08.02.23DividendsTotal return
Tavistock InvestmentsTAVIAimFinancial advisory services3.9p7.8p0.07p101.8%
Billington BILNAimStructural steel and construction safety solutions214p320p3p50.9%
H&THATAimFinancial services group304p444p13p50.3%
Sylvania Platinum SLPAimPlatinum group metals producer98.4p102p10.25p14.1%
Vector CapitalVCAPAimSecured property lender46.6p38p2.51p-13.0%
Henry BootBOOTMainLand development, construction, property investment and development300p241p6.29p-17.6%
ConygarCICAimProperty developer and investor160p125p0p-21.9%
TekcapitalTEKAimTechnology investment company29.15p19.9p0p-31.7%
Average 16.6%
FTSE All-Share Total Return index8,5258,993 5.5%
FTSE Aim All-Share Total Return index1,2581,027 -18.4%
Source: London Stock Exchange

 

Tavistock Investments (TAVI)

Aim: Share price: 8.15p

Bid-offer spread: 7.8-8.5p

Market value: £45.2mn

  • 53 per cent discount to sum-of-the-parts valuations
  • £12.3mn pro-forma net cash on balance sheet
  • £13.3mn deferred cash payout due from Titan Wealth
  • Fast-growing financial advisory business worth a third more than Tavistock’s own market capitalisation

Aim-traded Tavistock Investments (TAVI), a UK financial services group that helps more than 40,000 clients look after £4bn of investments, enjoyed a major re-rating after I highlighted the value opportunity 12 months ago. However, the shares still trade on less than half my sum-of-the parts valuation of £95.6mn (17.2p a share).

Having sold its profitable multi-asset manager to discretionary fund manager Titan Wealth for an initial cash consideration of £20mn in August 2021 – in the process becoming debt-free – Tavistock recently collected the first of three deferred annual instalments of £6.7mn (1.2p a share) from Titan Wealth. The balance of the deferred consideration of £13.3mn (2.4p) is due at the end of 2023 and 2024. In addition, Tavistock used £6mn of its cash windfall to purchase a 21 per cent stake in regulated IFA group LEBC Holdings (deferred consideration of £4mn due in April 2023).

This means that the group has pro-forma cash of £12.3mn (2.2p a share), of which a third will be used to make the £4mn deferred payment outstanding for the LEBC share purchase. It also means that the cash pile, the investment in LEBC and the outstanding £13.3mn deferred consideration due from Titan Wealth are cumulatively worth £31.6mn (5.7p), or more than two-thirds of Tavistock’s own market capitalisation of £45.2mn.

This means that Tavistock’s fast-growing advisory business is in the price for £13.6mn even though the division increased its cash profit contribution by 56 per cent, to £1.4mn, on revenue of £16.6mn in the six months to 30 September 2022. Put another way, it is effectively in the price for 3.3 times the £4.1mn cash profit contribution the unit reported on revenue of £31.3mn in the 2021-22 financial year.

To put the low-ball valuation into perspective, even if you only value Tavistock’s advisory business on a multiple of 15.5 times cash profit and two times annual revenue – and transactions in the sector have been materially above these levels in recent years – then as a standalone entity the business should easily be worth £64mn, or 4.7 times the amount embedded in Tavistock’s current market capitalisation.

Tavistock Investments sum-of-the-parts valuation

Portfolio company

Estimated value 31 January 2023

Value per share

Basis of valuation

Cash

£12.3mn

2.2p

2022/23 interim accounts adjusted for subsequent £3mn disposal of LEBC Hummingbird post period end, and receipt of first deferred payment of £6.7mn from Titan Wealth

LEBC stake (initial consideration)

£6.0mn

1.1p

Announcement 23 May 2022

Titan Asset Management deferred consideration

£13.3mn

2.4p

Sale and purchase agreement 14 June 2021

Tavistock Advisory

£64.0mn

11.5p

Multiple of two times revenue for 2021/22 financial year and 15.6 times Ebitda multiple

Total NAV

£95.6mn

17.2p

 

Source: Tavistock Investments 2022/23 interim accounts, and London Stock Exchange filings.

