When I was selecting companies for my 2022 Bargain Shares Portfolio I made a conscious decision to target those priced on deep discounts to their sum-of-the-parts valuations in order to create a margin of safety.
The stock selection bias means that the portfolio should outperform weak stock markets due to the absence of higher beta growth stocks, which are likely to be hardest hit in a risk-off environment. Moreover, as monetary conditions tighten, as is now happening on both sides of the Atlantic, investors are more likely to take a more defensive approach in their asset allocation, a positive for my deep value stock selections. This can be seen in the performance figures to date.
The portfolio has posted a total return (TR) of 9.2 per cent since launch on 11 February 2022, outperforming both the FTSE Aim All-Share TR index (11.7 per cent negative return) and FTSE All-Share TR index (1.7 per cent negative return), which despite its heavy weighting to energy and resources stocks is in negative territory.
Of course, the operational performance of the small-cap companies is critical to maintaining the ongoing outperformance. On this score, there is good news to report.
Tavistock’s recycles cash into smart investments
- Completion of £10mn purchase of a 21 per cent minority stake in regulated IFA group LEBC Holdings
- Purchase of LEBC Hummingbird for £3mn
Aim-traded Tavistock Investments (TAVI:6.2p), a financial services group that has more than 175 advisers across the UK helping more than 40,000 clients look after £4bn of investments, has completed the purchase of a minority stake in LEBC Holdings following approval from the Financial Conduct Authority.
The group has also announced the purchase of LEBC Hummingbird, an unregulated business that provides research on the asset class allocations to be used within funds and model portfolios. Its service is designed to help investment managers match their investment solutions with the differing risk profiles identified through use of “attitude to risk” questionnaires completed by clients.
Hummingbird started trading in 2020 as a provider of financial research for the regulated LEBC Group (a subsidiary of LEBC Holdings), but is already highly profitable. In the financial year to 30 September 2021, it reported pre-tax profit of £0.43mn on £0.6mn of revenue, a performance that more than warrants the £3mn cash consideration Tavistock is paying.
It looks a sound deal to me, and other investors clearly concur as Tavistock’s share price is now up 50 per cent on my 2022 Bargain Shares Portfolio entry level. However, the shares are still priced on a 62 per cent discount to my sum-of-the-parts valuation of £95.8mn (16.5p a share) and well below last reported net asst value (NAV) of £49.8mn (8.6p a share). Such a deep discount is anomalous given that the group holds £9.6mn (1.65p a share) of net cash and is set to receive £20mn (3.45p a share) of deferred cash consideration following last year’s disposal of its multi-asset manager, Tavistock Wealth, to Titan Wealth – a fast-growing discretionary fund management business.
Effectively, the cash pile, Tavistock Wealth deferred cash consideration and the value of the holdings in LEBC and Hummingbird back up more than the current share price. This means that you are getting a free ride on Tavistock’s advisory business, which should have made around £3mn in earnings, before, interest, taxation, depreciation and amortisation (before central overheads) on revenue of at least £29mn in the 12 months to 31 March 2022.
Even if you only value this fast-growing business on two times revenue, and recent transactions in the industry have been priced well above that multiple, Tavistock’s advisory business is still worth £58mn (10p a share) as a standalone entity, hence my sum-of-the-parts valuation of 16.5p a share. Buy.
|Bargain Shares Portfolio 2022|
|Company name||TIDM||Market||Opening offer price 11.02.22||Latest bid price 26.05.22||Dividends||Total return|
|FTSE All-Share Total Return index||8,525||8,383||-1.7%|
|FTSE Aim All-Share Total Return index||1,258||1,111||-11.7%|
Source: London Stock Exchange
A rock-solid property play
- Robust trading performance across all divisions
- Annual results to be first-half weighted and expected high second-half activity levels to benefit 2023 performance
Sheffield-based Henry Boot (BOOT:327p), a leading land development and construction group, has issued a bullish trading update that de-risks full-year earnings estimates, and for 2023, too – a performance that justifies including the shares, at 300p, in my 2022 Bargain Share Portfolio.
For example, land developer Hallam Land has already sold 3,477 plots this year including 2,170 plots to Taylor Wimpey (TW.) and Persimmon (PSN) at a site in Didcot, Berkshire, earlier this month. To put the performance into perspective, the subsidiary contributed £58.5mn of revenue and pre-tax profit of £18mn on 3,008 plot sales in 2021. Moreover, the land bank has been replenished and is holding steady at 92,500 plots, highlighting scope for further strong gains given that inventory is held in the books at the lower of cost or net realisable value.
