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How the 2019 Bargain Shares portfolio beat the market

Simon Thompson's 2019 Bargain Shares portfolio smashed the market. Our ace small-cap stockpicking expert explains just how this was achieved, and why there is still material valuation upside to the portfolio
How the 2019 Bargain Shares portfolio beat the market

My 2019 Bargain Shares portfolio put in a vintage performance, returning 33.1 per cent in the past 12 months, or 19.7 per cent percentage points more than a FTSE All-Share index tracker fund and 26.4 percentage points more than the total return on the FTSE Aim All-Share in the same period.

Moreover, I recommended exiting three holdings: TMT Investments (TMT), a venture capital company that has a significant number of Silicon Valley investments in its portfolio; Futura Medical (FUM), a pharmaceutical company that is developing innovative products based on its transdermal Dermasys® drug delivery technology; and Mercia Asset Management (MERC), an asset management and investment company focused on UK technology businesses with high growth potential. What this means is that, including dividends banked, you will have turned 48 per cent of your invested capital into cash and still own seven holdings that are worth between them 85 per cent of your portfolio’s starting capital. This not only de-risks the portfolio, but means that the risk-adjusted return is even more impressive given the high cash holdings.


Simon Thompson's 2019 Bargain Shares Portfolio performance
Company nameTIDMOpening offer price 1.02.19Closing bid price 29.01.20 or exit price (see notes)DividendsPercentage change
TMT Investments (note one)TMT250¢580¢20¢140.0%
Futura Medical (note two)FUM14.85p34p0p129.0%
Bloomsbury PublishingBMY229p284p8.03p27.5%
Augmentum FintechAUGM102.4p100p0p-2.3%
Litigation Capital ManagementLIT77.5p73.6p0.81p-4.0%
Mercia Asset Management (note three)MERC29.57p27.5p0p-7.0%
Jersey Oil & GasJOG205p122p0p-40.5%
Average     33.1%
FTSE All-Share Total Return index6,8527,769 13.4%
FTSE Aim All-Share Total Return index1,0231,092 6.7%
Note 1: Simon advised taking profits on TMT Investments at 580¢ a share on Monday, 9 September 2019 ('Takeovers, tender offers and taking profits', 9 Sep 2019). The selling price is the one used in the performance table.
Note 2: Simon advised taking profits on Futura Medical at 34p a share on Monday, 14 October 2019 ('Bargain Shares: golden opportunities', 14 Oct 2019). The selling price is the one used in the performance table.
Note 3: Simon advised selling Mercia Asset Management at 27.5p a share on Monday, 9 December 2019 ('Taking stock and profits', 9 Dec 2019). The selling price is the one used in the performance table.
Source: London Stock Exchange opening offer prices at 8am on Friday, 1 February 2019 and closing bid prices on Wednesday, 29 January 2020, or on the date that Simon advised exiting the holding.


TMT Investments

Aim: Share price: 408¢

Bid-offer spread: 388-418¢

Market value: US$92m


When I suggested buying shares in Aim-traded TMT Investments (TMT), a venture capital company that invests in high-growth, internet-based companies across a variety of sectors including a significant number of Silicon Valley investments, they were trading 20 per cent below net asset value (NAV) of 312¢ per share even though cash accounted for 85¢ a share. This seemed harsh given that NAV per share had more than trebled in the eight years since TMT’s IPO, implying an internal rate of return (IRR) of 19.5 per cent.

The portfolio has continued to do well, buoyed by gains on Bolt, a leading international ride-hailing company previously known as Taxify ( Having completed a $175m (£135m) funding round led by automotive giant Daimler AG and European venture capital fund Korelya Capital in May 2018, Bolt subsequently completed another funding round last summer, which raised the value of TMT’s holding by almost 30 per cent to $22m.

It wasn’t an isolated example. A new equity funding round by portfolio company, PandaDoc, a document automation Software-as-a-Service (Saas) provider ( raised the value of TMT’s stake by 79 per cent. The company also sold its entire investment in mobile technology investor relations app platform, The IRApp (, at an 82 per cent premium to book value. For good measure, the board paid out a special dividend of $5.8m (20¢ a share) out of the $22.6m cash received from selling TMT’s holding in Wrike (, the collaborative work management platform that provides workplace teams with a single digital platform to maximise their operational performance. TMT had invested $1m in Wrike in June 2012, highlighting the eye-watering returns that can be made from venture capital.