Moreover, Tavistock has been offered a bank facility of £20mn to assist with acquisitions, a sensible way of recycling the future cash proceeds from Titan Wealth into value-accretive acquisitions ahead of receipt of the deferred consideration. The re-rating has further to run. Buy.

 

Billington (BILN)

Aim: Share price: 330p

Bid-offer spread: 320-340p

Market value: £39.9mn

  • Massive EPS upgrades at end of 2022
  • Robust sales pipeline
  • Operational improvements help drive margin expansion
  • Healthy net cash position

Barnsley-based Billington (BILN), one of the UK’s leading structural steel and construction safety solutions specialists, had lost half of its market value since the start of the Covid-19 pandemic when I spotted the investment opportunity 12 months ago. Project delays, supply chain issues and input cost pressures had been impacting both revenue and profits.

That’s no longer the case. Buoyed by a resurgent order book, improving revenue mix and a bumper sales pipeline, house broker FinnCap pushed through massive earnings upgrades at the interim results last September, upgrading its full-year pre-tax profit estimate by 30 per cent to £3.9mn on maintained annual revenue forecasts of £90mn.

The group’s structural steel business continues to operate at near full capacity, fulfilling contracts in growth areas such as distribution warehouses, and has secured several larger-than-average contracts at an improved margin, particularly in the data centre, energy from waste and industrial sectors. This improves sales visibility into 2023.

In fact, FinnCap was forced to upgrade its estimates again in mid-December, raising 2022 and 2023 pre-tax profit forecasts by 50 and 55 per cent, respectively, such is the strength of the order book. The house broker now expects Billington to more than quadruple 2022 pre-tax profit from £1.3mn to £5.9mn on 9 per cent higher revenue of £90mn, buoyed by an eye-catching expansion in operating margin from 1.6 to 6.6 per cent. Moreover, the directors are guiding the market to expect an even better outcome in 2023 given the strength of activity levels and the internal efficiency improvements made.

Billington financial results and estimates
Year end 31 DecRevenuePre-tax profit Earnings per sharePrice/earnings ratioDividend per shareDividend yieldPay-out ratio
2020A£66.0m£1.7mn11.3p29.24.3p1.3%38%
2021A£82.7m£1.3mn8.1p40.73.0p0.9%37%
2022E£90.0m£5.9mn39.5p8.411.0p3.3%28%
2023E£115.0m£7.6mn50.1p6.613.0p3.9%26%
2024E£115.0m£8.0mn52.7p6.315.0p4.5%28%
Source: Company data, FinnCap estimates (14 December 2022). Calculations based on 12.1mn shares in issue.

FinnCap believes Billington’s operating margin can be maintained at 6.6 per cent, which on 28 per cent higher revenue of £115mn, implies both operating profit and pre-tax profit can rise by 29 per cent to £7.6mn in the 2023 financial year. On this basis, expect earnings per share (EPS) to increase by more than a quarter to 50.1p and a likely 2022 dividend per share of 11p to be lifted to 13p.

Importantly, Billington is managing cost pressures well, utilising a proportion of the group’s healthy cash resources to maximise the margin available on contracts through stockpiling of steel when appropriate to take advantage of attractive supply and pricing opportunities. That’s a sensible use of resources. Furthermore, the group can afford to invest in working capital as net cash is still expected to have risen from £9.4mn to £10.7mn last year. FinnCap has pencilled in net cash of £14.4mn (119p) by the end of 2023, or 40 per cent of its closing year-end net asset value (NAV) estimate of £36mn (297p).

