Five small-caps for value and more

Alternative Income REIT (AIRE:59.5p) has reported robust rent collection rates, collecting all quarterly rents for the September quarter day (83 per cent of the total) along with all monthly rents due. The company has agreements in place to collect the remainder of the monthly rents by the year-end.

AIRE invests almost entirely in freehold or long leasehold property in the following non-traditional sectors: care homes, hotels and serviced apartments, student housing, nurseries, automotive (car showrooms and petrol stations), car parks, and small power stations. Tenants include budget hotel chains Travelodge and Premier Inn Hotels, and motoring groups Motorpoint and Volkswagen Group.

Although annual results revealed that AIRE’s property portfolio (worth £101.6m following the recent sale of the Wet 'n' Wild Water Park at a premium to book value) has not been immune from the fallout from the Covid-19 crisis, valuation declines over the past two quarters have been modest compared to more traditional UK property portfolios. This highlights the defensive qualities of AIRE’s assets and how they are less vulnerable to the shift in sentiment affecting mainstream occupational markets. The portfolio is also fully let and has a weighted average unexpired lease term of 19.5 years to the earlier of break and expiry.

Importantly, AIRE has ample covenant headroom under its £41m loan with Canada Life (fixed interest of 3.19 per cent and five years to expiry). In fact, asset valuations and rental income of the 16 properties secured to Canada Life would need to fall by a third before breaching loan-to-value and income cover covenants. That’s simply not going to happen.

AIRE’s share price has edged up slightly since I last suggested buying (‘In search of value opportunities’, 17 August 2020), and the board has paid out a 1.42p a share dividend, too. That takes the total pay-out to 5p a share for the 12 months to 30 June 2020, or 90 per cent of EPRA earnings per share (EPS) of 5.52p, an attractive income stream in a zero interest rate policy environment.

Glenstone Property certainly sees the value on offer as it has just made a tender offer to purchase up to 25 per cent of the shares at 59.25p each. I wouldn’t take up the offer. That’s because AIRE’s 29 per cent share price discount to net asset value (NAV) of 83.58p should start to narrow as more investors cotton onto the fact that its high yielding and inflation proofed portfolio – European Public Real Estate Association (EPRA) net initial yield of 5.72 per cent – remains in a robust state. Buy.

A highly profitable read

■ Forecast busting interim results lead to massive upgrades.

■ Eye-catching progress from Bloomsbury’s Digital Resources.

The Covid-19 crisis has led many companies to withdraw earnings guidance, so creating an information void for analysts. When they have taken a stab at making forecasts, more often than not they have erred on the side of caution. Bloomsbury Publishing (BMY: 259p), the company best known for publishing author JK Rowling’s best-selling Harry Potter books, is a case in point.

Having selected the shares, at 229p, in my market beating 2019 Bargain Share Portfolio, Bloomsbury’s share price was riding a 13-year high of 295p at the start of the year before giving back all the gains, and more, when Covid-19 hit. Print books accounted for 79 per cent of Bloomsbury revenue last year and some analysts feared the worst, factoring in a 70 per cent decline in physical sales of books during the lockdown period. However, I felt they were being far too cautious given that online sales were booming, so making good the lost sales through book shops due to lockdown restrictions (‘Bloomsbury’s recovery potential’, 26 May 2020).

In the event, Bloomsbury has just reported a 60 per cent jump in interim pre-tax profit to £4m, the highest first half earnings since 2008. Consumer titles were a key driver, delivering 17 per cent revenue growth and an eye-catching fourfold increase in profit contribution to £2.7m. Profit from children’s books doubled to £1.6m and adults’ trade sales put in a storming performance, reversing a small loss in the comparable period of 2019 to report a £1.1m profit.

The other take for me is the ongoing growth of digital revenues as Bloomsbury repositions itself from mainly being a consumer publisher to a digital business-to-business publisher in the academic and professional information market. Of the 60,000 books that Bloomsbury has in print, around 80 per cent are in the academic, professional and special interest category. In the first half, Bloomsbury’s Digital Resources (BDR) increased revenue by almost half to £5.6m and raised pre-tax profit 12-fold to £1.2m, so is well on course to lift annual revenue to £15m and, with the benefit of margin growth and operational gearing, deliver a profit contribution of £5m in the 2021/22 financial year as targeted.

Analysts at Investec have taken note, raising full-year EPS estimates by 36 per cent to 12.3p on the basis of Bloomsbury delivering annual pre-tax profit of £12.3m on flat revenue of £163m. Moreover, with the benefit of an increasing contribution from BDR, expect EPS to exceed the previous high water mark of 15.7p in the 2021/22 financial year. The long-term rationale for holding Bloomsbury’s shares – organic growth in digital resources, deploying cash flow to make earnings enhancing acquisitions, targeting international growth – still holds.

Furthermore, with net cash of £44.1m (52.5p a share), the board has ample firepower to pursue their strategic objectives including a progressive dividend policy. Investec predict a cash dividend of 8.2p a share in the 12 months to 28 February 2021, a pay-out comfortably covered by forecast free cash flow of 14p a share. Bloomsbury has paid out 14.92p a share of dividends since I first suggested buying the shares in February 2019.

