'Welsh wizard' sees value in this stock – and so do we

Richard Griffiths, the founder of investment bank Evolution and boutique finance house ORA Capital, has been upping his stake in Logistics Development Group (LDG:10.7p), an Aim-traded investment company managed by asset management firm DBay.

Known in the City of London as the 'Welsh Wizard' due to his astute stock picking, the Jersey-based investor has raised his holding in LDG from 10.9 to 15.3 per cent in the past week. It’s easy to see why his interest has been sparked in the £56mn market capitalisation company.

That’s because I estimate that LDG’s has a spot net asset value (NAV) of £106mn (20.35p) and that sum includes net cash of £34.7mn (6.6p). So effectively its portfolio of five holdings is in the price for £21.3mn even though it has a combined mark-to-market valuation of £71.5mn and includes three listed investments: Alliance Pharma (APH:39p), a distributor of consumer healthcare and pharmaceutical products; SQLI (FR:SQI), a leading pan-European digital transformation business; and Mission Group (TMG:24p), a UK advertising and marketing specialist that recently received a bid approach from London-based social and digital media group Brave Bison (BBSN:2.5p). Cumulatively, the three holdings have a value of £44mn (8.35p).

Source: LDG annual results for 12 months to 30 November 2023 and subsequent London Stock Exchange RNS filings. Latest share prices for portfolio companies correct on 28 May 2024.

In addition, LDG holds a 27.5 per cent stake worth £17.8mn (3.4p) in Finsbury Foods, a speciality bakery manufacturer of cake, bread and morning goods, that was acquired last year for £143mn by funds managed by DBay. The offer valued Finsbury on 8.3 times operating profit to enterprise valuation at the time, a multiple that suggests scope for valuation upside for a growing business either through a trade sale or relisting at some point.

LDG’s final holding is a £10mn (2p) high interest payment in kind (PIK) fixed rate unsecured loan note that was issued three months ago to The Power of Talent Midco, a special purpose vehicle that owns the operating companies of unlisted Nash Squared Group, a recruitment and consultancy group. The three-year loan note earns LDG a 15 per cent annual fixed rate of interest, matures no later than 9 February 2027, and has a balance of £10.45mn outstanding including accrued interest.

LDG chronic undervaluation

Of course, investors may wish to apply a chunky discount to the value of LDG’s unquoted holdings for liquidity reasons, but on the basis they are already in the price for free then they are hardly being overvalued to start with. To put the scale of the company’s undervaluation into some perspective, LDG’s shares not only trade on a massive 47 per cent discount to spot NAV estimates, but the value of its listed holdings and cash are cumulatively worth 38 per cent more than the company’s market capitalisation. Spot NAV is 90 per cent higher than the current share price.

Furthermore, it’s not as if DBay hasn’t had some recent success even if the largest holding in Alliance Pharma remains under water. For instance, the asset manager acquired a 2.8 per cent stake in industrial fasteners group Trifast (TRI:69p) for £2.7mn and subsequently sold it for £3.1mn at the tail end of last year. The 11.7 per cent stake in Mission Group was purchased for £1.7mn and is now worth £2.45mn.

As I noted in my analysis of the Mission bid situation, the company’s directors are open to proposals that enhance shareholder value and deliver benefits to its own shareholders. The indicative all-share offer from Brave Bison doesn’t achieve that, a point that DBay made in no uncertain terms when rebuffing the offer. However, that’s not to say a deal can’t be done between the two media companies at a price point acceptable to all parties. In any case, Brave Bison’s approach could flush out interest from other bidders attracted by Mission’s recovery potential. It is certainly not being reflected in a bargain basement rating of less than four times cash profit estimates to enterprise valuation. Given the improving market environment for small and micro-cap companies, there should be upside to LDG’s portfolio.

So, having included the shares in my 2023 Bargain Share Portfolio, I feel that the 11 per cent share price decline since I reviewed its performance three months ago is wholly unwarranted. The Welsh Wizard certainly thinks so, too. Priced on a 47 per cent discount to my spot NAV estimate, the shares rate a buy.

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