The cash pile got a further boost after TMT’s directors sold 9 per cent of its stake in Backblaze (, a leading data back-up and cloud storage company. The partial disposal implied the value of TMT's retained interest in Backblaze had increased to $23.2m, or 120 per cent higher than the $10.5m carrying value as of 31 December 2018. The uplift added a further 43¢ a share to TMT’s last reported NAV, the key reason why NAV per share rose by 18 per cent to 366¢ (before the special dividend payout) in the first half of 2019.

The high investment returns TMT continues to make for its shareholders hasn’t gone unnoticed. In fact, the share price rocketed to a bid price of 580¢ by mid-September 2019, a significant premium to book value. So, although a healthy premium is justified given expectations that TMT’s diversified portfolio (focused around big data/cloud, e-commerce, marketplaces and Saas) will continue to produce eye-watering gains, I felt that the 140 per cent profit was worth banking (‘Takeovers, tenders and target prices’, 9 Sep 2019). It proved the correct call, with TMT’s share price now trading a third below that high-water mark.

Clearly, Artemii Iniutin, TMT's head of investments and one of its co-founders, sees value in the shares at the current level. He acquired 434,157 shares at 390¢ a share at the end of December, a purchase equating to 1.49 per cent of the share capital. The co-founders (including family members) of TMT control around half of the shares in issue, so are heavily invested personally in the success of the company’s investee companies.

I am maintaining a watching brief for now given that TMT’s shares trade on a 16 per cent premium to end 2019 book value, but remain on the look-out for another buying opportunity as and when there is another mispricing of the company’s equity to exploit.


Futura Medical

Aim: Share price: 11p

Bid-offer spread: 10.75-11.25p

Market value: £27m


Shares in Futura Medical (FUM), a pharmaceutical company that is developing a portfolio of innovative products based on its proprietary, transdermal Dermasys® drug delivery technology and focused on sexual health and pain, were priced 90 per cent below their all-time high when I suggested buying them 12 months ago, at 14.85p, a reflection of the lack of licensing deals to monetise the company’s intellectual property.

However, an equity raise in the autumn of 2018 boosted Futura’s cash pile and provided the funds required to take its flagship product, MED2005, a breakthrough topical gel for erectile dysfunction (ED) through Phase 3 development with a view to seeking a partner or selling the asset. Investors got really excited about the upside for MED2005 given it had potential to become the world's fastest-acting treatment for ED, with a rapid rate of glyceryl trinitrate (GTN) absorption, the ingredient added to Futura’s Dermasys® drug delivery technology.

The investment was not without risk as I highlighted in my analysis when I initiated coverage 12 months ago. So, having first advised buying the shares at 14.85p, repeated that advice in April at 14.75p ('Futura’s blue-sky opportunity', 15 Apr 2019), and again at 30.5p early in the summer (‘Futura’s huge potential draws investor interest’, 20 Jun 2019), by the autumn I felt there was risk that my 129 per cent paper gain could be eroded in the event that the data from last year’s European study was not well received, or if the company’s next equity fundraising proved to be dilutive to shareholders. This prompted me to play safe and bank the eye-watering gain (‘Bargain Shares: Golden opportunities’, 14 Oct 2019).

On both counts it proved to be the correct call. That’s because none of the three doses of GTN in the Phase III trial showed superiority in improving ED outcomes versus the placebo. In fact, all doses including the placebo (Futura's proprietary DermaSys delivery gel without GTN) delivered statistically significant and clinically meaningful improvements in ED outcomes versus patient baselines. The efficacy in the placebo was such that there appears to be a benefit from DermaSys alone, as it caused an increase in nitric oxide and therefore produced smooth muscle relaxation, a prerequisite for normal sexual behaviour. Moreover, the efficacy of the DermaSys-only dose supports this view, as over 60 per cent of patients noticed a meaningful difference over baseline.

The upshot is that Futura has changed tack and is now looking to progress the DermaSys-only product as a medical device. The company has submitted a request to the US drugs regulator, the Federal Drugs Administration (FDA), for a pre-submission meeting in the first quarter of this year ahead of regulatory submission. The medical device route is typically faster, requires less data and is less costly than the prescription drug approval route. Futura aims to file its submission in mid-2020 in the EU, and potentially in the US as well, although this assumes no further studies being required by the FDA.

