Investors Chronicle 17/04/2017 Apr 2020 08:37
CIP Merchant Capital (CIP:44p), a
Guernsey based closed investment company that predominantly
invests in listed equities by adopting a private
equity style approach, held half its portfolio in cash when
I published my portfolio. The hefty cash backing proved
a drag on performance last year when net asset value
(NAV) declined slightly to £46.2m (84p a share). However,
by keeping its powder dry for more attractive investment
opportunities, CIP has been shielded from the worst of the
stock market crash. Indeed, the portfolio outperformed the
FTSE Aim All-Share index by 11 percentage points during
the first quarter of 2020, albeit it took some hits as the latest
NAV of £37.5m (68.2p) highlights.
What this means is that net cash of £18.6m (33.8p)
now backs up 77 per cent of CIP’s market capitalisation of
£24.2m, so CIP’s portfolio of investments are in the price for
£5.6m, or 70 per cent below their £18.9m market valuations.
To put the ‘margin of safety’ into some perspective, CIP’s
stake in CareTech (CTH:380p), a heavily asset-backed provider
of social care services and one of the largest companies
listed on London’s junior market, is worth £3.5m alone.
CareTech’s shares are rated on a modest forward price/
earnings (PE) ratio of nine after factoring in 11 per cent
likely earnings growth this year, buoyed by the operational
benefits from the October 2018 acquisition of Cambian.
CareTech’s net debt of £291m is backed by a freehold
estate worth £774m, and debt service is not an issue as
annual interest costs are covered six times by cash profit.
Importantly, the majority of service users in care are children
and adults with a learning disability, mental health diagnosis
and/or with challenging behaviours, so do not fall into a
high-risk group or frail and elderly. It’s business as usual.
CIP’s portfolio also includes valuable stakes worth
a total of £4.5m in Orthofix Medical (US:OFIX), a
$500m (£404m) market capitalisation Nasdaq quoted
medical devices company, and Aim-traded Circassia
Pharmaceuticals (CIR), a cash-rich speciality biopharmaceutical
company focused on allergy and respiratory
diseases. I can see upside to both investments, and several
other of CIP’s holdings, too. The decision to widen the
investment manager’s sector remit is sensible in light of the
value opportunities across the whole market. Buy.
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