In addition, Leeds-based premium housebuilder Stonebridge has secured 93 per cent of its 200-unit forecast sales target as well as planning consent for 49 homes in Masham, Yorkshire, and a further 97 homes in Barnard Castle, the first site to be opened in the North East. More than 80 per cent of Stonebridge’s 1,157-plot land bank now has planning permission.
Moreover, the group’s development arm has already pre-let or pre-sold a high percentage of the industrial and logistic developments under way, hardly surprising given the structural shift to internet shopping that is driving up demand. Interestingly, the board is considering selling some properties in its £126mn investment portfolio, half of which is in the hot warehouse space.
House broker Peel Hunt expects current year pre-tax profit and earnings per share (EPS) to rise by a third to £47.8mn and 28p, respectively, with a first-half bias, and sees upside if some asset disposals are realised.
Rated on a forward price/earnings (PE) ratio of 11.6, offering a prospective dividend yield of 2 per cent and priced on 1.14 times net tangible asset value, I maintain my sum-of-the-parts valuation of £639mn (479p a share). Buy.
Vector Capital’s value proposition
- Loan book up almost 10 per cent to £50.8mn this year
- Number of loans has increased from 79 to 89
- Average loan of £571,000 secured on £1mn-worth of property
Aim-traded Vector Capital (VCAP:51.5p), a commercial lender offering first charge secured property loans to predominantly small property developers who buy properties to refurbish and then re-sell, has issued an upbeat trading update at the company’s annual meeting.
Not only has Vector increased its loan book to further diversify customer concentration risk, but chief executive Agam Jain reports a strong pipeline of new loan opportunities, adding weight to house broker WH Ireland’s forecast of a 10 per cent uplift in operating profit this year. Moreover, the current £50.8mn loan book is generating a near 10 per cent post-tax return on equity and double the amount of free cash flow needed to support the payment of a 2.6p a share forecast annual dividend.
The shares are 10 per cent ahead of my entry point in my 2022 Bargain Shares Portfolio, albeit they succumbed to profit taking after the full-year results in April. The trading update indicates that such caution is unwarranted. Trading on a PE ratio of 10, offering a prospective 5 per cent dividend yield and rated 7 per cent below year-end net asset value estimates, the shares offer 40 per cent upside to WH Ireland’s fair valuation. Buy.
A smart play on the build-to-rent boom
- Planning consent granted for build-to-rent (BTR) flats and hotel at site in Nottingham
- Record investment into BTR sector in first quarter of 2022
- Further yield compression expected as competition for assets increases
Aim-traded property development and investment group Conygar (CIC: 151p) has been granted planning consent for 247 build-to-rent (BTR) apartments, 223 hotel rooms and an extensive food and beverage offering at its flagship 36-acre Island Quarter site in Nottingham. There is potential for the residential element to expand to 3,500 apartments.
Bearing this in mind, the supply-demand imbalance in the UK housing market is highly supportive of the ongoing institutional demand for BTR assets (‘Built for solid returns’, 17 May 2022). In the first quarter of 2022, £1.7bn of deals were agreed in a sector that is now considered a mainstream asset class.
Property consultancy JLL notes that listed housebuilder tie-ups supported £335mn of the total investment, including deals for Crest Nicholson (CRST), Countryside Partnerships (CSP) and Inland Homes (INL). Record levels of BTR investment are driving down yields, which are now 3.25 per cent for prime London residential BTR property and 4.5 per cent for secondary regional assets. Property agency Savills expects further yield compression as institutional competition for assets increases in places with supply-demand imbalances. The asset class also provides a hedge against inflation given the upward pressure on rents.
It’s certainly a positive backdrop for Conygar to forward fund its BTR schemes especially as rising valuations are more than mitigating the short-term inflationary impact on construction costs. Importantly, Conygar can do deals from a position of financial strength given that it has £30mn of net cash, a sum accounting for a third of the current market capitalisation and a quarter of NAV.
Priced slightly below the entry point in my 2022 Bargain Shares Portfolio and 29 per cent below book value, investors have yet to latch onto the material value that is being created for shareholders. They will in time. Buy.
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