In periods of heightened uncertainty, the value of a rigorous and disciplined investment process cannot be overstated. Decisions based on either the fear of missing out or on a “wait and see” approach are unlikely to lead to success. We focus on UK-listed small-cap stocks, seeking out those likely to benefit from structural growth and boasting high-quality earnings and cash generation.
We aim to buy companies at a discount to their “real world” value to a private equity or corporate buyer and to invest for the long term. This framework has helped us cut through the constant barrage of news about Covid-19 to identify opportunities where we believe the market is missing the broader long-term picture (even if there is short-term disruption).
Clinigen will close the value gap
A classic example of a major gulf between a firm’s fundamentals and its share price is Clinigen Group (Aim: CLIN). Clinigen provides pharmaceutical products to healthcare providers in more than 120 countries. As most of these medicines are for critical and chronic conditions, there has been limited disruption to date. Still, the shares plunged from 900p to 360p as markets slumped, prompting us to top up our holding.
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Although the shares have since recovered somewhat, we believe the company is a unique asset that remains materially undervalued. Furthermore, recently acquired drug Proleukin is being used in numerous clinical trials alongside immunology cancer treatments. Its potential has yet to be factored in to both current forecasts and the share price.
Medica Group (LSE: MGP) has been affected by Covid-19, but is well positioned to emerge stronger on the other side. The company provides teleradiology services that enable medical images to be interpreted remotely by radiologists. A structural shortage of radiologists and increasing demand for imaging is driving strong growth: revenues increased by 19% last year.
Although scan volumes are currently severely affected as the NHS focuses on Covid-19, the company has a variable cost base and a net cash position that should enable it to ride out a prolonged period of disruption. Medica is currently deepening its relationship with the NHS by providing the health service with its remote-working technology and this will stand it in good stead once normal activity resumes. Dr Stuart Quin, CEO since September, has an excellent record of delivering value for shareholders.
A resilient share registrar
The share registrar and financial services provider Equiniti Group (LSE: EQN) is a core holding, with a key attraction being the resilience of the underlying business model. Around 80% of sales stem from long-term recurring contracts. While discretionary revenue streams such as those relating to merger and acquisition activity have been affected by the crisis, more rights issues and share placings will offset some of this.
We expect the business to remain profitable, cash generative and well capitalised this year. Longer term, there is opportunity in the US now that Equiniti’s strategic acquisition there has been fully integrated. The shares have fallen by around 25% since February to 150p – an attractive entry point into a high-quality company.
Adam Khanbhai is a fund manager at Strategic Equity Capital
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