The news wasn’t what investors had anticipated, which is why Futura’s share price has fallen below my recommended buy-in price. A £3.25m equity raise at the end of 2019 pitched at 8p a share to fund working capital (to enable Futura to pursue a medical device regulatory pathway for DermaSys) accentuated the share price reversal. Also, should further clinical work be required before submission can be made to the appropriate regulators, the company’s cash balance of £3m along with the net proceeds from December’s fundraising will not be sufficient to complete this work. In the event that further clinical work is required, the directors will assess non-dilutive funding options, including funding from potential commercial partners as a result of upfront licensing fees or as part of an overall out-licence agreement.

Having already exited the holding, I am maintaining a watching brief for now ahead of future newsflow.



Aim: Share price: 87.2p

Bid-offer spread: 87-87.4p

Market value: £178m


Inland Homes (INL), a south-east of England-focused housebuilder and brownfield land developer, has reported a raft of positive news in the past 12 months.

At the end of the 2019 financial year, the company reported a record land bank of 7,796 plots of which more than  3,000 plots have planning consent and a further 3,533 plots form part of Inland’s strategic land bank, the majority of which is held under options that are exercisable at a discount to market value. The total land bank has a gross development value (GDV) of £2.4bn, a strong indication of the bumper profits to be released when the plots are either developed or sold on to larger housebuilders.

The decision to buy out the company’s joint venture partner at Cheshunt Lakeside, Hertfordshire, after the local authority granted planning consent last year, is likely to prove a shrewd and highly profitable decision. Inland controls 1,253 plots on the site with a GDV of £429m and Inland’s directors are evaluating their options to develop it as well as their flagship 100-acre development at Wilton Park, Beaconsfield. Wilton Park has been granted formal planning consent for 350 homes (GDV of £288m) and there are provisional proposals for further development on the site which could provide an additional 250 homes and 18,500 sq m of commercial space.

Inland now has 892 private homes and 921 partnership homes under construction, and is in discussions with build to rent operators to enter more deals that will reduce the company’s borrowings – Inland has net debt of £152m – and release capital to invest back into the business while at the same time further de-risking the forward sales pipeline. For instance, the company has just signed a contract with Octavia Housing, a leading provider of affordable housing, for the development of Afrex House, in Alperton, north-west London. The development of this former light industrial site into 31 one, two and three-bedroom apartments will support the broader regeneration of the Alperton area.

Annual results released last week revealed that the company’s European Public Real Estate Association NAV rose 13 per cent to £233m (113.6p a share) and pre-tax profit surged by more than a quarter to £25m, of which half represented a valuation gain on the Cheshunt site. However, I maintain my view that the Wilton Park and Cheshunt Lakeside flagship developments have scope to create £100m of additional value for Inland’s shareholders over time, a sum equating to more than half the company's current market capitalisation. A 3.1p a share annual payout produced a decent dividend yield of 3.5 per cent, too. Buy.



Aim: Share price: 242p

Bid-offer spread: 240-244p

Market value: £74.5m


Middlesbrough-based Ramsdens (RFX), a diversified financial services company whose main activities encompass foreign-currency exchange, retail jewellery, pawnbroking and a precious metals buying and selling service, listed its shares on London junior’s market three years ago with the intention of expanding its store format through organic expansion. The directors have been delivering just that and more, buoyed by the strong sterling gold price (up 21 per cent in the past 12 months), which is benefiting the group’s precious metals segment and profits from scrapping slower moving jewellery sales, and double-digit sales growth in both new and second-hand jewellery. Premium watches (Rolex and Breitling, in particular) have proved popular. Both pawnbroking and foreign-currency exchange activities continue to produce good results, too.

Half-year results to 30 September 2019 revealed a 23 per cent surge in pre-tax profits to £6.2m on revenue up 29 per cent to £32.5m. Key contributors were a 15 per cent hike in gross profit to £8.4m from providing foreign-currency exchange to over 500,000 customers, £600,000 of one-off gross profits from scrapping gold to lift the segment’s gross profit contribution by more than half to £4.2m, and an 11 per cent increase to £2.5m in gross profits from jewellery sales. The momentum has continued since then as highlighted by last month’s bullish trading update, which prompted house broker Liberum Capital to push through a 10 per cent earnings upgrade.