Offering decent upside to my 300p target price, the shares are worth buying on a cash-adjusted price/earnings (PE) ratio of 12 for 2021/22 financial year, and on a modest price-to-book value of 1.3 times. Buy.

Chariot primed for further share price gains

■ Non-binding expression of interest to fund the Anchois gas discovery.

■ Offtake discussions ongoing.

Aim-traded Chariot Oil & Gas (CHAR:6.48p) has received two non-binding expression of interests to provide development funding for the company’s Anchois offshore gas discovery in Morocco. It’s a huge resource with an estimated 361bn cubic feet (bcf) of 2C contingent recoverable resources, and 690bcf of 2U prospective resources.

The fact that two highly regarded institutional lenders – African Finance Corporation, a Pan-African infrastructure institution, and a well-known multinational bank – have endorsed the project underlines its quality. It’s also significant given that capital expenditure of US$300m to US$500m needs to be funded to bring the development on stream. Chariot is also engaging with potential off-takers both within the domestic Moroccan gas market, and through the Maghreb-Europe pipeline to the European gas market. 

Investors have reacted positively to the news. In fact, the share price has surged 70 per cent since I highlighted the buying opportunity three weeks ago (‘Priced for profitable outcomes’, 12 October 2020). If Chariot secures both an offtake agreement and the development finance, as seems increasingly likely, then the share price could easily treble or quadruple given that analysts’ risked net asset value of $153m (£118m) for the Anchois gas field is five times Chariot’s own market capitalisation of £24.5m. Buy.

Sylvania’s eye-catching first quarter profits

■ Production doubles quarter-on-quarter.

■ Cash profit surges by 55 per cent.

Sylvania Platinum (SLP:64p), a cash-rich, fast-growing, low-cost South African producer and developer of platinum, palladium and rhodium, has delivered eye-catching first quarter results that support a re-rating towards my 100p target price.

After a steady return to full production following the outbreak of COVID-19 and government imposed industry shutdown, Sylvania doubled quarter-on-quarter output to almost 18,000 ounces from its dump operations, albeit that’s still 14 per cent shy of the same quarter last year. However, with Sylvania’s gross basket price up 93 per cent year-on-year in Rand terms, buoyed by a 150 per cent increase in the price of rhodium (12.5 per cent of Sylvania’s overall basket), then the company’s quarterly revenue soared by a third to US$41.2m to drive a 55 per cent rise in cash profit to US$29.7m. Cash balances are soaring, too, more than doubling to US$60.9m (17.3p a share) in the past 12 months.

At the current run rate, Sylvania’s annualised cash profit of US$120m is 74 per cent higher than in the 2019 financial year and implies the shares are rated on enterprise valuation to cash profit multiple of only 1.4 times. A current year forecast free cash flow yield of 33 per cent is appealing, too. The shares have so far generated a 344 per cent paper profit since I first suggested buying, at 14.5p, in my 2018 Bargain Shares portfolio, and are still worth buying.

Exploit Driver’s re-rating potential

■ Resilient second half performance.

■ Robust cash position.

Consultancy group Driver (DRV:47p) has matched its first half trading performance and expects to deliver underlying pre-tax profit of £2.5m in the 12 months to 30 September 2020. On this basis, analysts expect EPS of 3.7p. That’s 16 per cent shy of the 2019 result, but is a robust performance given that strong trading in the UK and Europe was offset by weakness in the Middle East and Asia. Operations in those two regions have now been restructured to meet the changing demands in end markets.

Driver provides clients in the construction and engineering sectors with specialist commercial management, planning, project management, and dispute resolution services. More than a fifth of revenue comes from expert witness work undertaken by its Diales subsidiary, a key focus for growth says former chief operating officer and chief executive Mark Wheeler. He has a point because the Covid-19 pandemic is set to drive higher demand for Diales’ team of 48 adjudicators, arbitrators and mediators. That’s because more than half of all construction projects normally incur cost over runs or late completions, a figure that has surged due to the pandemic. It’s high margin work, too, as Driver earns gross margins of 30 to 40 per cent.

In addition, the recently announced strategic partnership with Africa's leading claims and dispute resolution consultancy, Johannesburg-based EVRA Consulting, combines the services of Diales’ experts with EVRA's relationships and gives the business access to a network of 54 countries across the African continent. A new office in New York is enabling Driver to service existing clients better and has improved access to important South American markets.

The other take for me was Driver’s impressive cash flow generation. Year-end net cash of £8.2m (15.7p a share) is more than double the £3.3m position at 31 March 2020.

Admittedly, the shares are volatile, having rallied from 57.5p when I last suggested buying (‘On the hunt for recovery buys’, 6 July 2020) to the 74p entry point in my 2019 Bargain Share Portfolio, before giving back all the gains, and more. However, the de-rating since the summer is unwarranted as there are decent prospects of a profit rebound.

With the shares trading on a cash-adjusted PE ratio of 8 for the financial year just ended, and on a modest price-to-book value of 1.3 times, the recovery potential is being under-priced in the heavily oversold shares – 14-day RSI of 20. Buy.

Finally, I am now on annual leave for the next fortnight.

■ 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].

November Promotion: Subject to stock availability, the books can be purchased for the promotional price of £12.50 each plus postage and packaging, or £25 for both books 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.

Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.