Billington's solid balance sheet and improving financial returns
Year end 31 DecNet asset value per sharePrice to net asset valueAdjusted return on equityNet cashNet cash per share
2020A242p1.404.7%£13.9m115p
2021A243p1.403.3%£9.4m78p
2022E265p1.2814.9%£10.7m88p
2023E295p1.1517.0%£14.4m119p
2024E325p1.0516.2%£17.0m141p
Source: Company data, FinnCap estimates (14 December 2022). Calculations based on 12.1mn shares in issue.

Despite the strong share price rally, Billington’s shares are still modestly rated, priced on a forward price/earnings (PE) ratio of 6.8 and offering a prospective dividend yield of 3.8 per cent for the 2023 financial year. The low rating combined with a decent cash pile and a modest 1.15 times estimated year-end price-to-book value ratio highlights the takeover attractions of the company to likely predators, too. Despite the strong share price rally, Billington’s shares are still modestly rated, priced on a forward price/earnings (PE) ratio of 6.6 and offering a prospective dividend yield of 3.9 per cent for the 2023 financial year. The low rating combined with a decent cash pile and price-to-book value parity highlights the takeover attractions of the company to likely predators, too. Buy.

 

H&T (HAT)

Aim: Share price: 445.5p

Bid-offer spread: 444-447p

Market value: £196mn

  • Forecast EPS growth of 75 per cent (2022) and 60 per cent (2023)
  • Prospective dividend yield of 5.2 per cent for 2023
  • Trading on modest premium to 2023 net tangible book value estimate

Established in 1897, H&T (HAT) has cemented its position as the market leader in UK pawnbroking, part of the alternative credit market that is shunned by the mainstream lenders and, as such, provides a valuable source of credit to individuals lacking the financial status to borrow from high-street banks.

The group’s services have been in strong demand, so much so that analyst Gary Greenwood at house broker Shore Capital was forced to raise his 2022 pre-tax profit estimate by 18 per cent to £18.7mn last summer, and has edged it up to £19.1mn since then. In the first half of 2022, H&T’s pledge book increased from £66.9mn to £85.1mn, well above pre-pandemic levels (£72mn). Higher customer demand due to the cost of living crisis coupled with a strong and rising sterling gold price has added fuel to lending growth, a key reason why H&T ended last year with a pledge book of £99mn, up 48 per cent on the year. The directors report that lending in the new financial year has remained strong.

A high sterling gold price is attractive for gold-purchasing activities, too. It also reduces the risk of H&T incurring a loss when unredeemed pledged items are sold through the group’s 267-store estate or if the gold content in them is scrapped. The group’s average loan is below 65 per cent of the value of the asset used to secure the pledge, thus protecting credit quality on the lending book by incentivising customers to redeem their pledges to retain ownership of their assets.

H&T financial results and estimates
Year end 31 DecPre-tax profit Earnings per sharePrice/ earnings ratioDividend per shareDividend yieldPay-out ratio
2020A£15.6mn32.1p13.98.5p1.9%26%
2021A£10.0mn20.8p21.412.0p2.7%58%
2022E£19.1mn36.3p12.315.0p3.4%41%
2023E£32.6mn57.9p7.723.0p5.2%40%
2024E£39.2mn69.6p6.428.0p6.3%40%
Source: Company data, Shore Capital estimates (17 January 2023). Dividend yield and PE ratio calculated using share price of 445.5p.

Other parts of H&T’s business have been flying, too. Retail sales increased 30 per cent to £48mn last year with the directors noting that December was a record sales month. Luxury watches remain in high demand; the category is increasingly being seen as an alternative asset class. Sensibly, management has been capitalising on the opportunity in watches by making the complementary acquisition of Swiss Time Services, an independent watch centre that already serviced a large proportion of H&T’s watches prior to their sale.

Importantly, H&T retains a rock-solid balance sheet. Net debt was only £8.6mn at the half-year-end before factoring in the £4.3mn acquisition of Swiss Time Services (completed in July 2022). H&T subsequently raised £16.9mn in a placing, at 425p a share, in September 2022, so after factoring in the £14mn second-half growth in the pledge book, balance sheet gearing remains modest.