Analysts now expect Ramsdens' pre-tax profits to rise by 25 per cent to £8.7m on revenue of £58.4m in the 12 months to 31 March 2020. On this basis, expect to EPS to rise by 30 per cent to 22.6p to support a payout per share of 8.1p. Net cash equates to 40p a share, implying the shares are only rated on a cash-adjusted price/earnings (PE) ratio of nine and offer a prospective dividend yield of 3.3 per cent.

Moreover, having acquired 22 former The Money Shop (TMS) stores in 2019 to take the estate to 160 shops, the full benefit of the acquisitions will be seen in the new financial year when the integration is complete. Ramsdens' mature shops generate a pre-tax profit of £48,000 each, or £15,000 more than TMS, highlighting the scope to improve profitability by making improvements to the product mix (including introducing jewellery sales) and operational savings. The directors expect the former TMS stores to contribute £600,000 of pre-tax profit in the 2020/21 financial year.

The holding has produced a total return of 48 per cent in the past 12 months, but there is still value on offer given the shares only trade on a cash-adjusted PE ratio of nine and price-to-book value of 2.1 times. That’s hardly an exacting valuation for a company set to deliver a post-tax return on equity of 21.5 per cent, and one that doesn’t offer unsecured personal loans nor high-cost, short-term credit loans as defined by the Financial Conduct Authority.

Offering 13 per cent potential upside to my 275p upgraded target price, Ramsdens’ shares continue to rate a buy.


Bloomsbury Publishing

Main: Share price: 285.5p

Bid-offer spread: 284-287p

Market value: £215m


It has proved to be a magical year for shareholders of Bloomsbury Publishing (BMY), the company best known for publishing author JK Rowling’s best-selling Harry Potter books. The holding has produced a total return of 27 per cent in the past 12 months, with a real possibility of further gains to come.

The little wizard’s adventures at Hogwarts continue to put a magical step into Bloomsbury’s profits, and so too is Bloomsbury’s 2020 digital strategy, which is on track to deliver £5m of operating profit and £15m of revenues by the 2021-22 financial year. The initiative aims to accelerate growth of digital revenues and reposition the business from primarily being a consumer publisher to a digital business-to-business (B2B) publisher in the academic and professional information market. Around 80 per cent of the 60,000 books that Bloomsbury has in print are in the academic, professional and special interest category. Good examples are the five-year digital subscription contract the company entered into with the Institute of Chartered Accountants of England & Wales for Bloomsbury Professional Tax Online, and the partnership with Spotify, which demonstrates management’s ability to develop innovative ways to market its digital offering.

Underlying digital revenues surged by 42 per cent in the 2018/19 financial year, and academic and professional segments delivered over 20 per cent of the group’s pre-tax profit, a performance that was driven by double-digit top-line growth. There is a clear pathway to higher profit generation in the coming years, a key reason why analyst Malcolm Morgan at brokerage Peel Hunt is pencilling in near 10 per cent growth in pre-tax profits to £15.5m on revenues up in low single digits to £169m in the 12 months to 29 February 2020, highlighting the operating margin expansion from the digital strategy. On this basis, expect EPS of 15.8p and a payout of 8.4p a share. Furthermore, Bloomsbury could be making a near 10 per cent operating profit margin on revenue of £173m in the 2020/21 financial year to drive pre-tax profits up to £17m and deliver EPS of 17.3p, an outcome that underpins expectations of a further hike in the payout to 8.9p a share.


Potential for earnings upgrade cycle

There is also the possibility that Bloomsbury may be poised to enter into an upgrade cycle driven by the commercial performance of its digital resources offering and one augmented by an increased emphasis on cash-funded acquisitions. The small £1.2m acquisition of London-based drama publisher Oberon Books at the end of 2019 highlights the potential to recycle surplus cash into earnings-accretive acquisitions without hindering the board’s ability to maintain its progressive dividend policy. The £5.8m acquisition of London-based academic publisher I.B. Tauris in May 2018 was also internally funded. The addition of that business has enhanced Bloomsbury’s offering in the non-consumer segment.

Although generally seen as a domestic publisher, Bloomsbury offers the potential to increase its geographic footprint, too. For example, at the tail end of last year the company entered the domestic Chinese market through a joint venture with China Youth Publishing Group (CYPG), a state-owned publisher, and Roaring Lion Media, a subsidiary of CYPG. The joint venture is based in Beijing and will publish its own titles originating from China, as well as licensing titles from Bloomsbury and other global publishers in the Chinese language for the mainland market. It’s a unique opportunity for Bloomsbury as it is one of only a small number of western publishers that have joint ventures in the Chinese mainland domestic market. China is an important and growing market for books and, in particular, is a key market for trade and academic publishing.

