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The Aim 100: 30-21

We continue our review of the junior market’s largest companies
April 29, 2016

We continue our review of the junior market’s largest companies

30. FIRST DERIVATIVES

Greater regulatory scrutiny following the financial crisis has been an obvious boon for First Derivatives (FDP), which provides data analysis and trading software to the financial services industry. Evidence of this success can be found in the latest trading update. Buoyant performances from its software and consulting arms in the six months to February led management to predict that full-year figures would come in comfortably ahead of expectations.

Chief financial officer Graham Ferguson reckons the group’s consultants have plenty more to offer existing clients. A record number of big contract wins in the past few months indicate that his optimism isn’t unfounded.

To keep up with this demand management plans to boost its staff count by 50 per cent in a year. It also wants to branch out into new sectors, believing that its solid track record of developing analytics software for banks can be replicated in the telecoms, pharmaceutical and automotive sectors. Some progress has already been made tapping into these new areas, although it remains to be seen whether this significant investment will pay off in the same way as it did with its capital markets business. Nevertheless, First Derivatives’ niche positioning in a growing market shouldn’t be sniffed at. Recent results underline the huge selling power of its products, although we’d argue that this enviable position is priced into the shares, which trade on 33 times forecast earnings. Hold. DL

29. STAFFLINE GROUP

There’s no denying that the operating environment for recruiters has deteriorated in recent months, as evidenced by a fall-away in Staffline's (STAF) market valuation since the final quarter of 2015. However, the group’s share price decline was actually modest relative to the wider sector and came on the back of a stellar performance in the first half of the year. This resilience is due, at least in part, to Staffline’s provision of services across several niche areas in the labour market, including food production, logistics and driving, in addition to its continued involvement in government-backed welfare-to-work services. This source of revenues was given added impetus through the April 2015 acquisition of A4e, subsequently rebranded Peopleplus.

Although specialisation provides a degree of insulation against the wider cyclical downturns that bedevil recruiters, Staffline obviously isn’t completely immune to macro effects. Even though management felt able to bump up the group’s full-year dividend as gross profits for 2015 increased by a third, the main focus is now on debt reduction as Staffline responds to a tightening trading environment. The shares now trade on a forward multiple of 11 – hardly expensive, but perhaps reflective of wider sentiment towards the sector. Hold. MR

28. PATISSERIE HOLDINGS

Patisserie Holdings' (CAKE) pricey cakes are almost as expensive as the upmarket patisserie group’s shares. Trading on 27 times forward earnings, belief in the cake maker is clearly well and truly baked in. A big part of the appeal is its strong cash generation. The company wants to double its outlet count from the 166 it had at the end of November 2015 and its working capital discipline means this can be entirely funded through operating cash flows, which more than doubled to £18.3m in the year to 30 September.

There’s been a mixed view from institutional investors recently, though, with Wasatch Advisors upping its stake to 3 per cent in December and Old Mutual dropping its slice to below 7 per cent at the end of January this year.

A major factor in how well the group fares from here will be its online offering. Sales via its website rose by £0.5m, or 20 per cent, to £3.1m at November’s full-year results and progress here will no doubt be scrutinised by investors. Success here could be a good balance for the business if high-street trade weakens, something that has recently been reported by other retailers. Hold. BG

27. ADVANCED MEDICAL SOLUTIONS

It was evident from recently announced results that the US continues to be the key market for wound-care specialist Advanced Medical Solutions (AMS). Sales have rocketed stateside in the past few years, pulling the group ever closer to its target 20 per cent US market share. The Liquiband range has been the key driver of this growth and revenue from these products increased by 93 per cent in 2015. Liquiband is a surgical glue with a wide variety of applications – the group recently launched Liquiband Fix8 for hernia treatment, for example.

Gains in the US helped to offset difficulties in Europe, which has been hit by currency pressures. In the US the group sells its products via distributors, but it sells them directly in the UK and Germany and this division suffered a 13 per cent decrease in profit.

However, overall revenue and profit growth helped to almost double net cash at the year-end. We are keeping our eyes peeled for acquisition activity, which has historically been a key strategy. The market, too, appears to be anticipating an acquisition, with the share price up 40 per cent in the year, leaving the shares trading on a lofty 25 times forward earnings. Hold. MB

26. SAFECHARGE INTERNATIONAL

Online gaming and e-commerce have been dynamic growth areas in recent years, but companies tilling those furrows don’t always have the requisite technical expertise to optimise their online and mobile payment procedures. Step forward SafeCharge International (SCH), a provider of digital payment and risk management technologies with development centres located in the UK, Guernsey, Germany, Ireland, Cyprus, Bulgaria, Austria and Israel.

The group was established in 2007 and found its way on to Aim in April 2014. Since admission, SafeCharge has continued to win new contracts, but the support services company also continues to enjoy a high customer retention rate. Its proprietary full-suite payment platform has been selected by both Rank Group and Israel’s national airline, EL AL, while PaddyPower Betfair secured SafeCharge’s services for its global alternative payment systems. The group is intent on diversifying its revenue streams, a point borne out by the increasing importance of games developers as a source of growth. This is certainly one area of the business worth keeping tabs on through 2016.

Aside from a growing and impressive client portfolio, performance metrics also attract the eye, with full-year core revenues (excluding 2015 acquisitions) up by 20.4 per cent, a stable gross margin of 58 per cent and adjusted cash profits ahead by 27.3 per cent on the December 2014 year-end. And yet if you strip out cash and cash equivalents then SafeCharge’s shares are changing hands at an undemanding 13 times forecast earnings. Buy. MR

25. GAMMA COMMUNICATIONS

Gamma Communications (GAMA) has enjoyed a splendid first full year on Aim, and its share price is now 120 per cent up on the price it listed at in October 2014. Gamma provides integrated telecoms services, and has recently launched several new products that aim to meet the increasingly complex voice and data demands of businesses.