H&T strong balance sheet and high return on equity
Year end 31 DecTangible net asset value per sharePrice to tangible net asset valueReturn on tangible equity
2020A344p1.309.8%
2021A349p1.286.0%
2022E377p1.189.7%
2023E417p1.0714.6%
2024E462p0.9615.8%
Source: Company data, Shore Capital estimates (17 January 2023). 

Moreover, with the pledge book around 50 per cent higher than a year ago, the group looks on course for another year of strong growth. This explains why Shore Capital is pencilling in 60 per cent higher EPS of 57.9p in 2023 and a 50 per cent plus hike in the payout to 23p per share. On this basis, the shares are priced on a 2023 forward PE ratio of 7.7, offer a prospective dividend yield of 5.2 per cent and are trading marginally above estimated net tangible assets at the year-end. Buy.

 

Sylvania Platinum (SLP)

Aim: Share price: 102.5p

Bid-offer spread: 102-103p

Market value: £275mn

  • Enterprise valuation only two times forecast post-tax profit
  • Shares offer 10 per cent dividend yield
  • Highest quarterly production since start of Covid-19 pandemic

Sylvania Platinum (SLP), a cash-rich, fast-growing, low-cost South African producer and developer of platinum, palladium and rhodium, has reported its strongest quarterly production since the start of the Covid-19 pandemic, delivering 19,276 platinum group metal (PGM) ounces (oz) in the three months to 31 December 2022, up from 19,194oz in the previous quarter.

The group has two distinct lines of business: the re-treatment of PGM-rich chrome tailings material from mines in South Africa's north-west province; and the development of shallow mining operations and processing methods for low-cost PGM extraction. The strong production figures reflect higher PGM grade feeds received from Samancor’s host mine to Sylvania’s Mooinooi operation, and improved recovery efficiencies at the group’s Lannex operation, which is benefiting from the implementation of a new flotation reagent regime. A fortnight ago, the directors raised their production guidance by 2,000oz to 70,000-72,000oz for the financial year to 30 June 2023.

The production report also revealed that Sylvania has earned $46.4mn of cash profit across the first two quarters of its 2022-23 financial year, up from $36.2mn in the same period in 2021, on slightly higher net revenue of $70mn. This will become apparent when the group reports its interim results on Tuesday, 21 February. Sylvania is set to report 32 per cent higher net profit of $32.2mn.

The results will also reveal that despite paying shareholders a final dividend per share of 8p at a cost of $25.6mn, and spending $6.2mn on capital expenditure, net cash has increased from $121mn to $124mn since the 2022 financial year-end. Based on full-year cash profit forecasts of $121mn on revenue of $191mn, house broker Liberum Capital expects net cash to balloon to $169mn (£141mn) by 30 June 2023, or half Sylvania’s current market capitalisation of £275mn.

Sylvania Platinum profit forecasts
Year to 30 Jun2021A2022A2023E
Revenue$208mn$152mn$191mn
Ebitda$145mn$83mn$121mn
Reported operating profit$142mn$80mn$118mn
Net interest$1.3mn$1.3mn$4.9mn
Reported pre-tax profit$143mn$81mn$123mn
Fully diluted earnings per share 35.9c20.4c31.5c
Dividend per share4.0p10.25p10.5p
Price/earnings ratio3.56.13.9 
Dividend yield3.9%10%10.2%
 
Leverage 2021A2022E2023E
Net cash$106mn$121mn$169mn
Net cash/Market capitalisation31.7%36.2%50.5%
Source: Liberum Capital (30 January 2023)

Effectively, the operational business is in the price for £134mn, or a little over two times analysts’ net profit forecasts of $84.1mn (£68mn) for the current financial year. Moreover, with the benefit of an average basket price of $2,432 per oz – three times the group’s all-in cash cost of production – Sylvania’s cash generation is such that the board is able to declare hefty cash dividends to reward shareholders. Indeed, Liberum is pencilling in a total current year payout of 10.5p a share covered 2.5 times from EPS of 31.5¢ (25.5p), implying the shares offer an enticing prospective dividend yield of 10.2 per cent.