Bloomsbury’s strong financials are highly supportive of the investment case, too. A current year forecast free-cash-flow yield of 16p a share covers the forecast 8.4p a share dividend almost two times. In addition, Bloomsbury had net funds of £27.6m (36.5p) at the February 2019 year-end, so even after paying out dividends since then, the cash pile is set to swell to more than £30m (40p a share) by the 29 February 2020 financial year-end, and could easily be north of £36m (48p a share) by February 2021, thus providing additional surplus capital to deploy on earnings-accretive acquisitions.

On this basis, Bloomsbury’s shares are priced on a cash-adjusted forward earnings multiple of 14 times for the 2020/21 financial year, on a modest 1.5 times book value and offer an attractive prospective dividend yield of 3 per cent. That’s still not overly expensive and I am upgrading my target price to 330p. Buy.


Augmentum Fintech

Main: Share price: 101p

Bid-offer spread: 100-102p

Market value: £118m


Augmentum Fintech (AUGM), a leading venture capital investment group, became the first publicly listed fintech fund in the UK when it listed its shares on the London Stock Exchange, at 100p a share, almost two years ago. Admittedly, the shares have failed to make progress in the past year, but there are sound reasons to believe that likely valuation gains on the portfolio will lead to a narrowing of the share price discount to NAV of 112.6p.

Admittedly, Augmentum’s investment portfolio only posted modest gains in the six months to 30 September 2019. However, this doesn’t tell the whole story. That’s because one of its largest holdings, Zopa, the world’s first peer-to-peer consumer lending platform, faced a challenging investment climate to raise the £140m regulatory capital required by the banking regulator ahead of launching its bank. Despite “significant investor interest” in Zopa’s equity raise, potential investors wanted to wait until there was greater economic and political stability in the UK before committing.

The Prudential Regulation Authority (PRA) proved less forgiving and there was no leeway in its 3 December 2019 deadline, forcing Zopa to raise the capital from a diminished pool of investors. This meant that Augmentum was forced to mark down its 6.2 per cent stake in Zopa from £22m to £11.7m, wiping 8.8p off NAV per share, to align the carrying value of the holding with the low-ball valuation in December’s funding round. I would expect the impairment to reverse over time as Zopa develops its business and the value being created in the business is recognised by investors.

The fact that Augmentum still reported net investment gains of £4.6m overall reflects the company’s diversified investment portfolio. For example, Augmentum’s 3.7 per cent stake in Interactive Investor (ii), a leading UK investment platform, was marked up from £10m to £14.7m, or three times higher than the £3.2m cost of Augmentum’s investment. In the 2018 financial year, ii reported pre-tax profit of £8.9m on revenue of £73m, and since then the business has benefited from the acquisition of Alliance Trust Savings. The carrying value of the stake still represents a deep discount to the earnings multiples enjoyed by listed peers AJ Bell (AJB) and Hargreaves Lansdown (HL.).

Augmentum’s investment in Tide (, an emerging force in the small- and medium-sized enterprises (SMEs) challenger banking sector, delivered a similar sized uplift after the company exchanged its convertible debt for equity. Augmentum now owns a 6.3 per cent stake in the rapidly growing company worth £14.2m, or £5.2m higher than its £9m investment. In addition, Augmentum’s £9m investment in Monese (, the fast-growing UK-based mobile-only current account provider, has been marked up by £2.5m following a recent £45m funding round backed by the likes of PayPal.

Since Augmentum's half-year results were released in early December, the company has used $5m (£3.8m) of its £29m cash pile to make a further investment into Onfido (, a leading global provider of online identity verification, through a convertible loan note. In addition, Augmentum has made a £7.5m investment into Receipt Bank (, the UK-headquartered digital book-keeping platform, as part of a £55m Series C fundraising, led by Insight Partners, with participation from existing investors Kennet Partners and Canadian Imperial Bank of Commerce. One of the 50 fastest-growing technology companies named in the Sunday Times 2019 Tech Track, Receipt Bank operates across six markets – the UK, US, Canada, Australia, South Africa and France – and will use the new funding for expansion into new markets in Asia and within Europe.

Trading 10 per cent below NAV, and with pro-forma cash of £17m on hand to invest, Augmentum’s shares have scope to resume their upward trajectory. Buy.


