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The Aim 100: 60-51

The Aim 100 was the best performing of all the UK’s broad indices in the past 12 months
April 22, 2016

The Aim 100 was the best performing of all the UK’s broad indices in the past 12 months

60. MANX TELECOM

Surfing the web at high speeds is a pressing priority for consumers and businesses in the digital age. As the dominant provider of landline, mobile and data services in the Isle of Man, Manx Telecom (MANX) has been milking this demand to the best of its abilities.

Manx is the only operator of a copper network on the island, meaning it alone is responsible for connecting 35,000 homes and 4,000 businesses. Its monopoly on the island of roughly 85,000 inhabitants is obviously beneficial and, given the amount of capital expenditure that would be required to compete against it, looks relatively secure for now. On a less encouraging note, that also leaves the group highly dependent on the ageing population it serves remaining economically prosperous.

With that potential conundrum in mind, Manx has been busy developing new services designed to reel in customers from other locations. This strategy has seen significant capital poured into its 4G mobile network and data hosting, a process that facilitates the supplying of mobile networks to virtual operators and machine-to-machine services. Unfortunately, lower text messaging revenue meant that side of the business didn’t do too well last year.

But despite the odd challenge weighing slightly on growth prospects, Manx remains an attractive income play. The shares yield 4.9 per cent, and the relative stability of the group’s operation mean this mouth-watering dividend looks good to last. Buy. DL

59. BENCHMARK

Growth by acquisition has continued for animal health specialists Benchmark (BMK). The new breeding and genetics division of the business, created through the acquisition of SalmoBreed and StofnFiskur at the start of 2015, made a big contribution to revenue in the year. This helped to offset the decrease in sales in the animal health division, as one of the group’s key products, Salmosan, came under heavy competition in key market, Chile. In February 2016 Benchmark also completed the reverse takeover of INVE Aquaculture, the global leader in advanced nutrition products for fish and shrimp. Funded by a £186m equity raise and the extension of group debt facilities, this acquisition is expected to enhance earnings in 2016. INVE has also added a further 40 products to the pipeline, and expanded the group’s selling regions.

The outlook is good, but research and development expenditure is high, and forthcoming costs associated with the INVE acquisition are likely to weigh on the bottom line in the short term. This being said, analysts at Cenkos are bullish, and based on their estimates Benchmark’s shares are currently trading on 17 times forward earnings – a discount to historic valuations. Hold. MB

58. RENEW

Renew (RNWH) moved into the second quarter of 2016 with trading ahead of the comparative position last year and with expectations of an increased forward order book and a reduction in net debt. With anxieties growing over the sustainability of the post-February market rally, the engineering services provider offers investors lower-risk access to the sector due to its exposure to regulated markets and engineering maintenance contracts for Network Rail.

You could certainly argue that Renew offers defensive qualities due to the primacy of its engineering services arm, which accounts for more than 85 per cent of group revenues. This part of the business serves the environmental, infrastructure and energy sectors, all of which are generally governed by regulation and often benefit from non-discretionary committed funding. Such long-term contracts with government, or private corporations with government backing, tend to be lower-margin but they usually afford long-term revenue visibility.

In the past, Renew has also successfully bought in growth, and while management flagged a potential rise in acquisitions through 2016, it’s worth remembering that underlying organic growth increased by more than 20 per cent in the year through to Sept 2015. A current forward rating of 13 doesn’t appear overly expensive given what Renew can bring to your portfolio. Buy. MR

57. BROOKS MACDONALD

Volatile investment markets have put wealth managers through the wringer during the past 12 months, dampening investment returns as well as investors’ willingness to part with their cash. However, Brooks Macdonald (BRK) has coped well against a turbulent trading backdrop, increasing its pre-tax profits by a fifth during the first half of the financial year – ahead of expectations.

Part of the reason for Brooks’ growth is its presence in the increasingly popular discretionary fund management market, where private clients hand over their money to be managed rather than signing off day-to-day investment decisions. The group is in the process of transferring its Channel Island clients to discretionary from advisory accounts. This process has happened faster than management had anticipated and is expected to reduce profits this year by £0.5m, as it drags on commission income. But over the longer term management reckons it will result in higher-quality income, based on funds under management rather than transactions.

As a result, the pace of growth is expected to slow this year, before picking up again next year. Shares in the group are trading at 19 times forward earnings. However, considering the long-term growth prospects on offer, we reiterate our buy rating. EP

56. VINALAND

Vinaland (VNL) specialises in the emerging real-estate market in Vietnam, so it’s no surprise that the venture has been ranked as high-risk and subsequently ignored by most investors. However, those brave souls taking the plunge have been rewarded with a near-30 per cent gain in the share price in the past year. The company is subject to a continuation vote and, last November, shareholders voted to give the board another year to realise value for distribution.

This is not surprising, given that the shares are trading at a discount of a third to net asset value. But that’s because unloading real-estate assets in Vietnam is not as easy as it would be elsewhere. However, it managed to sell the NPV project in Danang, releasing net proceeds of $19.1m (£13.2m). Patience has its virtues because the sale was effected at a valuation 29.4 per cent above the September 2015 valuation. There’s little else to add other than the fact that there will be another continuation vote towards the end of this year, and, given the difficulty in shifting assets, it seems likely that the company will receive additional blessing to continue its divestment programme. Buy. JC

55. TELIT COMMUNICATIONS

Companies are adding more and more computing power to everything from cars to thermostats. That has fuelled rapid growth at Telit Communications (TCM), which makes electronic components that allow devices to wirelessly communicate. Shipments of the Israeli group’s modules rose 17 per cent to 17.7m in 2015, driving adjusted cash profits up 31 per cent to about $45m (£32m).