It’s worth pointing out that rhodium accounted for 11.5 per cent of the group’s PGM prill split in the 2021-22 financial year, or more than three times higher than is found in platinum-bearing ore from the Merensky Reef in South Africa. Rhodium’s major use is as a catalyst in three-way catalytic converters in cars, as it is two to three times more effective than platinum in the auto-catalyst in reducing nitrogen oxide emissions. That’s worth bearing in mind as there could be a demand pull from new carmakers as the chip supply shortage eases. Buy.

 

Vector Capital (VCAP)

Aim: Share price: 39p

Bid-offer spread: 38-40p

Market value: £17.6mn

  • 15 per cent loan book growth in 2022
  • Average loan size reduced by 15 per cent to £0.5mn
  • 2022 PE ratio of 8 and dividend yield of 6.2 per cent

Vector Capital (VCAP), a commercial lender that offers secured property loans to mainly small property developers who buy properties to refurbish and re-sell, lifted its loan book by 15 per cent growth to £53.4mn last year.

At the year-end, Vector had 107 live loans, a third higher than 12 months earlier, but the average loan size has been reduced from £0.59mn to £0.5mn, a strategic move to diversify risk. Importantly, the company has been able to pass on the majority of its higher borrowing costs to customers, and in some cases reduce gearing to maintain margins.

Vector Capital delivering strong loan growth
Financial year to 31 DecAggregate loan book
2017£12.5mn
2018£21.1mn
2019£33.6mn
2020£32.7mn
2021£46.3mn
2022£53.4mn
Source: Vector Capital Aim Admission Document, and London Stock Exchange filings

 

 

However, the challenging property market environment means that Vector will make a £0.2mn provision for doubtful debts when it releases annual results in early April 2023. This is the reason why analysts at WH Ireland expect pre-tax profit to dip slightly from £2.8mn to £2.7mn, rather than deliver the £2.9mn that analysts at Allenby Capital had been forecasting when I highlighted the company 12 months ago.

Vector Capital financial results and estimates
Year end 31 Dec20182019202020212022E2023E
Revenue £1.84mn£3.59mn£4.33mn£5.28mn£5.90mn£6.30mn
Pre-tax profit£1.24mn£1.97mn£2.35mn£2.82mn£2.70mn£2.90mn
Year-end loan book£21.1mn£33.6mn£36.4mn£46.3mn£53.4mnna
Earnings per sharenana5.58p5.24p4.90p5.00p
Dividend per sharenana2.4p2.4p2.4p2.5p
Price/earnings rationana7.07.48.07.8
Dividend yieldnana6.2%6.2%6.2%6.4%
Source: Company data, WH Ireland estimates

That said, bad debts have been historically low, a reflection of both the company’s strict credit underwriting and a conservative loan-to-value ratio on the lending book (53.5 per cent in 2021). Vector has good relationships with its wholesale lenders, securing a £5mn increase in its debt facility in the second half of 2022 to an aggregate £40mn. Recycling internal cash flow and £24.5mn of shareholders’ equity support further growth in profitable lending, too, a fact that is not reflected in the current rating with the shares priced on a modest 2022 PE ratio of eight, offering a dividend yield of 6.2 per cent and rated 28 per cent below net tangible asset value of 54p.

To put the ‘margin of safety’ into perspective, Vector would have to write off almost £7mn of its £53.4mn loan book for the shares to be trading at price-to-book value parity, an armageddon scenario that is simply not going to happen. The low-ball rating is worth exploiting. Buy.

