Our main feature highlighted how hard shares on the Alternative Investment Market in particular have been hit by the downturn in global markets - to the point where shares in genuinely attractive companies are trading at rock-bottom valuations. Here are six of the best.
Accsys Technologies
Accsys has, until recently, been seen as a concept technology stock as it strove to prove the viability of its acetylation process, which transforms traditional soft wood into wood with strength and durability equal to that of the toughest hard woods, but at a significantly lower cost. The economic benefits of Accsys' production of hard wood-equivalent are allied to the environmental benefit of being able to use sustainably grown soft woods instead of threatened hard woods.
The Accsys methodology is now proven and the company has sold licences in the Gulf region and China and is actively pursuing more licences worldwide. The licences already signed helped Accsys to move into profitability in the year to March due to upfront fees. Further milestone payments and then royalties, as well as direct sales from Accsys' own facility in Holland, should see this profitability grow strongly, according to broker Collins Stewart. In order to meet estimates Accsys will need to secure more licences, although a recent sales agreement for North America could be the next to be transformed into a licence.
The global economic situation may be weakening, but the market Accsys is targeting is big enough for it to take even a small market share and still thrive. On current estimates, Accsys, at E1.50, is valued at 16 times earnings for the current year, falling to 6.5 times in 2010. The cash payments Accsys has received, plus fund-raisings completed in more benign times, mean it also ended its last financial year with E46m (£37.4m) of cash in the bank.
Accsys is well funded with a proven technology that could grab enough market share to fulfil short-term expectations, and more. The shares have fallen more than 60 per cent in the past 12 months, but look compelling at this level. Buy.
Asian Citrus
Asian Citrus is China's largest orange plantation owner, producing 120,000 tonnes of oranges in the year to June. And, with a huge planting programme well under way, annual production is expected to increase sharply in the next three years, but the company is already strongly cash-generative with a cash pile and growing EPS.
Its shares have been hammered by a rapid about-turn in sentiment towards both agricultural and Chinese stocks as speculators have pulled back from soft commodities and emerging markets exposure. But Asian Citrus is one of the least risky of the plethora of Chinese stocks on Aim.
Production will increase as a further 1.2m trees are due to mature over the next two years and another 2.4m are set to be planted before the end of 2011. Asian Citrus has also moved up the value chain by selling more of its production to supermarkets, where it can command higher prices. It has also received organic accreditation, which should allow it to charge a further premium. Add to this the potential for a fresh orange juice joint venture, which will begin crushing this winter, and all the ingredients are in place for a solid, improving performance over the coming years.
Yet despite this, shares in the company have been hammered, halving over the past 12 months to 173p. But they now trade on a lowly three times earnings for 2009, while also yielding an impressive 5 per cent.
Bateman Litwin
Bateman Litwin's shares have fallen heavily over the past 12 months to 35p as the company's rapid growth, both organic and through acquisition, came back to haunt it. The supplier of engineering, procurement and project management services to the oil and gas industry appeared to lose focus and a slew of projects were costed uneconomically. It also suffered due to the acquisition of Delta-T, an engineering business specialising in the ethanol sector.
The punishment handed out by Bateman's shareholders following a profit warning was harsh to say the least: its shares are down 95 per cent from their 12 month peak. But a new management team has been parachuted in to clear up the mess and has already started rationalising operations in order to create a more harmonious global operation. In its recent preliminary results the new management team took the opportunity to lay bare the problems its predecessors had created. A hefty $88.2m (£55.8m) was set aside in exceptional charges against legacy project costs, $43.9m of which relates to potential future costs.
Bateman still has cash in the bank and its largest single shareholder, BSG Resources, has pledged further cash support. What Bateman also has is a hefty order backlog worth $1.3bn, which offers visibility for the next 18 months. Although it serves the oil and gas industry, where lower commodity prices threaten some investment decisions, Bateman's expertise remains in demand and its prospects, even on a reduced scale, appear solid. Bateman is one of the riskiest of our recovery plays after its recent travails and it has admitted that it could potentially breach its banking covenants. But the potential upside for a company valued at just three times this year's EPS, compared with a sector average of 10 times, is considerable.
Hamworthy
Hamworthy has long been one of the most popular stocks on Aim. But recent worries about the health of its major end markets, shipping and oil and gas, have sent investors scurrying for the hills, and sent its shares down more than 60 per cent in the past year. But this has created a buying opportunity. The company has a solid order book, a good track record of delivery and is now valued at just seven times 2009 earnings, with a 4 per cent dividend yield.
Investors are right to be concerned about Hamworthy's end markets after the recent collapse of the Baltic Dry Index, a key indicator of shipping activity, and the rapid halving of the oil price from its summer high. But Hamworthy occupies a niche in the shipping market, which should be more immune than most to a global economic downturn. Its specialist marine engineering systems are used primarily on liquefied natural gas and liquefied petroleum gas carriers, but it also provides wastewater systems for cruise liners. Demand in both these markets is likely to remain buoyant due to a major structural change in global energy markets and environmental legislation in the cruise markets. At its latest trading update, Hamworthy said its order book stood at £300m-plus, slightly ahead of the previous year, proving its resilience.
