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Monthly Archives: June 2014

Universe Group – Some Fresh Perspective(s)

24 Tuesday Jun 2014

Posted by Wexboy in Uncategorized

≈ 2 Comments

Tags

activist investor, Downing LLP, growth investor, HTEC, Jeremy Lewis, Kalibrate Technologies, Robert Goddard, Stephen McLeod, UNG, Universe Group, value investor

I first published a write-up on Universe Group (UNG:LN) almost 2 years ago: A Universe of Stocks… This was back when the shares were trading at GBP 2.375p, after a long & relentless 9 year decline. At that point, despite the scary chart, I believed the company had finally reached an inflection point…

This perception wasn’t just built on hope value:  The core HTEC division was an obvious jewel in the crown, a new management team was already delivering on its promises, and (if necessary) the shareholder register promised potential activist intervention. The company’s substantial undervaluation was obvious – and its evolution from manufacturing & product sales to a software/transaction solutions provider, focused on increasing recurring revenues, promised significant intrinsic value upside potential in the future. Based on the company’s metrics at the time (adjusted for somewhat excessive debt), I pegged Fair Value at 8.4p per share. I also predicted its loss-making CEM unit would be closed down, or sold – contingent on that, I suggested a Secondary Fair Value of 11.0p per share was also possible.

Just 2 weeks later, the story took a big step forward. Universe announced a placing & a GBP 0.2 million loan issuance – initially for debt reduction, which I was pleased to see. Unfortunately, the resulting enhancement of intrinsic value was relatively small (in my opinion), whereas the dilution impact was substantial: UNG’s undervalued share price/market cap meant a colossal 63% increase in outstanding shares was required to raise just GBP 1.7 M of equity funding. Which knocked my Fair Value targets back to 5.1p & 6.8p per share, respectively. However, management also stated they were ‘exploring a range of options’ for the CEM business – which I took as confirmation it would soon be shut down/sold off, so I was happy to merge/average my price targets into a new Fair Value of 5.9p per share. Despite the dilution, this still offered a highly attractive 164% upside potential! Fast forward two years, the company’s made steady progress…

As expected, the CEM unit was sold in Dec-2012, followed by two strategic bolt-on acquisitions (Indigo & RST) in 2013. A new & updated product offering was completed in 2012 & enjoyed a very successful 2013 customer roll-out. Revenue reached a H2-2013 run-rate of GBP 18.6 M, vs. continuing ops. revenue of 10.5 M in 2011. And with the turn-around complete, the CEO Stephen McLeod departed in Sep-2013 to pursue other projects (Robert Goddard remains as Chairman) – to be replaced by Jeremy Lewis, an ex-investment banker & a technology/software company CFO/CEO for the past 15 years. The share price has also lived up to its potential – it’s now trading in excess of my price target, at 6.125p – that’s a 158% gain vs. my original write-up at 2.375p per share! In fact, the shares almost reached my original 8.4p fair value target, with a Nov-2013 high of 8.25p per share. Which begs the obvious question – what’s an appropriate fair value target for UNG now?!

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European Islamic Investment Bank – Tender Offer/AGM Reminder

18 Wednesday Jun 2014

Posted by Wexboy in Uncategorized

≈ 18 Comments

Tags

asset management, EIIB, European Islamic Investment Bank, share buy back, shareholder activism, shareholder value, tender offer, Zak Hydari

I hope readers were just as pleased (as I was) to note the recent tender offer announcement by European Islamic Investment Bank (EIIB:LN). Even if you’re not an EIIB shareholder, it’s an excellent reminder activism isn’t simply a bloodsport practiced by US hedge funds. All investors, large & small, have rights & responsibilities as the owners of the companies they invest in – and sometimes they need to insist their voice is heard by management…

I proposed such a tender offer to EIIB management in my Jan-2014 letter (with the support of Guy Thomas, Ali Al Shihabi & a number of other shareholders). Of course, this letter was a follow-up to my previous 2013 letter. Some might argue I’ve been far too sedate/polite in my activism – that’s understandable – I could definitely have taken a far more aggressive activist stance, but in this instance my approach reflected my underlying (positive) perspective on the business. As I’ve detailed before, I believe EIIB offers investors a compelling triple play on frontier markets, Islamic finance, and Middle Eastern oil wealth & resources. Unfortunately, in its previous incarnation, that potential was wasted…

However, the arrival of HBG & the appointment of Zak Hydari as CEO stabilized the business, led to the acquisition of Rasmala & re-focused operating strategy on becoming a leading GCC asset manager. Which has, to date, been a great success – not that you’d notice from the share price – Assets under Management (AUM) have doubled in just 2 years (to USD 1,176 million at year-end 2013, from USD 600 million in Jan-2012). This is clearly a high margin business, with attractive economies of scale, but that’s not yet apparent due to the restructuring of Rasmala/EIIB & the rapid expansion in AUM. Unfortunately, as things stand, it’s unlikely this operating progress/potential can deliver a decent return on equity for shareholders in the foreseeable future – because any likely return will end up swamped in a sea of equity! [EIIB currently has GBP 123 million of equity, mostly in cash & liquid securities].

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