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The Aim 100: 10-1

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

10. PLUS500

Plus500 (PLUS), a specialist contracts for difference broker, has been through the wringer these past 12 months. The Israel-based group suffered reputational and financial damage when it revealed that the Financial Conduct Authority had compelled it to review client documentation to ensure its compliance with anti-money-laundering regulations. A colossal 67 per cent drop in share price followed during the week after the announcement in May. Since the end of last year the shares have been steadily recovering.

The question is whether management can sufficiently regain customers’ and investors’ trust. The signs so far are promising – during the first quarter of this year new customer numbers were up by 85 per cent on the final quarter of last year, while sales were up more than a quarter. The group has spent a significant amount of money tightening up compliance, including a review of its sign-up processes.

A high level of cash generation and consensus forecast dividend yield of around 10 per cent this year work in Plus500’s favour. What’s more, the shares are trading on nine times forward earnings, slightly below the historic three-year average of 10 times. However, given the relatively recent compliance issues, we’re waiting for more proof that the group has rebuilt customer trust. Hold. EP

9. NEWRIVER RETAIL

NewRiver Retail (NRR) is our Income Tip of the Year, paying a quarterly dividend with a prospective yield of over 5.5 per cent. The shares are also likely to increase in attraction as the company plans to move from Aim to the main market some time later this year. Much of the success of the building model is NewRiver’s ability to work with existing tenants to maximise rental income from an existing asset. That takes the risk factor down to negligible levels.

However, the group is still making acquisitions, and is currently in preliminary negotiations that could lead to the acquisition of the Broadway shopping centre in Bexleyheath for around £120m. The property developer also recently secured planning consent for regeneration of the Marlets shopping centre in Burgess Hill, West Sussex. This will include a 10-screen multiplex cinema, a hotel, five restaurants and 142 residential units. NewRiver has shown itself to be adept at identifying changes in consumer trends, tending to steer away from large superstore developments in favour of small, local convenience stores. It has also used surplus land from its portfolio of public houses to accommodate alternative uses, notably an agreement with the Co-operative group to develop a string of convenience stores. Buy. JC

8. FEVERTREE DRINKS

The certainty with which the bubbles in Fevertree's (FEVR) upmarket tonic will rise rather than fall could almost be applied to its share price since the stock listed in November 2014. The business was launched in 2005 by co-founders Charles Rolls and Tim Warrillow and has certainly made its mark since listing. Now it can be found in several supermarket chains as well as well-heeled pubs and bars. The obvious question, though, is: when will the fever fall from the tree?

This is, of course, virtually impossible to answer. There are various factors in favour of the brand retaining its almighty standing for a while, though. There is strong appetite from institutional investors for the stock, substantiated by the recent stake reduction by Messrs Rolls and Warrillow to assuage said demand. Not only this, but there is always likely to be a thought in the back of the City’s mind that the company could become a takeover target. And as it is an asset-light business (it outsources processes such as bottling) cash generation is strong compared with peers.

The company is exposed to consumer sentiment, but several customer-facing businesses say people are willing to part with more money for what they perceive to be a quality product. This could give Fevertree some shelter in all but seriously deteriorating economic conditions. Hold. BG

7. BREEDON AGGREGATES

One of the objectives laid out by Breedon Aggregates (BREE) in 2010 was to consolidate the highly fragmented UK aggregates business, which at that time comprised around 200 small independent businesses. And the latest acquisition – Hope Construction Materials – subject to regulatory approval, will nearly double the size of the business. So from a market value of just £91m in 2010, Breedon is in line to be worth something over £1bn.

Part of the explosive growth comes from acquisitions, but the recovering UK economy has also played a part. So much so that total aggregates sold in 2015 grew by 13 per cent to 8.7m tonnes, with asphalt sales up 20 per cent at 1.8m tonnes.

Strategic acquisitions have helped to broaden the group’s geographical spread; this is important because of the significant cost of hauling aggregates any great distance. Not including Hope Construction, Breedon owns more than 50 quarries, around 60 ready-mixed concrete plants and has more than 500m tonnes of mineral reserves in the ground. The attraction here is that there is a relatively stable cost base that allows for significant operational gearing as sales increase, allowing profits to drop straight through to the bottom line. Buy. JC

6. JAMES HALSTEAD

Flooring specialist James Halstead (JHD) was affected by sterling’s strength against the euro because it has made exports more expensive. However, the other side of the coin revealed that raw material imports were cheaper, while lower energy bills helped to keep costs down. In fact, overheads in the half-year to December 2015 were down by 3.2 per cent. Trading overall remains positive, with first-half operating profits up by 7.7 per cent at an all-time high.

