Three complicated businesses with hidden value

published 14 February 2022

All investors are looking for “value”, but this can be far from easy to find. One approach is to look carefully at individual stocks. Often opportunity is hidden within a complex story where high-quality sections of a business are overlooked, leaving the shares trading below a “sum-of-the-parts” value. Combine this with a strong market position that will attract potential buyers and you can have confidence in finding value regardless of the market environment. Some of our investments at Odyssean excite us for exactly these reasons.

Chemring: the value in cybersecurity

Chemring (LSE: CHG) is a leading provider of countermeasures, sensors and energetics products, used mainly by the defence industry. Chemring has a strong record, but we still see significant value in the group. A cybersecurity consultancy called Roke sits within its sensors unit. Roke has world-leading intellectual property and supports governments and companies in high-end cyber and electronic defence missions. Roke is delivering around £80m a year in revenues, is growing at double digits, and enjoys high profit margins. Based on cyber-focused peers, we believe Roke could be valued at four times its revenues (at least) were it a standalone company. This supports a significant portion of Chemring’s current share price – excluding Roke, the rest of the group trades on less than 1.5 times sales. With significant interest in the sector, and recent deals done at two times sales or more, the market seems to be undervaluing the sum of Chemring’s parts.

Euromoney (LSE: ERM) is a leading business-to-business provider of data and events services. A complex group with a wide service range, it has significant recurring revenue and looks well placed to see a recovery in “in-person” events as post-Covid-19 reopening continues. We believe the market is overlooking the significant value of the group’s Fastmarkets business, which provides unique pricing data on a variety of commodity markets. This is a high-recurring revenue, high-growth business unit in a market where strategic buyers and private equity are highly active. Informa’s recently announced sale of its intelligence division will provide a relevant reference valuation point for Fastmarkets. Note also that historically, deals have been done at 20 times earnings before interest, tax, depreciation and amortisation (Ebitda) or more. Euromoney as a whole currently trades at around 11 times Ebitda, suggesting overlooked value.

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Wilmington (LSE: WIL) provides training and information services focused on the governance, risk and compliance needs of various markets. The new management team is refocusing and improving the business, which is well placed to benefit from the Covid-19 reopening. It operates a number of business units and brands across a range of markets, with the risk that its complexity is obscuring the value here. For example, Wilmington recently sold its loss-making training business AMT for £23m to a strategic buyer who valued its unique content and market position. We believe similarly overlooked strategic value exists in some of the group’s other business units. With a net cash balance sheet, high revenue visibility and strong cash flow, the sum-of-the-parts value of the group appears underappreciated.

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