Two valuation anomalies that are worth exploiting

Netscientific runs a portfolio of 24 companies of which 18 raised £70mn through equity and venture debt last year, buoyed by key fundraisings after several companies achieved significant milestones. It operates an asset-light business model, making direct investments of £0.6mn last year together with £5.3mn of third-party ‘advised’ investments, thus benefiting from carried interests across 11 portfolio companies.

I suggested buying the shares, at 64p, in my 2023 Bargain Share Portfolio, highlighting why the underlying valuation of the portfolio is materially above carrying values in the accounts. The investment case remains firmly intact, so much so that the directors are optimistic about liquidity events to “enhance shareholder value” and expect to report a “significant increase in the [portfolio] fair valuation” in next month’s annual results.

Any exits or corporate activity will bring into focus the glaring valuation anomaly on offer. The portfolio of directly owned investments and subsidiaries was last valued at £33mn (140p per share) and that excludes EMV’s carried interests, which could easily be worth a further £5mn (21p). Buy.

Exploit Tavistock’s discount

• £7mn earnings accretive acquisition
• Upskilling and cross-selling opportunities

Aim-traded Tavistock Investments (TAVI:7.85p), a UK financial services group, has announced the earnings accretive acquisition of Precise Protect, a fast-growing insurance and protection business based in Bangor, Northern Ireland.

Having sold its profitable multi-asset manager to discretionary fund manager Titan Wealth for an initial cash consideration of £20mn in August 2021, Tavistock received the first of three deferred annual cash payments of £6.7mn (1.2p a share) from Titan Wealth at the end of 2022 to boost its pro-forma net cash to about £12.3mn (2.2p a share).

The board’s strategy is to replace the profit contribution from its multi-asset manager by recycling its cash pile into acquisitions. Tavistock purchased a 21 per cent stake in regulated IFA group LEBC Holdings last summer, the £4mn deferred element of the £10mn consideration is due later this month. It still leaves the group with proforma net cash of around £8.3mn which easily funds the acquisition of Precise Protect.

A smart looking acquisition

The £7mn total consideration includes the issue of £0.25mn of new shares to the vendors as well as a cash payment of £2.75mn on completion. Sensibly, the balance of £4mn is being staggered as annual cash payments over the next three years linked to the future performance of the acquired business.

In the 2022 financial year, Precise Protect reported pre-tax profit of £1.45mn on revenue of £6.5mn, implying a sensible purchase price of less than five times profit and 5.7 times its net assets. It has strategic importance, too. That’s because Precise Protect has a network of over 200 advisers who work with more than 37,000 UK clients with an average below 40, offering them a range of products including private medical insurance, income protection, life and critical illness cover.

The acquisition not only boosts the group’s client base by almost 50 per cent to more than 110,000 private clients and doubles its network of financial advisers, but it provides Tavistock with an opportunity to boost revenue per employee by upskilling Precise Protect’s mortgage and protection advisers to become IFAs through the group’s academy. Tavistock’s fast-growing advisory business, which increased its cash profit contribution by 56 per cent to £1.4mn on revenue of £16.6mn in the first half of the 2022/23 financial year, will also benefit from financial advice leads generated from Precise Protect’s client base. There is scope to make cost savings in software, systems and regulatory oversight, too.

Exploiting hidden value

Although Tavistock’s share price has doubled since I included the shares in my 2022 Bargain Shares Portfolio, there is still material hidden value on offer in the £43.4mn market capitalisation company.

After settling the LEBC deferred consideration and the initial payments on the Precise Protect acquisition, proforma net cash should be around £5.5mn (1p a share) and that excludes £13.3mn (2.4p) cash payments due from Titan Wealth at the end of 2023 and 2024. In addition, the investments in Precise Project and LEBC are worth £13mn (2.3p).

This means that the group’s advisory business is effectively in the price for £11.6mn (2.1p), or less than three times the £4.1mn 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 sum to support sum-of-the-parts valuations more than double the current share price. 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. The books are  priced at £16.95 each plus postage and packaging (P&P) of £3.95 [UK], or both books can be purchased for the promotional price of £25 plus P&P of £5.75.