We continue our review of the junior market’s largest companies
50. OAKLEY CAPITAL INVESTMENTS*
Led by chairman Peter Dubens, Oakley Capital Investments (OCL) makes its money by taking stakes in private equity ventures established by its associated limited partnership Oakley Capital Private Equity, providing mezzanine debt finance. Oakley provides investors with exposure to a range of private mid-market UK and European businesses, sized between £20m and £150m. It focuses on companies in industries with growth or consolidation potential as well as those with the potential to achieve scale, thereby commanding a premium on exit.
The investment trust has so far managed its funds well. In the 12 months to the end of December the group received distributions from two of its holdings – Italian car insurance broker Facile.it and German online dating agency Parship – which provided aggregate proceeds of €14.3m (£11.3m). The investments delivered an internal rate of return of 75 per cent and 169 per cent respectively for the private equity fund in which they are held. Oakley owns 38 per cent of that fund.
The fair value of the group’s portfolio increased by a third on the previous year, while its net asset value was up 9 per cent to £382m. Priced at 136p, the shares are now trading at a 32 per cent discount to the group’s NAV per share at 31 December. Buy. EP
*3 May 2016: this article was updated to correct the information on the distributions at Facile.it and Parship. Previously we reported Oakley had exited two of its holdings: in fact it received distributions from two of its holdings, the vast majority from Facile.it. We have corrected the copy to make this clear, and also clarify the company's ownership of the fund.
49. VICTORIA
From its foundation in 1895 to 2011, Victoria (VCP) was a renowned if quiet manufacturer of carpets. However, the past five years have been nothing short of spectacular. Led by former private equity guru Geoff Wilding, the company has gone on a huge acquisition spree to consolidate the fragmented flooring and carpets industry.
In 2015, the group laid out £85m to buy three businesses, including carpet underlay specialist Interfloor, which Victoria said would be “immediately and materially earnings enhancing”. Particular focus is being applied to the management teams of the targets, all of which have agreed to multi-year lock-ins following their takeover. The company – something of a pioneer when it comes to novel capital markets deals – has also beefed up its shareholder base through a “retailer incentivisation plan” which rewards loyal suppliers with stock bonuses.
We remain concerned that the market is asking a lot of the integration strategy and the notoriously cyclical home repair, maintenance and improvement market. But while we expect 2016 to be tough, it has started well: management recently confirmed early-stage talks to acquire Belgian group Lano Carpets and expects profits “before tax and exceptional items” to be materially ahead of consensus forecasts. Hold. AN
48. IOMART
Surging demand for cloud computing solutions lined the pockets of investors in Iomart (IOM) last year. The Glasgow-based provider of data storage and related services dedicated the past decade to acquiring companies capable of boosting its ability to advise and deliver on public, private and hybrid cloud. Given how much the market is growing, regular outperformance has become a key feature ever since.
The latest update, covering the year to March 2016, saw the group guide for a 13 per cent increase in adjusted pre-tax profit. Aside from customary organic growth, Iomart credited the acquisitions of cloud hosting firm Serverspace and consultancy SystemsUp for triggering this impressive performance.
Iomart funds its acquisition drive by generating a lot of cash. Its industry-leading position has translated into a sticky client base and cash profit margin of over 44 per cent. Importantly, 90 per cent of operating profit is regularly converted into cash, and a lack of a dividend means most of this is reinvested to generate further growth.
This highly functional business model should help to ease concerns over the expensive recruitment drive currently taking place. While such measures are likely to depress earnings in the short term, a solid track record of making savvy investments in a mushrooming market suggest this decision will eventually be lauded as a wise one. That’s not reflected in the shares, though, which are priced at a discount to peers on 19 times forecast earnings. Buy. DL
47. APPLEGREEN
Petrol forecourt retailer Applegreen (APGN) is a new entrant in this list. The Irish group only listed on the London Stock Exchange last June, but the share price has already risen around 27 per cent in under a year. Costs associated with the float are still weighing on reported figures, but revenues have already exceeded the €1bn mark.
The group is not overly tied to the suppressed oil price despite running petrol forecourts. If anything, bosses there say a squeezed oil price could work to the group’s advantage as drivers are likely to have more disposable income to spend in the station shop. It’s also not overly reliant on the Irish economy. Albeit an Irish company by heritage, the group now operates 200 sites in total, which span Ireland, the UK and even the US. The idea is to keep the ball rolling. So far this year, the group has already opened four new sites in Ireland and five more in the UK. That means plenty of the company’s growth will be bought in but, new openings aside, it’s worth remembering that like-for-like sales grew by 6.9 per cent last year, suggesting underlying growth is also going great guns. Hold. HR
46. REDCENTRIC
Medium-sized organisations are rapidly realising that it’s cheaper, safer and less complicated to outsource responsibility for their computing and telecoms systems to Redcentric (RCN). The managed services group is also shifting away from selling hardware to focus on more lucrative services such as data storage, cloud applications and video conferencing. The strategy paid off in the six months to 31 September 2015, propelling adjusted pre-tax profits up 22 per cent to £5m.
