Neil Woodford is a portfolio manager who is not afraid to go against the herd. Whereas most equity income portfolio managers prefer to invest primarily within the FTSE 350 index, an analysis of Woodford’s Equity Income fund reveals that his portfolio holds a number of less well-known small-cap stocks.
One smaller company within the portfolio that has performed well recently is CityFibre Infrastructure Holdings (LSE: CITY). Indeed, the shares jumped over 40% last Thursday. Given that Woodford holds approximately 18% of the company, he has no doubt done quite well from the stock’s rise. By my calculations, he made a paper profit of around £20m in a single day.
So what caused the sharp spike in CityFibre’s share price and more importantly, does the stock offer further potential for investors?
CityFibre is a provider of wholesale fibre optic infrastructure. The £392m market cap company designs, builds and operates pure-fibre networks across the UK and is aiming to become a third national network operator, alongside BT and Virgin Media.
Thursday’s share price surge was the result of an announcement that the company had signed a “major strategic partnership” with Vodafone. The company stated that under the agreement, it will provide full-fibre connectivity to a minimum of one million UK homes, with the potential to extend this to up to five million (20% of the current broadband market) by 2025. Construction is due to commence next year, and be mostly completed in four years. Over 20 years, the initial phase of the agreement for one million homes is estimated to be worth over £500m.
Chief Executive Greg Mesch commented: “This agreement has unlocked the UK’s full-fibre future and is a major step forward in delivering our vision for a Gigabit Britain. With this forward-thinking commitment from Vodafone, we have a partner with which we can transform the digital capabilities of millions of homes and businesses and establish an unassailable wholesale infrastructure position across 20% of the UK broadband market.”
Still time to buy?
So what does this deal mean for investors? Is there still time to get on board the stock?
Placing an intrinsic value on CityFibre shares is difficult at present. At the current share price, its market capitalisation is almost £400m, which seems high for a company that generated revenues of £15.4m last year, and made a net loss of £12.6m. Of course, after signing the contract with Vodafone, the company could potentially make sizeable profits in the future. According to The Financial Times, analysts at Finncap described the agreement as “the dawn of a new UK.”
Personally CityFibre is not a stock I would invest in, as I prefer to buy companies that are already profitable. I’ve found this strategy tends to minimise the chances of experiencing big losses. However, for long-term risk-tolerant investors, I can see appeal in holding a small position (the stock was just 0.49% of Woodford’s portfolio at the end of September) as a speculative buy.
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Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.