The company has also been making moves to reduce its cost base. Most recently, it acquired a small Polish ship design agency with a view to moving much of its higher-cost design operation from Norway to Poland. With exposure to resilient sectors of the shipping industry, reflected in its solid order book, a good track record of delivering on growth targets and cash in the bank, Hamworthy's shares fall into the oversold category at 197p.
May Gurney
May Gurney, a support services maintenance specialist, is in the enviable position of having a £1.25bn-plus order book in the relatively safe markets of government outsourcing and contracting. It has built specialist divisions in highway maintenance, utilities services and recycling and waste management, but has always tended to err on the side of maintenance and support contracts rather than trying to win big one-off capital investment projects. This means it should remain relatively resilient even if the government cuts spending for infrastructure investments. Councils will still have to have their streetlights repaired, potholes filled and waste recycled.
Despite the costs incurred by May Gurney when gearing up new contracts, it has managed to maintain margins, grow its profits and also stash away a cash pile of £21m. It is not averse to using this on acquisitions to boost its growth, as it did with this year's purchase of ECT Recycling. Cash generation is strong – after spending £13m on acquisitions in the year to March, May Gurney ended the year with just £1.4m less in cash than it had when it started.
Broker Altium Securities forecasts profit growth of 14 per cent this year and 11 per cent in 2010 and the long-term order book and strong track record of delivery thus far suggest that this is eminently achievable even if the country enters into a prolonged recession.
But fears over government spending mean May Gurney's shares have halved in the past year. At 189p, the company is now valued at just seven times next year's earnings, providing a good potential entry point in a safe haven stock.
RCG Holdings
RCG's biometrics technology is becoming more popular in its core markets of south-east Asia and the Middle East. Its fingerprint and facial recognition technology are used across a range of applications, from laptops and simple safety boxes to full security systems applied to the offices and facilities of major corporations. It has also developed Radio Frequency Identification (RFID) systems which are incorporated into security systems and have also been bought by hospitals in China for the tracking and security of patients. Recent acquisitions have also seen RCG expand into ticketing and stadium security and control systems in China.
A consumer spending downturn in its core markets is a risk, but RCG has already started to prepare for a slowdown by reducing production of its own laptops, focusing instead on selling its FxGuard Windows Logon facial and fingerprint recognition software, on which margins are better. Also, its core security solutions business should continue to benefit from increased demand for security at the corporate level and also from expansion into other emerging markets in Asia and the Middle East.
Sales have grown rapidly in recent years and are forecast to continue doing so. Meanwhile cash conversion, which was poor, is also improving fast, increasing from 39 per cent to 70 per cent in the first half of 2008. Nonetheless the withdrawal of funds from emerging markets plays has hit its shares hard, they are down 54 per cent in the past 12 months to 44p.
An even more significant factor in its share price decline is the uncertainty over a 27.6 per cent stake in the company held by the disputed estate of Hong Kong property magnate Nina Wang. The dispute is to be heard next February and could result in Tony Chan, who already holds 26.7 per cent of the company, owning almost half the company should he win control of the estate. Whether this would lead to Mr Chan having to bid for the company is unclear but, for investors, the resolution of the ownership of the stake will come as a welcome relief and could prompt a rerating of the shares.
The recent sell-off has left RCG shares trading at a paltry 3.6 times next year's earnings which, for a company that has regularly exceeded expectations, is too low to ignore, although its recovery could take a little longer than our other candidates.
High-risk pick: Managed support services
The rather bland name given to this company hides a rather dark past as far as investors are concerned. In its former guise, Worthington Nicholls, the air-conditioning fitting and maintenance business, enjoyed a stellar ride on Aim before crashing back to earth as its policy of rapid growth through acquisitions unravelled. Controls had simply not been tight enough and accounting issues were uncovered, which meant interim management, parachuted in to replace the architects of the growth process, were left to tackle a rather sloppy mess.
But the company's fortunes changed the day it brought in a new management team led by Simon Beart. Mr Beart and his team have a strong track record of turning companies around and selling them on, illustrated by the performance and subsequent sale of Revenue Assurance Services under their tutelage.
A period of rationalisation ensued, including the name change, and performance appears to be improving fast. A recent trading update, in which the company said it would beat market estimates for the year to March, caused analysts at Cenkos to upgrade their full-year forecasts. The company is now trading on eight times forecast earnings and also has £7.9m in the bank, compared with a market capitalisation of just £10.8m.
Managed Support Services is the most high-risk of all our recovery stocks and is probably most at risk from an economic downturn. But its management has tried to steer the business away from its reliance on one-off contracts towards maintenance business, which should be more sustainable.
It can also shave costs by cutting back on subcontractors and there are still more costs to be cut. At 10p, the shares are high risk, but potentially high reward, and with the added comfort of a proven turnaround team on board.