Litigation Capital Management (LIT)

Aim: Share price: 74.3p

Bid-offer spread: 73.6-75p

Market value: £85.4m


Sydney-headquartered Litigation Capital Management (LIT), a leading provider of litigation financing to enable third parties to pursue and recover funds from legal claims, listed its shares on Aim in December 2018 when equity markets were falling out of bed. However, I felt that investors had missed a trick and they were duly rewarded when Litigation Capital’s share price rallied by 51 per cent from my 77.5p entry point to a high of 117.5p in May 2019.

However, the litigation financing sector then came under severe pressure after hedge fund Muddy Waters published a scathing report on market leader Burford Capital (BUR), which highlighted unsubstantiated accounting issues. Shares in Litigation Capital have reversed amid the negative sector sentiment, and given back all the paper gains. In my view, this is wholly unwarranted.

It’s not as if Litigation Capital hasn’t delivered. Excluding one-off costs, mainly fees relating to the December 2018 IPO when the company raised £19.4m of new equity, last year’s underlying pre-tax profit of A$12.3m (£6.7m) was only slightly below the record level (A$12.9m) in the 2017/18 financial year, even though the board has invested heavily in new offices in London and Singapore. Cash receipts from litigation investments were maintained at A$26.8m.

Net assets of A$76.2m includes net cash of A$49m and A$27.4m of litigation investments, all of which are valued at their cash cost. The conservative accounting policy explains why Litigation Capital reports hefty profits when cases are settled and has generated a cumulative return on invested capital (ROIC) of 135 per cent in the past seven financial years. The internal rate or return (IRR) on these investments is high, too, at 80 per cent (including losses), reflecting a short 25-month average payback period on funded litigation cases. The litigation portfolio comprises 29 projects, up from 20 projects in June 2018, of which 23 are conditionally funded.

One significant portfolio development has been Litigation Capital’s entry into the corporate portfolio market, a growth area and one that is underserviced. The benefit of litigation funding for corporate entities is that they can take litigation risk off the balance sheet, thus not exposing their shareholders, while at the same time financially benefiting from any upside when the disputes are resolved in the courts. Litigation Capital has funded two such cases.

Changes to the insolvency laws in both Australia and UK has provided Litigation Capital with another new business line, as previously insolvency practitioners could not assign statutory rights and were restricted to traditional funding techniques. Smaller claims arising out of insolvency typically require a less significant funding commitment and have a shorter duration period of 12 to 18 months, so will see potential returns realised at a faster and more consistent rate.

There is scope for Litigation Capital to build a profitable fund management business, too, by tapping into the expertise of the smart legal eagles the company employs. Management is in discussions about setting up a £150m fund with a third party.

Importantly, the core business continues to perform well. The company announced the settlement of two single-case litigation investments at the tail end of the year, which will generate combined revenue of A$10.35m and gross profit of A$4.45m in the financial year to 30 June 2020, adding weight to analysts’ expectations that the company can deliver a 20 per cent increase in adjusted pre-tax profits to A$14.8m, EPS of 10.4¢ (5.5p) and raise the annual dividend from A1.3¢ to A3.1¢ (1.65p). Buy.


Mercia Asset Management

Aim: Share price: 24.2p

Bid-offer spread: 24-24.4p

Market value: £107m


Aim-traded Mercia Asset Management (MERC), a cash-rich specialist asset manager focused on supporting regional small- and medium-sized enterprises (SMEs), has had a roller coaster ride over the past year and one that sent me heading for the exit in December even though it meant crystallising a 7 per cent loss in the process (‘Taking stock and profits’, 9 Dec 2019).

When I suggested buying the shares 12 months ago, Mercia’s market value of £87m represented a 30 per cent discount to its last reported NAV of £125m even though the company held £39m of net cash at the time. This meant that if you attributed nil value to £10.3m of intangible assets on the company’s balance sheet, and clearly Mercia’s fund management business has to be worth something, then the company’s £77.8m investment portfolio was effectively being valued 38 per cent below its carrying value. That seemed harsh given that Mercia is seen as the go-to regional investor, which is enabling it to build up a potentially valuable asset management business, while at the same time the company is well placed to provide capital from its own balance sheet to investee technology companies and create further shareholder value.