Shareholders have also been rewarded with a special dividend payment, giving a running yield of 4.7 per cent. Trading at Polyflor Canada saw revenue up by a third, while its operation in France delivered a 10 per cent increase. Even the central European operation fared well, lifting revenue by 4 per cent. Trading in the second half has remained a challenge, the company admitted, although sales are still ahead of the previous year, with softness in the UK market (around 39 per cent of group revenue) offset by continued strength in its non-UK operation. However, the shares are trading on 25 times forecast earnings, which suggests that they are up with events. Hold. JC

5. DART

It has been a turbo-charged year for investors in holiday company Dart (DTG) with the shares up two-thirds as passenger numbers and fuel costs have both been going in the right direction. Management has been keen to get more of its customers on package holidays rather than just flying with its Jet2 airline as the former are higher margin. At the half-year results in November 2015, this seemed to be on track, given that the 940,000 package customers represented a 22 per cent increase on the corresponding period in the previous year. This helped net cash from operating activities hit £200m in the half-year numbers, up from £93m in the previous respective period. Perhaps unsurprisingly, this contributed to strengthening the balance sheet, which boasted £335m of net cash in November.

The company’s lack of exposure to North Africa – which has experienced several recent terrorist atrocities – could help in the near term. This is supported by the fact that more than 50 per cent of its package holidays had been sold at the time of the March trading update, ahead of the comparable figure in 2015. Elsewhere, its Fowler Welch distribution business saw operating profits more than double to £3.5m in the last half and its joint venture, Integrated Service Solutions, could help expedite this growth further. Hold. BG

4. HUTCHISON CHINA MEDITECH

We initiated a buy recommendation on Hutchison China Meditech (HCM) in October in anticipation of its listing on Nasdaq. In March the fast-growing pharmaceutical company saw that strategy through and listed on the tech-savvy index, raising $101m (£71m) in the process.

Chi-Med’s reasons for listing were fourfold; it is expected to help improve the stock’s liquidity, give it more coverage than it currently gets from London analysts, move it closer to the all important US Food and Drug Administration (FDA), which regulates new drug applications, and of course raise more cash to plug into drug development.

Although Chi-Med does generate income from its commercial platform (where it sells healthcare products in China) and via joint ventures with big pharma companies, good access to cash is of utmost importance. In 2015 research and development spending increased to $64m (2014: $45m). The company now has 20 clinical trials under way, having recently announced human studies into another cancer therapy. Three of those trials are in the final stages and two cancer drugs, savolitinib and fruquintinib are expected to be filed with the US FDA and China FDA respectively by early 2017 at the latest. Buy. MB

3. ABCAM

It has been a year of change for Abcam (ABC). The supplier of research antibodies and proteins to scientific and medical institutions is moving into its next phase of growth with a “consumer-centric” focus. It has also targeted China as a key market for expansion.

This has resulted in a ramp-up in investment in technology and people, which caused an uncharacteristic fall in pre-tax profits at the recently announced interim results. The group has also been spending on acquisitions and recently purchased AxioMX, a company that will allow it to produce more effective antibodies for its catalogue.

Although recent investments are expected to weigh on earnings in the short term, the long-term outlook remains positive. The business model supports strong cash generation, providing the group with a solid balance sheet to support growth plans.

Apart from a dip following the interim results announcement, the group’s share price has been on the rise in the year and now trades on 30 times forward earnings. The lofty valuation means we aren’t recommending buying at present, but we’re keeping our eyes peeled for any share price wobbles, because this is definitely a stock to buy on weakness. Hold. MB

2. GW PHARMACEUTICALS

Although still lossmaking and chomping through cash, it has been a pivotal year for GW Pharmaceuticals (GWP). In March, the drug developer, which is attempting to provide novel cannabis-based treatments for a range of diseases, received positive final-stage clinical trials results for its lead product, Epidiolex, and patient investors were rewarded with a 125 per cent leap in the share price. The group will now register the drug with the US Food and Drug Administration (FDA), and while this will not be completed until next year, brokers expect the drug to generate $1.1bn of sales by 2021.

Until this news, GW Pharma’s share price had been on a downward trajectory in the year. Final results showed a slight decrease in sales from the group’s one commercialised product, Savitex, which is currently licensed for use as a multiple sclerosis therapy. But now at 481p, the share price is slightly up on our original buy recommendation and we’re staying put. The group is anticipating more late-stage human trial results within the next few months and has recently announced that it will be initiating final clinical trials for the application of Epidiolex as a treatment for Tuberous Sclerosis Complex, a rare genetic disorder. Buy. MB

1. Asos

Online fashion retailer Asos (ASC) has to be one of Aim’s greatest success stories. But the company is arguably entering a new chapter now that founder and long-standing chief executive Nick Robertson has stepped aside, making way for successor Nick Beighton.

It seems change has been a good thing for Asos. The group just reported a robust set of interim results, reporting an 18 per cent improvement in adjusted profits following significant sales acceleration and better margin growth. The group has discounted far fewer items across its product line, while maintaining its core “value offering” for its loyal customers.

There have been some clear self-help

measures as well, including the group’s decision to terminate local operations in China. The Chinese business had racked up losses during its short

lifespan, but these will now be curtailed and spare

cash redirected into other parts of the company. Mr Beighton is particularly keen to invest in the group’s technology platforms, especially mobile which is driving a significant chunk of sales these days.

Asos’s shares carry an eye-watering price tag given the company’s high barrier to entry and monopoly status in the world of mass-market online fashion retailing. In our view, though, the shares are worth a punt. Buy. HR

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