New products include SIP Trunking – which provides a fully integrated telecoms service – and Cloud PBX, a cloud-based telephony service. These have both been gaining momentum, which helped to boost revenue in the year and offset the decrease in traditional products sales, reflecting a change in customer requirements.

Unlike many of its larger competitors, Gamma sells the majority of its products through distributors and in the year attracted 109 new commercial partners, helping to gain new high-profile customers such as HM Revenue and Customs.

The strong balance sheet is supported by excellent cash generation, which gives the group scope to invest in new projects and attract new clients. But the quality company comes with a premium valuation to match and with the shares trading on 20 times forward earnings we can’t recommend buying. Hold. MB

24. IMPELLAM GROUP

Impellam Group (IPEL) recently registered strong top-line and earnings growth for its January 2016 year-end, due in part to the successful integration of the Lorien Resourcing and Career Teachers acquisitions. The specialist recruiter expanded its geographical reach through 2015, and appears to have adapted well to a new organisational structure, with the business separated into two divisions: managed services and specialist staffing. This segmentation has helped the UK specialist staffing businesses to improve gross profit margins, which had been under a degree of pressure, while the group’s overall conversion rate – gross profit into operating profit – increased from 19.6 per cent to 22.6 per cent.

However, the core UK segment could find it tough going in the first half of this year, if, as press reports suggest, many corporations are deferring decisions on increasing staffing levels until the result of June’s referendum on continued membership of the EU; a material problem given that the UK accounts for 93 per cent of revenues. That may help to explain why the group trades on a forward multiple well below the sector average, although the share price uptrend in recent months is also supported by technical analysis. Although challenges are evident in two of the group’s biggest markets, healthcare and blue collar, Impellam is well positioned to profit over the long haul. Buy. MR

23. RWS HOLDINGS

Ostensibly, it shouldn’t be too difficult to determine the earnings trajectory for RWS Holdings (RWS) because of the cyclical nature of support services providers, although the highly specialised nature of its business offering presents a challenge on the valuation front.

RWS continued to benefit from China’s ongoing industrial expansion through 2015. The group is engaged in global patent translations and intellectual property services. So China’s heady growth rates have fed through into some impressive metrics, including an average annual return on equity of around 25 per cent over the past 10 years, while gross margins have oscillated between 39 and 46 per cent. The board expects revenues for the first half to be approximately £56.5m compared with £45.4m in the first half of 2015, an increase of 24 per cent.

Returns of this magnitude, combined with a low-intensive capital structure, have drawn in investors; the shares are well supported and normally trade at a double-digit earnings premium to sector peers. However, anxieties are intensifying over the indebtedness of China’s private sector, along with a domestic property market in danger of overheating again. They’re potentially significant issues as RWS expanded its staff numbers in China through to its September year-end, thereby increasing its risk profile. This highlights why specific regional economic issues can have a marked bearing on group performance. Nevertheless, RWS moved into 2016 with its core patent translation business performing solidly, although competition within end markets for its Europe-focused commercial translations division has intensified. The shares, after a stellar run during Q4 2015, now trade well in excess of the aforementioned historic premium, so there’s no implied upside on offer. Hold. MR

22. SUMMIT GERMANY

Summit Germany (SMTG) specialises in commercial property in Germany, and towards the end of last year it added two more sites to its portfolio of predominantly office buildings and spent €95m (£76m) in the process. Further acquisitions were made this year, taking the portfolio up to around 900,000 sq metres. Net rent is now up to around €60m, with an average occupancy rate of 87 per cent. Like-for-like rental growth has been more modest, as income from new leases was offset by a decrease in rental income as a result of lease expiries and one tenant becoming insolvent. Property values are on the rise, and a valuation uplift of around €42m is expected in the second half.

Finances are in reasonable shape, too. The current loan-to-value ratio stands at 46 per cent, and the company has set a limit of up to 50 per cent. More savings on loan costs seem likely. For while the average cost of debt is 2.8 per cent, recent finance raised to fund acquisitions has been secured at just 1.8 per cent fixed. Demand for office space remains strong and, with rental income growing and a share price trading at a discount to net asset value, there is plenty of value yet to be realised. Buy. JC

21. BURFORD CAPITAL

It is no secret that the US is a very litigious environment compared with other global jurisdictions. For Burford Capital (BUR), which makes its money by providing finance to companies and legal firms without the time or money to pursue civil redress, this has helped deliver stratospheric growth in its share price during the past 12 months. Litigation can run for years before a final outcome is achieved and by the end of last year the litigation finance group had made 225 per cent in capital returns on the investments made when the group was formed in 2009.

Management is now looking beyond the US, establishing an office in Hong Kong to expand into Asia. However, this is a long-term investment since at present the group can only finance insolvency, rather than commercial litigation, in Hong Kong*. Shares in Burford are up 136 per cent on our 2014 buy tip and now trade at 15 times forward earnings for this year. However, given the fact that Burford continues to invest in new portfolios of cases and is growing into relatively immature markets, we reiterate our buy tip at this price. EP

*3 May 2016: The last three words of this sentence were added to make it clear that the statement refers only to the Hong Kong office, not to the entire group.

For the full run down click on 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

The Aim 100: 50-41

The Aim 100: 40-31

The Aim 100: 30-21

The Aim 100: 20-11

The Aim 100: 10-1