Mercia has been successful, too, delivering a £1.9m operating profit post a £3.2m valuation gain on its £102m directly-held investment portfolio in the first half of the 2019/20 financial year. The company ended that trading period with unrestricted cash of £17.8m and NAV of £128m, or 42.3p a share.

However, the board’s decision at the tail end of last year to acquire the venture capital trust (VCT) fund management business of NVM Private Equity and fund the £25m deal by placing 120m shares to raise £30m left me speechless. The 25p issue price representing an eye-watering 40 per cent discount to NAV and the new equity raise equated to 39.6 per cent of the existing issued share capital. There was no open offer, so small shareholders unable to participate in the accelerated book build were shut out of the offering and saw their economic interest in the equity massively diluted. Mercia’s post-placing NAV per share falls to 37p.

True, the acquisition increased Mercia’s assets under management (AUM) by more than half to £770m and the £4m of annual net income earned from the acquired business has turned Mercia’s fund management business profitable. However, cash-rich investment companies should never, and I stress never, issue equity at a 40 per cent plus discount to NAV in any circumstance. Irrespective of the rationale for the deal, Mercia’s timing was incredibly poor given that the share price was still in the process of recovering from a stock overhang due to the implosion of the funds controlled by Woodford Investment Management. Having first advised buying Mercia’s shares at 27.5p in February 2019, the share price subsequently hit a high of 39p in July 2019 before slumping to a low of 22p in October 2019 mainly due to the Woodford overhang. The share price subsequently recovered to a high of 34p in late November as the stock overhang unwound, before reversing sharply when news of the proposed NVM acquisition emerged.

The fact that Mercia’s share price is still 12 per cent below my 27.5p exit price in early December is telling, especially as the UK equity market has rallied strongly since the general election. It undoubtedly reflects investors’ concerns that the board could, and clearly will, issue shares that dilute the economic interests of existing shareholders.


Driver (DRV)

Aim: Share price: 67p

Bid-offer spread: 65-69p

Market value: £35m


Established in 1978, Driver (DRV) is a consultancy that provides clients in the construction and engineering sectors with specialist commercial management, planning, programming and scheduling, project management, and dispute resolution support services. It’s also a company that should do rather well this year.

That’s because Driver delivered a strong rebound in its second-half trading performance, lifting underlying pre-tax profits from £1.7m to £2.24m on revenue down from £30.9m to £28.7m in the six months to the end of September 2019. The improved margins reflect a realignment of the cost base following a first-half slowdown in Asia Pacific and the Middle East, regions that account for half of total revenue. Indeed, Driver’s break-even revenue point has been lowered by £400,000 a month, or double management’s initial target, at a cost of only £400,000.

Importantly, the second-half recovery was driven by bumper growth in Europe and North America. The regions account for three-quarters of Driver’s operating profit of £5m (pre-central overheads), up from a 50 per cent share in the 2018 financial year. Admittedly, the stellar second-half outcome was not enough to make up all the first-half profit shortfall as Driver’s underlying pre-tax profit for the 12-month trading period still declined by a fifth to £3m on 6 per cent lower revenue of £58.5m. However, that still represented a decent post-tax return on equity of 14 per cent.

More important is news that the strong momentum has continued into the first two months of the new financial year, and the last reported pipeline of business is 15 per cent higher year on year including a “significant pipeline in Asia Pacific”. This adds substance to the recovery potential in the region, especially as Driver’s group operating profit in the 2019 financial year is stated after accounting for an operating loss of £363,000 from Asia Pacific.

So, with Driver’s operations in Europe and North America firing, and Asia on the rebound, house broker N+1 Singer anticipates that adjusted pre-tax profits will bounce back this year from £3m to £3.7m on revenue of £59.9m to deliver fully diluted EPS of 5.4p, up from 4.8p in the 2019 financial year. That should be good for cash flow – N+1 Singer is pencilling in free cash flow of £1.9m (3.5p a share) – and prospects for another hike in the dividend following a 150 per cent increase in the payout to 1.25p last year. It’s also good news for acquisitions as Driver’s net cash position of £5.4m (10p a share) is forecast to grow to £6.6m (12.2p a share) by September 2020.

Trading on a forward cash-adjusted PE ratio of 10, the potential for Driver to deliver 17 per cent earnings growth this year is simply not in the price. Buy.


