Home Personal Finance Two valuation anomalies worth exploiting

Two valuation anomalies worth exploiting

Jersey Oil & Gas deal is being overlooked by investors

Investors have yet to comment on the pre-close trading update from NetScientific (NSCI:69p)an Aim-traded investment firm that invests in early stage life sciences and technology companies and earns fees by syndicating investments through its corporate finance boutique, EMV Capital.

Netscientific manages a portfolio of 24 companies, 18 of which raised £70 million last year through equity and venture capital, backed by significant fundraising after several companies achieved major milestones. It operates an asset-light business model, making direct investments of £0.6m last year along with £5.3m of ‘advised’ third-party investment, thus benefiting from carry interests in 11 portfolio companies.

I suggested buying the 64 pence shares in my Bargain Stocks Portfolio 2023, highlighting why the underlying valuation of the portfolio is significantly higher than the book value in the accounts. The investment case remains firmly intact, so much so that the directors are bullish on liquidity events to “enhance shareholder value” and expect a “significant increase in [portfolio] fair valuation” in next month’s annual results.

Any exit or business activity will highlight the obvious valuation bias on offer. The portfolio of direct investments and subsidiaries was last valued at £33 million (140 pence per share) and that excludes EMV’s transferred interests, which could easily be worth another £5 million (21 pence). To buy.

Take advantage of the Tavistock discount

Profit-enhancing acquisition of £7 million Upskilling and cross-selling opportunities

Aim traded Tavistock Investments (TAVI:7.85p)a British financial services company, has announced the profit-boosting acquisition of Precise Prospect, a fast-growing insurance and protection company based in Bangor, Northern Ireland.

After Tavistock sold its profitable multi-asset manager to discretionary fund manager Titan Wealth in August 2021 for an initial cash consideration of £20m, Tavistock received the first of three deferred annual cash payments of £6.7m (share of 1.2 pa) of Titan Wealth at the end of 2022 to increase its pro forma net cash to approximately £12.3 million (2.2 pa share).

The board’s strategy is to replace the multi-asset manager’s profit contribution with reusing his cash pile for acquisitions. Tavistock bought a 21 per cent stake in regulated IFA group LEBC Holdings last summer, with the deferred £4 million portion of the £10 million due later this month. It still leaves the group with pro forma net cash of around £8.3m, easily financing the acquisition of Precise Prospect.

A smart-looking asset

The total consideration of £7 million includes the issue of £0.25 million of new shares to the sellers, as well as a cash payment of £2.75 million on completion. It is prudent for the balance of £4 million to be spread as annual cash payments over the next three years, linked to the future performance of the acquired company.

In FY 2022, Precise Project reported a pre-tax profit of £1.45m on a turnover of £6.5m implying a reasonable purchase price of less than five times earnings and 5.7 times net assets. It is also of strategic importance. That’s because Precise Project has a network of more than 200 advisers who work with over 37,000 UK clients with an average of less than 40, offering them a range of products including private health insurance, income protection, life insurance and life insurance.

The acquisition not only increases the group’s customer base by nearly 50 percent to more than 110,000 retail clients and doubles its network of financial advisors, but also gives Tavistock the opportunity to increase revenue per employee through Precise Project’s mortgage and protection advisors. upskill to IFAs through the group’s academy. Tavistock’s fast-growing consulting business, which increased its cash profit contribution by 56 per cent to £1.4m on £16.6m revenue in the first half of FY 2022/23, will also benefit from leads for financial advice generated by Precise Projects customer base. There is also room for cost savings in software, systems and regulatory oversight.

Exploit hidden value

Although Tavistock’s share price has doubled since I bought the shares in my Bargain Stocks Portfolio 2022is there still material hidden value in the £43.4m market capitalization company.

After settlement of LEBC’s deferred consideration and initial payments for the Precise Project acquisition, pro forma net cash should be approximately £5.5 million (1 pence per share), excluding £13.3 million (2.4 pence ) cash payments that Titan Wealth will make at the end of 2023 and 2024. In addition, the investments in Precise Project and LEBC are worth £13 million.

This means the group’s consulting business is effectively priced at £11.6m (2.1p), or less than three times the £4.1m annual cash profit the unit reported in the 2021/22 financial year . As a standalone entity, it could be worth five or six times that amount to support sum-of-its-parts valuations more than double the current share price. To buy.

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