Investors Chronicle 'A Bright Spark'
Our companies editor uncovers a potentially lucrative and under researched play in the battered technology sector.
As Marc Rivalland pointed out last week in his trader column, the technology sector has been taking an almighty battering recently. In fact, the Nasdaq 100 index is a down a hefty 15 per cent since early May and has been making a sequence of yearly lows. Sentiment is clearly poor and could deteriorate even further if results from the second quarter corporate earnings season disappoint. The savage markdown last week in the shares of computer manufacture Dell and internet search engine Yahoo served as a timely reminder of how the market deals with disappointment. So who in their right mind would be investing in the technology sector right now? Well, in a word, me.
Now before you think the recent heat wave has dealt me a serious case of stock market sunstroke, allow me to explain in the same way that equity markets have been punishing companies harshly for missing targets, it has not been rewarding those with a good news story either. This is rather good news for us as we can cherry pick decent companies that are trading well below their true intrinsic value and when the rout is over and the ultra bearish sentiment improves, that value should be recognized. So, with this thought in mind, I have been casting my slide rule over online merger and acquisition (M & A) bible mergermarket. (www.mergermarket.com)
The fast growing company provides original and aggregated news on global M&A markets to more than 1,000 customers in Europe and the US, including investment banks, hedge funds, law firms and accountants. Revenues and profits have been soaring, too. At the last count, revenues were up 80 per cent, year on year, renewal rates are currently touching 100 per cent and operating profits have increased 240 per cent. Clearly, it's a successful business – but one that the owners are in the process of selling, having earlier this year appointed investment boutique Hawkpoint Partners to handle the auction process. That process could net the owners around £120m if the City rumor mill proves accurate.
And we can make money from the sale, too, because the stock market has completely ignored the fact that Aim-traded technology investment company NewMedia Spark (TIDM: NMS – 14.5p) owns a 24 per cent stake in mergermarket. In fact, if Hawkpoint finds a buyer at around the £120m price tag, NewMedia will get £28.8m for its stake. That's just not a massive premium to the £13m book value in the company's last accounts, but it's a significant amount considering NewMedia, which has a market value of £68.5m, had net assets of £62.8m at the end of September last year.
The good news story doesn't end there, either, as the stock market has also ignored an announcement made by NewMedia three weeks ago regarding its £3.7m stake in IMImobile, an India-based developer of content management services and data services to mobile telecom operators. IMImobile, which has 40 customers worldwide, including India's leading operators, looks well-placed to benefit from the expected rapid growth in the Indian mobile telecoms market, with some analysts forecasting that subscriber numbers will be more than quadruple from the current 95m to 375m by 2010. So it was interesting to hear that IMImobile has raised $10m from Pequot Ventures, a major US investor in high-growth companies. Reading this across to the value of NewMedia's shareholding, and applying the strict British Venture Capital industry valuation rules, means that the book value of the IMImobile stake is set to rocket from £3.7m to £12.3m when NewMedia reports its interim results for the year to end-March 2006. These results will be released as soon as the mergermarket sale completes, which should be soon.
So, combining the 'potential' £15.8m valuation upside from the mergermarket sale to the 'guaranteed' £8.6m valuation uplift from the company's stake in IMImobile, adds a hefty £24.4m to NewMedia's last reported net asset value (NAV) of £62.8m and means its NAV per share could very well rocket from 14p to 19.5p when it reports its next results. And that's ignoring any valuation uplift from the rest of NewMedia's technology investment portfolio and the effects of the aggressive share buy back programme – funded by a £20m-plus cash pile – which will have boosted net assets per share, too.
Another notable investment that could provide a valuation uplift in NewMedia's next results is Kobalt, one of Europe's top 10 music publishers. The business has been growing strongly and recently turned cash-flow positive. NewMedia also owns a 54 per cent stake in DX3. which distributes digital entertainment content of behalf of all the major record companies, including Universal and EMI. Since gaining these licenses, DX3 now provides content for EMAP's television channels (including The Hits and Kerrang) and has Woolworths on its customer list.
So NewMedia Spark is trading on a potential 26 per cent discount to my calculation of its pro-forma net asset value, and there's some pretty strong newsflow set to emerge in the months ahead. That's why I rate its shares a strong buy.
Simon Thompson has been company's editor of the Investors Chronicle for five years and is a regular speaker at investment seminars on equity and market strategy.