Jersey Oil & Gas

Aim: Share price: 123p

Bid-offer spread: 122-124p

Market value: £26.8m


The laggard in the 2019 Bargain Shares Portfolio is Jersey Oil & Gas (JOG). However, the company’s poor share price performance and the modest valuation being placed on the equity is at odds with the strong operational progress the company’s management has made in the past 12 months.

Jersey is a UK North Sea-focused upstream oil and gas business that is developing the Greater Buchan Area (GBA) project. It includes the Buchan oil field, the J2 and Glenn oil discoveries, and an 88 per cent interest in the P2170 licence (Blocks 20/5b & 21/1d) in the Outer Moray Firth, which contains the nearby Verbier oil discovery. Jersey has a net interest in 142m barrels of oil and it’s potentially highly valuable, too, as the GBA project is estimated to have a net present value of $1.15bn based on post-tax cash flow of $3.17bn.

Last summer, the company was awarded a 100 per cent ownership of Block 21/2a that includes the Glenn oil discovery in the UK Oil & Gas Authority’s (OGA) 31st supplementary offshore licensing round, having been awarded the P2498 licence over the Buchan oil fields in July’s OGA licensing round (‘Jersey gushes higher on transformational licensing award’, 22 Jul 2019).

Jersey has since awarded contracts to Rockflow Resources for the provision of subsurface evaluation support, and Petrofac Facilities Management to provide facilities and well support for the concept selection phase of the GBA development project. The company has a close working relationship with both companies and they were instrumental in supporting Jersey in its successful application in the OGA’s 31st supplementary offshore licensing round that resulted in the licensing awards.

I maintain the view that the GBA development is likely to prove attractive to larger peers looking for a low-risk, low-cost way to boost their production growth, and one that has potential to be the largest new area hub in the UK Central North Sea since the discovery of Golden Eagle in 2007. The Buchan oil field was first discovered by BP in the mid-1970s, came onstream in 1981 and production continued until May 2017, when the Buchan Alpha platform was decommissioned prematurely due to safety concerns with its ageing facilities. At the time, it had produced a total of 148m barrels through natural depletion, but the field still has over 80m barrels to recover, so offers the potential to be producing for another two decades, assuming, of course, Jersey can find a funding partner.

Importantly, the field is development ready and recovery rates can improve by using new technology that was unavailable when Buchan was first developed in the 1980s, such as drilling horizontal wells alongside secondary recovery (water/gas injection) and enhanced recovery (chemicals) techniques. Buchan oil is a light 33.5° API oil with a low gas-oil ratio (GOR) GOR (285 scf/bbl), a term that quantifies the amount of gas dissolved in the oil.

In terms of the time line of future news flow, I expect Jersey’s GBA concept selection report to be submitted in the third quarter this year ahead of the farm-out process, followed by a formal development plan submission in late-2021. First oil could potentially arrive in late 2024. I would add that the proximity of Verbier (25m barrels of oil equivalent minimum recoverable resource) to the Buchan fields means there is the potential for a tie-back development of Verbier. This can only increase the commercial attraction to a future farm-in partner of Jersey’s GBA development hub. It therefore made sense for Jersey to buy out Equinor, the operator of the Verbier oil discovery, so that it can offer the tie-back development of Verbier in negotiations to a commercial funding partner for the much larger GBA project. That deal was announced last week. Financially, it makes sense, as Jersey is liable to pay only contingent consideration if there is commercial progress within the block. In any case, Verbier is too small for Equinor to develop, so the real value in the field is by offering it as a tie-back opportunity as part of the much larger farm-out process on the GBA.

Bearing this in mind, Jersey ended 2019 with net cash of £12m, so is funded through the GBA concept stage and into the second quarter of 2021, by which time there should be concrete news on any farm-out negotiations. Deduct cash from the company’s current market capitalisation of £26.8m, and effectively the Buchan field alone is in the price for a bargain basement $0.24 per barrel, and that is if you ascribe nil value to any of the Jersey’s other licenses. That’s a bargain basement valuation given that Arden Partners’ has a risked NAV of 326p and unrisked NAV of 737p a share based on a conservative Brent Crude long-term oil price of $55 a barrel (current spot price is $60 a barrel), and using a discount rate of 10 per cent.

Positive newsflow on development work and discussion with industry partners to commercialise Jersey’s valuable acreage are likely to lead to a sharp re-rating. Clearly non-executive director Marcus Stanton sees significant valuation upside in the shares at this bargain basement price. He purchased 10,000 shares last week to raise his holding to 80,000 shares. Recovery buy.


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