 

Henry Boot (BOOT)

Main: Share price: 244p

Bid-offer spread: 241-247p

Market value: £346mn

  • Record underlying operational profit in 2022
  • Analysts rein back 2023 earnings estimates to reflect more challenging market conditions

Established over 135 years ago, Sheffield-based Henry Boot (BOOT) is one of the leading land development, property investment and development, and construction companies in the UK. It’s well-run by respected management who have a track record of delivering. They maintained that record last year, delivering the highest level of underlying operating profit in the group’s history, helped by £29.6mn of asset disposals in the second half.

Admittedly, the decline in commercial property valuations – the CBRE index registered a 13 per cent reversal in 2022 – took some of the shine off the annual results. Although Henry Boot completed its disposals at a 17 per cent premium to book value, the remaining investment portfolio has not been immune to the sector-wide upwards yield shift.

However, there are many positives. For instance, Hallam Land, the group’s land developer, sold 3,800 plots in 2022, a 25 per cent increase on the prior year, and still managed to edge up its land portfolio to 95,407 plots, of which 10 per cent have planning consent. Analysts at broking house Panmure Gordon estimate that the division contributed £17.1mn of operating profit on revenue of £37.2mn in 2022, or 36 per cent of the broker’s £46.8mn group profit estimate. They expect an even better outcome from the division this year, highlighting that Hallam Land started 2023 with 1,600 plots of forward sales to mitigate some of the current malaise in the land-buying market.

That said, chief executive Tim Roberts is honest enough to admit that 2023 will be a more challenging year for the group, hence why Panmure reined back its pre-tax profit estimate from £54.4mn to £41.7mn, implying a 9 per cent profit decline on the record 2022 numbers. Panmure is pencilling in a slide in 2023 EPS from 24.4p to 20.2p, but still expects the dividend per share to be raised from 6.7p to 7.2p.

Henry Boot earnings estimates
Year end 31 DecSales Pre-tax profit before amortisationEarnings per shareDividend per sharePrice/ earnings ratioDividend yield
2020A£222.4mn£17.1mn8.9p5.5p27.42.3%
2021A£230.6mn£35.1mn20.9p6.1p11.42.5%
2022E£330.7mn£46.0mn24.4p6.7p102.7%
2023E£358.8mn£41.7mn20.2p7.2p12.13%
Source: Company data, Panmure Gordon estimates (24 January 2023)

On this basis, the shares are rated on a current year forward PE ratio of 12.1, offer a prospective dividend yield of 3 per cent and are priced on a 17 per cent discount to Panmure’s spot NAV per share estimate of 295p. Historically, the shares have traded in a range between one to 1.4 times forward price-to-book value (on a rolling 12-month basis). Henry Boot retains a solid balance sheet, too, as gearing is only 12 per cent and the £106mn investment portfolio alone covers net debt of £49mn more than two times.

Despite delivering a record operational performance in 2022, Henry Boot’s shares are one of the laggards in my portfolio, a reflection of the change in the macroeconomic and property market environment since last summer. The asset backing and low entry point suggest that long-term holders should be rewarded in time. Hold for recovery.

 

Conygar (CIC)

Aim: Share price: 126p

Bid-offer spread: 125-127p

Market value: £75.1mn

  • Planning application submitted for 249,000 sq ft bioscience building
  • £47.5mn funding secured for student accommodation block
  • £30mn zero dividend preference share fundraising

Aim-traded property development and investment group Conygar (CIC) is making decent progress developing its flagship 36-acre The Island Quarter site in Nottingham, even if the share price fails to reflect it. The site was recently revalued at £93mn by surveyors at Knight Frank, up from £70.5mn at the 2021 financial year-end. The latest valuation equates to £2.5mn per acre and factors in the project’s development in the past 12 months.