Strong demand drove automotive revenues up 60 per cent, while the release of IoT Portal – a platform its customers can use to manage the data, connectivity and security of their devices – sent sales of services up 30 per cent. Telit has also made eight acquisitions in the past five years that have strengthened its presence in areas such as automotive connectivity. But it was forced to slash revenue guidance by $15m in October after several large US customers decided to wait for the release of its next-generation 4G modules before upgrading their technology.

Analysts view the incident as just a bump in the road: broker Canaccord Genuity expects annual sales growth of close to 15 per cent over the next three years. Yet Telit’s shares trade at an unassuming 12 times forecast earnings for 2016. That undervalues its strong growth prospects and deep foothold in a mushrooming market. Buy. TM

54. TELFORD HOMES

Telford Homes (TEF) concentrates on building apartments and houses predominantly in east London, and while the top end of the inner London residential market has been hit by a cocktail of investor caution and higher taxation, Telford – with prices of between £500 and £800 per sq ft – comes some way below this.

Demand remains strong, too, and while there may be some reaction to the introduction of higher stamp duty on secondary properties, Telford already has impressive earnings visibility, with a forward order book in excess of £700m at the September 2015 half-year; that’s more than four times total revenue reported for the year to March 2015. Cash flow is also strong because Telford takes a 10 per cent deposit on any forward sale and a further 10 per cent a year later where exchange of contracts takes more than two years ahead of completion.

Telford is also looking into the emergence of institutional investment in the private rented sector. We first tipped Telford six years ago (Buy, 101p 22 April 2010), and even after the recent shakeout in equities the shares are still up by 250 per cent. Given the earnings visibility and continued demand, we remain buyers. JC

53. PANTHEON RESOURCES

Last year, Pantheon Resources' (PANR) shares grew 630 per cent, more than any other company on Aim. A remarkable achievement for an oil and gas company amid a general sector slump, but comprehensible in the context of a perfect drilling record.

Pantheon had two huge successes last year: the catchy-titled VOBM#1 in Polk County, East Texas, which flowed at over 1,500 barrels of oil equivalent per day during testing, and the VOS#1 in nearby Tyler County, which flow tested at half the rate of VOBM#1. Pantheon, which has a 50 per cent working interest in the discovery wells, believes these flow rates should materially improve through fracturing.

Because of the carry on its working interest, the explorer posted a post-tax loss of just £0.4m in 2015. That loss is likely to expand significantly this year, following a $30m equity placement with institutional investors to fund a drilling programme in the West AA discovery and additional portions of the VOBM#1 reservoir. The latter should lead to commercial production and cash flows, but the current valuation prices in a lot of optimism for a company still at a relatively early stage in its exploration programme. Hold. AN

52. FW THORPE

Lighting manufacturer FW Thorpe (TFW) is quickly developing a reputation for excellence, much to the frustration of those who doubted it. Not too long ago, the few commentators on this low-profile company fretted over potential liquidity issues, owing to the fact that the Thorpe family owns a large amount of shares. Interestingly, this same concern has since transformed into a positive, as meaningful inside ownership has triggered considerable prosperity.

The family’s know-how, and vested interest in the company, has helped it to expand its installed base of customers and expertly manage the transition from traditional fluorescent lighting to more efficient light-emitting diode technology. In short, this wave of developments has presented FW Thorpe with an important advantage over peers.

Evidence of this can be found in financial results for the six months to December 2015. During that period, operating profit growth of 18 per cent was delivered, a big chunk of which was generated by the acquisition of Lightronics. The Dutch specialist lighting firm was bought because its wide portfolio of products caters to legislation-driven energy-efficiency drivers. Judging by its opening contribution, the initial €7.8m (£5.7m) spent to bring it on board was a bargain.

The only concern at this point is the lack of progress made achieving the previously mooted international expansion. Management, which has a tendency not to gush about performance and prospects, accepted that the global economic slowdown has made it increasingly difficult to conquer newer markets such as the United Arab Emirates. Fortunately, rampant success in Europe is more than compensating for this temporary hiccup. Buy. DL

51. OPG POWER VENTURES

The structural drivers of Indian energy generator OPG Power Ventures (OPG) are not going anywhere – the chasm between demand and reliable supply of power from the country’s rapidly growing population. This has driven solid profit growth for the energy generator during the past four years as it has built up its operational capacity. OPG runs coal-fired plants in Gujarat and Chennai, with an operating capacity of 750 megawatts (MW).

With the plant infrastructure now in place, the focus for management this year will be on ramping up generation to maximise revenues, particularly at its 300MW Gujarat plant. Power sales from this plant have so far been to industrial customers on short-term contracts. However, management has gained permission to sell its power in certain states outside Gujarat in order to diversify its income stream and gain access to more attractive energy tariffs.

Even after heavy flooding in Chennai at the end of last year, management still expects trading this year to be within market expectations. That’s a Bloomberg consensus adjusted EPS of 7.1p for 2016, from 4.8p last year. Chief executive Arvind Gupta told us at the time of OPG’s half-year results in December that management intends to pay a maiden dividend during the 2017 financial year. Trading on 11 times earnings, we think the shares constitute a thematic buy. EP

For the full run down of numbers 100-51 click the links below:

The Aim 100: 100-91

The Aim 100: 90-81

The Aim 100: 81-71

The Aim 100: 70-61

The Aim 100: 60-51