Aim's best 45 shares (part 3)

Ascribe

Shares in healthcare software provider Ascribe traded for as much as 63p each in 2007. So, given that the company's management has announced a positive start to its 2007-08 financial year, and earnings per share are set to increase by more than 40 per cent this year to 3.1p, it is odd that the shares now trade on less than 10 times earnings.

Ascribe sells its software to the NHS in the UK and further afield, recently receiving its first 'accident and emergency' order in the Australasia market. A key feature of the business is that it sells its systems to local NHS Trusts, which have discretionary budgets. This means that the company is not dependent on the National Programme for IT to make sales in the UK. With the company expected to increase EPS by another 25 per cent next year, the shares are too cheap.

Cape

With oil at sky-high prices, companies like Cape - which provides industrial services to the oil & gas sector - should do well. The company, which traditionally serves customers in the UK, has seen its income from overseas customers increase significantly during the past few years. Such diversification should provide it with protection against country-specific shocks.

One key sector that Cape is exposed to is the liquefied natural gas (LNG) market. Global demand for LNG is set to quadruple by 2020, and Cape already has work on several LNG projects around the world. The business has a track record of profit growth, and the latest estimates indicate that it will have increased earnings by almost 50 per cent in 2007. Yet the shares are rated at less than 10 times earnings. In 2008, EPS is set to improve by another 20 per cent, so surely this share is due a rerating.

Education Development International

Education Development International (EDI) supplies schools, companies and other training bodies with accredited vocational and professional qualifications, performance measurement and assessment services. More than two-thirds of its revenues come from providing these services in the UK - where it managed to increase its turnover by 18 per cent last year. But the business also has an international dimension, and its most recent results showed that, for the third consecutive year, sales into international markets had grown, thanks mainly to strong performances in Germany and Asia. EDI's management says it plans to make the acquisitive company the UK's leading provider of innovative, high-quality assessment and learner support services within three years.The company's shares trade at 7.5 times earnings, which are forecast to grow between 16 per cent and 18 per cent a year. Such statistics suggest the shares would be cheap even if EDI's balance sheet did not have net cash of £3.1m (equivalent to 5.4p a share).

Hat Pin

Perceived wisdom might advise against investing in recruitment consultants in the current uncertain economic climate, but Hat Pin is a well-diversified business thanks to acquisitions and geographical expansion. Once a company focused on recruiting senior professionals in the advertising and marketing sectors in the UK, US and Hong Kong, Hat Pin now also finds executives for the financial services sector as well as senior management people for both the private and public sectors, and not-for-profit organisations. The company has added offices in Japan and India thanks to acquisitions. Hat Pin's shares, which were trading for as much as 114p in the early summer, are now down to 81p, but I think they have been oversold amid the general gloom. With the shares trading at less than 10 times forecast earnings for 2007, it is time to buy.

Invocas

Caught up in the pessimism that has affected the individual voluntary arrangement (IVA) sector, Invocas's share price suffered hugely in 2007. Its shares were trading for as much as 194p near the start of the year, but fell as low as 73p by December. This is not only unfair (since Invocas does not arrange IVAs, but protected trust deeds - the Scottish equivalent) but also strange, given that the business reported yet another improved set of results (its interims) in December, in which both turnover and profits increased.

Invocas is set to do even better as the fallout from the credit crunch continues and demand for both corporate and personal debt services are expected to increase significantly during 2008. With the shares rated at less than eight times earnings for the year to 31 March, and EPS set to increase by around 25 per cent both this year and next, the tide must turn for this share soon.

Norman Hay

Norman Hay is a West-Midlands-based manufacturing business with customers in the oil & gas, automotive and process industries. The group's Surface Technology business provides its customers with such services as plating and surface coating to inhibit corrosion, while the Ultraseal subsidiary provides sealants to the automotive and engineering sectors. Norman Hay also owns a company that supplies equipment to treat waste water and effluent.

The group has a good track record of increasing profits, and interim results showed that pre-tax profits for the first six months of 2007 were up 38 per cent to £1.3m. At the time of the half-year results, the company reported continued strong trading, so the consensus profit forecast of £2.3m for 2007 as a whole should have been achieved quite easily. Earnings are growing at more than 14 per cent, but the shares trade at less than 11 times 2007’s eps, which means they're undervalued.

Printing.com

Printing.com has built up a strong presence on the high street thanks to its differentiated business model. There are two features to this model: firstly, the company operates a 'production hub' system whereby all printing work is carried out at a centralised production site, which reduces costs. Secondly, Printing.com uses a franchising model, so it does not bear all the costs of operating its network of stores (it only owns four stores itself out of the 224 that use its brand).

A predicted modest growth in earnings (less than 5 per cent) for this year explains why the shares have fallen back since the summer. But next year, Printing.com is expected to produce an almost 20 per cent increase in EPS, which makes its PE ratio of less than 11 times look stingy. The share also pays a great dividend that yields more than 7.5 per cent.

Tikit Group

Having established itself as a leading provider of IT services and software to the legal sector, Tikit has increased its scope during the past few years to include the accountancy industry. The focus on these niches has served it well, as demonstrated by last September’s record results for the six months to 30 June 2007. These showed that the group had increased first-half pre-tax profits by 17 per cent to £1.5m on turnover up 16 per cent to £13.2m.

The company reported that it had continued to make inroads into its target markets thanks to increased sales of customer relationship management (CRM) and data management software, but it also expressed caution about uncertainty in the financial and M&A markets, which was resulting in lower confidence among its clients. Since then, the shares have fallen back significantly. But, despite the more pessimistic outlook, they represent good value for the long term.

TMN Group

One of the largest online direct marketing companies in the UK, TMN Group counts several blue-chip companies as clients, including Microsoft, Morgan Stanley and Nestle. The core business manages e-mail marketing campaigns - a sector undergoing significant growth. The group also carries out online market research. Interim results, which came out in December, showed that revenues during the six months to 31 October had increased by 13 per cent to £9m, while pre-tax profits were up by 4 per cent at £1.4m. The profit would have been bigger had it not been for a one-off £500,000 investment in new staff, which the group needs to handle the increasing demand for its services. Online advertising is set to increase by 28 per cent in 2008, and by 69 per cent over the next three years to 2010 (source: ZenithOptimedia). With the key Christmas period expected to help drive growth at TMN in the short term – and full-year profits to £4.5m (2007: £3.3m) – we expect the shares (valued at less than eight times earnings) to improve.

WIN

WIN supplies technology to efficiently manage content across different mobile devices, formats and platforms for mobile network operators, such as O2 and Vodafone. It is also able to handle large volumes of SMS and multimedia messages on behalf of its media customers, including the BBC. The company also helps corporate customers - such as the AA and Centrica - with interactive mobile services to help them better engage with consumers via their mobile phones.

With such a breadth of services, it should have a good chance in the long term of continuing to benefit from the growth in the use of content on mobile phones and other kinds of mobile devices. For 2007 and 2008, it is expected to report earnings growth of 14.5 per cent and 19.3 per cent, respectively, yet its shares trade at less than eight times prospective earnings. Clearly, they are too cheap.

Jon Mainwairing is an award-winning freelance journalist who specialises in smaller companies coverage.