Augmentum Fintech (AUGM:87p), the first publicly listed fintech fund, delivered a resilient first-half performance highlighting the chronic undervaluation of its shares.

Not only is the group’s market capitalisation of £148.4mn a massive £125mn below net asset value (NAV) of £273.3mn (160.2p) at the half-year end, but Augmentum holds net cash of £51.1mn (30p). The cash pile was boosted last summer when workplace pensions and savings provider Cushon was sold to NatWest Group (NWG). The transaction delivered a return of 2.1 times Augmentum’s invested capital on its holding and realised cash proceeds of £22.8mn.

 

Largest investments performing well

Importantly, the top 10 investments (72.7 per cent of the portfolio) continue to deliver, reporting a total investment return of £10.6mn in the latest six-month period. This mitigated £6.9mn of negative valuation movements on Augmentum’s other 14 investments. The group’s three largest holdings, Tide, Zopa and Grover, are category-defining digital leaders in large and growing markets, are either profitable or funded to profitability, and are currently growing at an average of 79 per cent year on year.

The largest holding, Tide, is an emerging force in the small and medium-sized enterprises (SME) challenger banking sector. It has achieved profitability and a 10 per cent share of the UK market, now moving into a new phase of maturity, delivering strong revenue diversification through product cross-selling across a large and stable base of business customers. The valuation of Augmentum’s 5.1 per cent stake was marked up from £35.7mn to £41.5mn in the half-year, and has a pro-forma valuation of £45.7mn after taking account a post-period-end investment.

Zopa Bank is also profitable and performing ahead of budget in the year to date. It further strengthened its balance sheet recently by raising £75mn in Tier 2 regulatory capital. The upward movement in the valuation of Augmentum’s 3.4 per cent holding (from £30.1mn to £33.9mn) is underpinned by year-on-year revenue growth of 92 per cent and returns the position above cost for the first time since the write-down event that coincided with Zopa securing a banking licence in 2019.

Berlin-based Grover, a leading consumer-technology subscription platform, is generating annual recurring revenue of €266mn from 320,000 active customers across five core markets. The company continues to track its profitability-focused year-on-year revenue growth target of 30 per cent. Both operating profit and net income margin are performing ahead of expectations, reflecting a close focus on costs. The business is expected to move into profitability in 2024. Augmentum’s 6.3 per cent stake has a carrying valuation of £41.2mn, or more than four times the cost of the investment.

The point is that the investments in Tide, Zopa and Grover and balance sheet cash are cumulatively worth £168mn (99p), or 12 per cent more than Augmentum’s current market capitalisation of £148mn. That leaves shareholders with a free ride on 21 other holdings, including an 8.3 per cent stake in Volt, a fast-growing provider of account-to-account payments connectivity for international merchants and payment service providers.

 

Volt delivers electrifying gains

Augmentum invested a further £5.3mn in Volt’s Series B funding round in June 2023 to more than double its invested capital to £9.8mn since making its first investment in December 2020. Reflecting the pricing of the funding round, the group booked a £4.2mn uplift on the stake, which is now carried in the accounts at £23.8mn, making it the group’s fourth-largest holding.

There is scope for further investment upside as Volt expands its global footprint. The company already has a partnership with Worldline, the European leader in payments and transactional services, giving more than 600 enterprise-level merchants globally access to Volt’s open payments infrastructure, and expanded into Brazil to integrate domestic instant payments network, Pix, and partners with global ecommerce platform, Shopify.

 

Exploiting a golden opportunity

Augmentum also has exposure to the precious metal complex through its 11.1 per cent stake in BullionVault, a physical gold and silver online marketplace for private investors which has more than 100,000 clients and $3.7bn of assets under management. BullionVault generates solid monthly trading profits from trading, commission and interest income, is cash generative and dividend-paying, too. The company’s pre-tax profit increased by 8 per cent to £8.4mn in the 2022 financial year and is likely to have risen further this year given that the gold price is closing in on its all-time high.

Augmentum’s stake in the company has been revalued from £11.6mn to £12mn, but it still looks modestly rated as the read-through valuation implies an equity value of £108mn, or a multiple of 12.8 times BullionVault’s pre-tax profit in 2022 and 2.5 times its NAV.

 

Exploiting an unwarranted discount

Sensibly, Augmentum’s directors are using some of the group’s bumper cash pile to buy back shares in the open market to take advantage of the massive share price discount to NAV. In the six-month period, 3.9mn shares were repurchased at an average price of 99.2p. It should pay to follow their lead, as clearly the current share price fails to reflect the tangible value across the top 10 holdings and their potential for further growth. Moreover, assuming sentiment improves next year as further declines in UK inflation and a likely flattening of the yield curve make equity investors less risk averse, the shares could re-rate sharply.

So, having included the shares, at 102p, in my 2019 Bargain Shares Portfolio, and seen the group deliver an impressive 16.6 per cent internal rate of return (IRR) on invested capital since inception, I maintain my positive stance. Buy.

■ 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 at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.