Construction work has started on a 693-bed purpose-built student accommodation (PBSA) scheme on one acre of the site, targeting completion ahead of the start of the 2024 academic year. Conygar has been using its own cash to finance the project to date, but at the tail end of last year the group secured a sensibly priced development and investment facility of £47.5mn to fund the £59mn build costs of the PBSA scheme. Projected gross rental income of £5.7mn equates to a near-10 per cent yield on build cost, highlighting potential for a £30mn (50p a share) plus valuation windfall (based on current regional PBSA yields) when the scheme completes in 18 months’ time.

Conygar retained net cash of £17.4mn (29.1p) on 30 September 2022 and plans to raise £30mn of additional capital through the issue of zero-dividend preference shares at a gross redemption yield of 7.5 per cent in early 2023 to continue the development of The Island Quarter.  

Management recently submitted a detailed planning application for a 249,000 square feet (sq ft) bioscience building on the site, located adjacent to an existing bioscience hub. Conygar has already been granted full planning permission on an adjacent plot for two hotels to be managed by Intercontinental Hotels Group, 247 build-to-rent apartments, a food and beverage offering and co-working space.

Conygar's sum-of-the-parts valuation

Investment portfolio

Valuation

Island Quarter, Nottingham

£93.0mn

Haverfordwest

£9.3mn

Holyhead Waterfront

£5.0mn

Rhosgoch

£2.5mn

Parc Cybi

£0.4mn

Cash

£17.4mn

Other assets

£0.2mn

Valuation

£127.7mn

Provisions

£3.1mn

Sum-of-the-parts valuation

£124.6mn

Shares in issue

59.65mn

Sum-of-the-parts valuation per share

208.6p

Source: Conygar annual 2022 report and accounts

Capital will be realised from Conygar’s other assets, too, including the wholly owned site at Haverfordwest, which has outline planning consent for 729 homes and 90,000 sq ft of retail space. The property is in the books for £9.3mn (15.6p) and expect further announcements in the coming months.

Conygar also retains valuable plots of land at Rhosgoch and Parc Cybi on Anglesey, which have a combined carrying value of £2.9mn. Despite receiving interest from the renewable sector, the directors are retaining the land to see whether the UK and Welsh governments commit to energy projects on Anglesey. If they do, the land holdings would surge in value.

Expect news early this year on the planning application for a 250-berth marina, 259 apartments and homes, and commercial and retail space at Conygar’s site at Holyhead Waterfront. That site is in the books for £5mn.

Of course, the increase in funding costs for property development projects, and the higher yield investors are demanding to make them viable financial propositions, has changed the investment market environment since I suggested buying the shares 12 months ago. That said, Conygar is clearly making good progress in creating shareholder value from The Island Quarter, a factor that is not reflected in the 39 per cent share price discount to net asset value. Buy.

 

Tekcapital (VCAP)

Aim: Share price: 20.2p

Bid-offer spread: 19.9-20.5p

Market value: £30.5mn

  • 31 per cent discount to sum-of-the-parts valuations
  • IPO of investee company Microsalt likely to be well received

Tekcapital (TEK), an investment company focused on food technology, autonomous vehicles, smart eyewear and respiratory medical devices, has had a rollercoaster ride since I suggested buying the shares 12 months ago. The share price initially rose 30 per cent by August 2022, before relinquishing all the gains, and more, to become the laggard in my 2022 portfolio.

The reason was a de-rating of its two-listed holdings: Innovative Eyewear (US:LUCY), the US operating subsidiary of Lucyd, the first company to deliver prescription glasses with Bluetooth technology; and Aim-traded respiratory medical device company Belluscura (BELL).

Innovative raised $7.3mn when the group listed its shares, at $7.50 (£6.17), on the Nasdaq last summer. The current stock price is $2.723, valuing Tekcapital’s holding of 5.19mn shares at $11.6mn (6.5p a share), or 48 per cent less than the $27mn valuation in its 2022 interim accounts. Tekcapital’s holding in Belluscura has halved in value from $18.9mn to $8.8mn (4.5p) in the same period, too.

