What is ThinkSmart?

According to its website, ThinkSmart is a “specialist digital platform business.” In reality, much of the value of the company comes from its 10% stake in Clearpay. As Clearpay is so important for the ThinkSmart share price, it is important to understand what it does.

Clearpay is a payment company that allows customers to break up the cost of their purchases into smaller interest-free payments. The ‘buy now pay later’ payments sector has experienced rapid growth over the last few years, especially in the UK, and Clearpay is at the forefront of this new industry. In fact, the payment platform is being adopted by large retailers including ASOS, M&S and JD Sports. The growth in this sector is so substantial that Clearpay found its revenue up 346% in 2020!

The Clearpay stake  

In 2018, ThinkSmart sold 90% of its Clearpay holding to Afterpay Touch, an Australian tech company. ThinkSmart has a further arrangement with Afterpay to sell its remaining 10% stake in the business. The management team at ThinkSmart seem committed to getting the most out of the company’s remaining stake. As well as this, over 40% of the small-cap stock’s shares are held by the management team and the board, something that I find very reassuring.

At the start of August, US technology giant Square announced its plans to acquire Afterpay. This acquisition is expected to be completed in early 2022, and the news sent ThinkSmart shares soaring. As Afterpay will be changing ownership, it can now exercise the aforementioned deal with ThinkSmart to acquire its remaining stake in Clearpay.

How could this affect the share price?

The share price has risen over 17% in the last week (at the time of writing), due to the company announcing its financial results. The company found net income up 35% for the year ending June 2021. This increase can be explained by a change in the valuation of its Clearpay holding. The valuation, which is carried out by a third party, brings the shareholders’ equity of ThinkSmart to just over £134 million. In theory, shareholders equity represents the assets owned by shareholders after all debt has been paid. Therefore, as ThinkSmart’s market cap is only £122 million, I believe we could see the share price move another 10% higher. There is also the chance that the deal is revalued higher before the acquisition.  

In reality, however, things rarely work out so smoothly. I worry that because the company’s market cap is so small, the share price will experience a greater amount of volatility. Quite frankly, I would like to see more than a 10% upside to stomach such large moves in the share price. As well as this, after the Afterpay acquisition, ThinkSmart has a very limited future in my eyes. Although I’m strongly considering buying, I won’t be pulling the trigger on this small-cap stock just yet.

Unfortunately, I didn’t have the cash to buy it at the time, but anyone who did is likely to be grinning smugly now. A £5,000 investment in June would have netted me £2,500 in clear profit now after the share price jumped on Monday.

So what’s the big news that has seen ThinkSmart shares rocket 50%? It’s actually to do with events far away linked to Square taking over Afterpay. 

ThinkSmart thinks smart 

First, some background. ThinkSmart’s business doesn’t look great on the face of it. The financial technology firm has posted declining revenues every year since 2016. The amount of money it has made through sales every year has halved in the past five years. 

And CEO Ned Montarello told shareholders in the most recent financial results that the company was making a bold move. It would stop its biggest earning activity to date: renting out electronic equipment to retail customers. 

But an investment in ThinkSmart is effectively a bet on the continued popularity of another company entirely. 

In 2018, TSL sold 90% of its buy now, pay later platform Clearpay to the Australian giant Afterpay. This service allows customers to split their payments for products they buy into monthly instalments. It’s particularly popular among younger consumers, who are used to having an item today and paying it off over time. And this technology development proved a very big earner for ThinkSmart. Especially since it retained 10% of Clearpay. That’s the part of the business that investors are really interested in. Afterpay has grown into a £33bn company. So the bigger Afterpay gets, the more ThinkSmart should be worth. 

In  full-year results to 31 December 2020, TSL’s Clearpay holding was valued at 109.4p per share. At the time, that represented a 40% discount on the ThinkSmart share price. 

Squaring the circle

On 2 August, payments giant Square — the other company run by Twitter CEO Jack Dorsey — announced it was buying out Afterpay. 

That put a rocket under the ThinkSmart share price, sending it shooting up 50% or more in a day. 

Square will pay $29bn for the Australian business. The US firm said it would integrate Clearpay into its suite of financial apps. So every merchant who uses Square will be able to offer a buy now, pay later option at checkout. 

The market cap of the AIM-listed business has shot up to £100m as of 2 August.

Small AIM-listed companies are usually a risky bet. And not all of such investments come to fruition. So I’d never buy AIM shares indiscriminately in the hope that one might get bought out. I could be waiting a very long time for that to happen. 

But by investigating smaller companies with big value propositions — as I suggested ThinkSmart had — I could be on my way to investing riches. And another lesson I’ve taken from this is that I need to keep some cash in reserve for opportunities I think could yield rich rewards in future!

Sir John Templeton perhaps said it best. “If you want to have a better performance than the crowd, you must do things differently than the crowd.” Sometimes, that means taking a calculated risk on an undervalued company.  

So I’ve chosen two UK shares I think will give investors the chance to generate outsize returns.

UK shares bounce back

UK stock markets have revived from the crushing lows of 2020. That means price-to-earnings ratios have rocketed as nervous investors pump cash back into stocks and shares. It also means that companies that were once bargains are now fairly valued. So to make the most of my capital, I want to buy undervalued shares and watch them grow over time.

The first of the UK shares I think is well undervalued is financial technology firm ThinkSmart (LSE:TSL). This is a £70m market cap company, so it’s down at the lower end of what I’d normally buy. The smaller the business, in my eyes, the higher the risk.  

On paper, the underlying business looks pretty poor. In fact, revenues appear to be dying out. And bosses say they are winding down their legacy business of renting out financial technology products.

So why buy? Well, after developing a ‘buy now pay later’ payment platform called ClearPay, in 2018, TSL sold 90% of it to £34bn Australian giant AfterPay. The 10% that TSL retained keeps growing in value. The more that AfterPay grows, the more TSL’s stake is worth.

How it happened

ThinkSmart shares are up almost 200% in the last 12 months to 66p. However, they are still a bargain, based on the net value of the company’s assets (NAV). In full-year results to 31 December 2020, released on 4 March 2021, ThinkSmart reported its NAV at 109.4p. Today’s share price is a near-40% discount!

I don’t think I’ve read any investing website that’s focused on ThinkSmart recently. So buying here, I’d be going against the crowd. I’m happy with that.

The second set of UK shares I’d buy now is the £650m market cap Bank of Georgia (LSE:BGEO). It looks to offer huge value today. Forward P/E is just 4.6, which is tiny, and the business expects earnings per share to hike over 90% next year. And after paying no dividends in 2019 or 2020? Yield is returning for the European bank’s shareholders. In fact, in 2021, dividend yield is expected to hit 5.6%, with up to 6.7% in 2022. I really like to see margins of nearly 50% in this business. It says to me that the bank is making pretty outstanding profits on the money it spends.

While Georgia is still a developing nation, its economy is going great guns. Poverty has declined rapidly in recent years, according to the World Bank. And that means more loans for business expansion. And more growth for the Bank of Georgia to get involved with.

If the country fails to come out of Covid-19 in one piece, BGEO shares will likely fall. That’s a common risk with investing in developing countries, as its infrastructure can’t compete with the rest of the EU. Still, I’m putting these UK shares are at the top of my buy list.