Four days ago this looked like a really bad tip. Now it seems almost inspired
Shares in Oxford Metrics had been trading below our recommendation but a bid for one of its businesses has transformed the picture
Until seven o’clock on Monday morning, Questor’s purchase in September 2019 of Oxford Metrics, the Aim-quoted tech company, for our Inheritance Tax Portfolio had looked like a poor decision: the shares, tipped at 89.5p, had closed on Friday last week at 78.5p. But then the company put out the following statement over the Regulatory News Service, the key source of company updates: “Oxford Metrics today announces the sale of its infrastructure asset management division, Yotta, to Causeway Technologies for a cash consideration of £52m.”
This compared with a market value for Oxford Metrics before the announcement of £100m – and Yotta is by a long way the smaller of the company’s two businesses. In the year to September last year it contributed 23pc of the group’s total sales and about 10pc of its “adjusted” profits before tax (on a statutory basis it made a loss).
It’s obvious then that Oxford Metrics got a good price for Yotta. Certainly the market thought so: the shares leapt on the news and ended the day 29pc higher at 101p.
We might legitimately wonder why they didn’t rise further. The combined business is now worth about £127m, which implies that the remainder once Yotta is detached is worth £75m. However, if we take into account its current net cash of £23m, the valuation of the remaining business itself is £52m. If we valued it crudely as being worth nine times as much as Yotta, since it makes nine times the profits, it would be worth £468m; if we used the sales breakdown of 77pc to 23pc, the remainder would be worth £174m – and these figures are before we add back the £52m proceeds for Yotta and the £23m in cash it already has.
So it seems that the continuing business of Oxford Metrics, which goes by the name of Vicon and, as we explained in our original tip, makes advanced equipment that monitors and digitises the movements of human beings for customers such as Nasa and Adidas, is being implicitly undervalued by the market. Perhaps therefore it too could attract the attention of a bidder, in all probability an American one: not only are US private equity houses awash with cash that they need to invest but their money now goes further if they spend it on British businesses thanks to the weakness of sterling.
Stockbrokers agreed that Oxford Metrics now looked too cheap. Numis, the company’s own broker, had a price target for the combined group’s shares of 157p before the deal was announced; it said it had “previously assumed a £52m valuation for Yotta and it is very pleasing to see the group achieve this given the uncertainty in the market, and to receive this in cash”.
It added: “We reiterate our buy rating and believe the group is strongly positioned to create further shareholder value.”
Admittedly the shares have risen since then to 99.5p but they are a long way short of 157p, which in Questor’s view now looks conservative anyway.
Singer Capital Markets described the sale of Yotta as “a great deal for shareholders” and added that “one could easily justify” a market value for Oxford Metrics of £150m. Again, this looks on the low side. We will hold on for our IHT portfolio but for any readers with new money to invest this stock would make a good home.
Update: RWS
We reported on April 27 the possible bid for RWS, the patent translation company, by Baring Private Equity Asia fund. Its interest was always tentative and on May 16 it said it had given up on the idea.
The shares, as you would expect, had jumped on the news of the possible bid and slumped when the fund said it had lost interest. But since then they have rallied and stand 11pc higher than immediately before the bid interest emerged. This gives us a paper loss of 7pc since our tip in 2017. Hold.