MXCP2 Sep 2019 22:18
MXC’s valuation gains worth exploiting
Simon Thompson
MXC Capital (MXCP:90p), a technology-focused merchant bank run by a management team that backs investee companies they represent, is set to report a bumper set of annual results for the 12 months to 31 August 2019.
That’s because there have been material movements in the value of its listed investments, the most dramatic being the near five-fold increase in the carrying value of MXC’s stake in IDE (IDE:7.35p), a £29m market capitalisation mid-market network, cloud and IT managed services provider. IDE has gone through a cost reduction programme to create a more appropriate and profitable cost base. It has been successful which has its customers the reassurance they needed. This also means that IDE’s management can now focus on driving the core activities of the business to rebuild value for shareholders. This is clearly happening.
In IDE’s latest annual results, chairman Andy Parker revealed that “towards the end of the 2018 financial year, several of our material customers renewed their contracts, some on a multi-year basis, and at the time of writing (28 June 2019), the pipeline of opportunities across the business both with existing and new customers and partners is the strongest it has been since my involvement.” The improvement in trading has worked its way through to a much improved financial performance, too, as “IDE has been trading profitably at an adjusted cash profit level in the year to date.”
Moreover, following a refinancing that resulted in MXC investing £8m in loan notes to enable IDE to pay off all its bank debt, the solvency risk subduing the company’s valuation has been unwinding, a factor that has accentuated the share price recovery. The point being that all of IDE’s loan notes are held by its largest shareholders, thus giving management the breathing space to focus on the ongoing turn round strategy.
By my reckoning, MXC’s holding of 172.8m shares in IDE is now worth £12.7m, a hefty £10m more than six months ago when I last advised buying MXC’s shares at 85p ('MXC returns to trading profitability', 9 May 2019). The valuation uplift adds almost 15p a share to MXC’s last reported net asset value (NAV) of 97p.
Further balance sheet gains
It’s not the only material balance sheet movement either as Aim-traded shares in Adept4 (AD4: 3.55p), a provider of 'IT as a service' to small- and medium-sized businesses in the UK, have quadrupled in value since MXC’s interim results in May, lifting the book value of MXC’s shareholding from £612,000 to £2.41m. Adept4 is a turnaround situation, too, and its directors recently reported that the business has returned to modest levels of profitability at the cash profit level.
The re-rating has also been driven by news that Adept4 has entered into a non-binding agreement to acquire Cloudcoco, a profitable company that offers cloud and related technology solutions and one with a strong and growing pipeline of business
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