However, as I noted in my update five weeks ago (‘A tech bargain that’s primed to recover’, 13 January 2023), both Belluscura and Innovative Eyewear have been signing important distribution agreements, which augurs well for a ramp-up in their sales. Innovative has also just launched a new version of its Lucyd Lyte smart e-glasses, with improvements made to the audio functions, battery life and touch controls.

Moreover, Belluscura has recently secured a $5mn convertible loan that bolsters its liquid resources of $11.9mn, so the company has additional working capital to deliver on its existing order book as well as funding to support the delivery of new orders. It should help allay investors’ concerns on that front – one reason for the de-rating.

Tekcapital's portfolio fair value estimate at 14 February 2023
Portfolio companyCarrying value 31 May 2022Estimated carrying value 8 February 2023Value per share
Guident$18.1mn$18.1mn10.0p
Innovative Eyewear$27.1mn$11.6mn6.4p
Salarius$7.0mn$13.1mn7.2p
Belluscura$18.9mn$8.8mn4.9p
Smart Food Tek$0.04mn$0.04mn0.0p
Convertible loan notes$1.0mn$1.0mn0.6p
Portfolio fair value$52.6mn29.1p
Cash, receivables$2.5mn1.4p
Intangible assets$0.3mn0.2p
Total NAV$55.4mn30.7p

Source: Tekcapital's 2022 interim accounts and London Stock Exchange RNS since 28 July 2022. Belluscura valuation based on share price of 43p a share. Innovative Eyecare valuation based on stock price of $2.23. Guident investment stated at 31 May 2022 valuation. Exchange rate used: £1:$1.20.

 

Microsalt IPO likely to be well received

In recent weeks another portfolio company, Microsalt, a business that has developed and makes a proprietary low-sodium salt, has been in the news, signing up US supermarket chain Giant Food of Maryland to carry its new saltshakers in store. Microsalt is gaining real traction in North America, having previously signed up Hannaford Supermarkets and a raft of other retailers to stock its products. In addition, the company has just signed an important distribution agreement with US Salt, a company that distributes over 90 per cent of the private-label, round can salt business in the US.

Interestingly, Microsalt has appointed Zeus Capital as its broker ahead of an IPO on London’s junior market. When Microsalt received an equity investment of $0.4mn in May 2022 from Spanish venture fund Tech Transfer Agrifood it was at a post-money valuation of $9.3mn. However, Tekcapital has just converted $1.35mn of convertible loan stock into ordinary shares at $2.18 per share, which gives Microsalt a valuation of $20mn. Tekcapital now holds 6.03mn shares, worth $13.1mn, a valuation well above the $7mn valuation in the company’s 2022 interim accounts.

I can see Microsalt’s London IPO being well received given that the company’s patented salt products enable food manufacturers and consumers to slash the sodium content of their food without impacting the flavour, a potential lifesaver for a third of adults worldwide who suffer from high blood pressure and other cardiovascular diseases.

 

A smart play on autonomous vehicles

Another investee company, Guident, is starting to gain traction, too, having been selected by Boca Raton Innovation Campus (BRiC) to provide an autonomous shuttle to connect to the Boca Raton Tri-Rail station, the most frequented station in South Florida. The service will utilise vehicles equipped with autonomous capabilities that have been integrated with Guident’s remote monitor and control centre, located at BRiC. Guident’s patented software provides an added layer of safety for autonomous shuttle services by delivering human supervision to autonomous vehicle fleets.

Of course, Guident needs to sign many more commercial deals for the $18mn carrying value of Tekcapital’s investment to rise, but it’s promising.

 

Unwarranted discount to sum-of-the-parts valuations

The bottom line is that Tekcapital’s shares are trading 34 per cent below my spot sum-of-the-parts valuations, even though there are real prospects of a post-IPO valuation uplift to the holding in Microsalt as well as recovery potential for the holdings in both Innovative Eyewear and Belluscura. Buy.

 

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