In January, Redcentric acquired City Lifeline, giving it a fourth data centre in the UK. Moreover, signing new customers and selling more services to existing clients bolstered its second-half order backlog. One concern might be that acquisition costs, capital spending and the timing of payments have pushed up net debt. But robust cash generation, improving revenue visibility and new banking facilities should reassure investors.
Broker FinnCap expects adjusted cash profits to climb 11 per cent this financial year. Yet Redcentric’s shares, which have jumped a quarter in the past year, still trade at 16 times forecast EPS for FY2017. That looks attractive given the group’s strong momentum, widening margins and the prospect of further acquisitions. A useful forward yield of 2.6 per cent seals the deal. Buy. TM
45. JOHNSON SERVICE GROUP
The textile services industry is another unglamorous segment of the support services market that usually supports transparent revenue streams and predictable margins. The relative predictability of the sub-sector is often reflected in a narrow trading band and tight spreads, but the flipside is that growth tends to be steady rather than spectacular. That’s why attention will focus on June’s half-year figures for Johnson Service Group (JSG). It will be then that the impact of last year’s acquisitions of London Linen and Lincolnshire-based Ashbon Services should become apparent, both in terms of commercial synergies and improved earnings. The deals boosted JSG’s capabilities in the hotel, restaurant and catering market – a key driver of growth, according to management.
However, a positive contribution from JSG’s acquired entities shouldn’t detract from an underlying organic growth rate of 4.1 per cent, with the group’s Apparelmaster and Stalbridge businesses performing ahead of expectations in 2015. It’s also a leaner operation following the restructuring of the dry cleaning arm, with the resultant closure of 101 branches. The move should prove supportive of group margins, while the expanding partnership with supermarket group Waitrose is likely to feed through into top-line growth in 2016. But at 14 times forecast earnings, JSG trades broadly in line with the sector and, with no dramatic near-term price catalysts in the offing, that seems about right for now. Hold. MR
44. MAJESTIC WINE
Acquisitions across the beverages industry are starting to become a trend, and high-street booze seller Majestic Wine (MJW) is no exception. New chief executive Rowan Gormley comes from Naked Wines, the online crowd-funding platform bought by Majestic last year for £70m. He now has a plan to get the enlarged retailer back on track. Mr Gormley wants to hit £500m in group sales by 2019, but will aim to keep the number of new openings under control to ensure the store estate doesn’t exceed 230 sites. Supply chains and IT systems will also be overhauled, although costs associated with the Naked Wines deal are still working their way through the company’s accounts.
Sadly, dividend payments aren’t expected to resume until 2018, although underlying growth does look promising. Last November, bosses said underlying retail sales grew 2.3 per cent during the first half of the financial year. There’s been more good news since then. Since the start of the new financial year, Naked Wines has hit more than £100m in sales, supporting and connecting more than 100 independent wine makers across 14 countries. Achieving the £100m mark suggests Mr Gormley is capable of hitting many more targets in the years to come. Hold. HR
43. RESTORE
In an age of increasingly high-tech support services ‘solutions’, it’s perhaps reassuring that a business model devoted to something as prosaic as document storage is proving successful. Restore's (RST) commercial offering is broadly split between document management and relocation services, incorporating shredding, scanning and cloud and conventional media storage. You would imagine that in a digitalised age the ‘paperless office’ might finally become a reality, but there’s plenty of evidence to suggest otherwise; Restore now delivers services to around 60 per cent of FTSE 100 constituents – that’s some paper trail.
Restore delivered a 41 per cent increase in adjusted profits through 2015, once one-off costs linked to restructuring and redundancies on acquisitions are stripped out. Growth prospects were enhanced by a deal to acquire Wincanton's (WIN) records management business at the tail-end of 2015. Part of the acquired business, Restore Document Management Ireland, was subsequently hived off in a move that effectively reduced Restore’s net debt by half. So Restore is now primed to grow the business both organically and through acquisition, but a forward rating of 17 times earnings is a fair reflection of near-term prospects. Hold. MR
42. PINEWOOD
The directors of Pinewood (PWS) have bigger aspirations than a spot in the Aim 100. They’re keen to secure a main market listing for the South Bucks-based studio, but its shares are too tightly held – three investors control more than three-quarters of them. Frustrated with the situation, they recently commissioned a strategic review of the group’s capital base and structure that could lead to a sale of the business.
Pinewood, which provides stages and ancillary services to film and television producers, is likely to attract suitors. High occupancy levels drove sales in the key media services segment up by a fifth in the six months to 30 September 2015, sending overall post-tax profits up 13 per cent to £4.3m. The group is also on track to complete the first phase of a £200m expansion programme in June, and it recently struck a joint venture to produce and finance premium TV dramas for the international market.
Strong showings across the group’s divisions led management to hike guidance for the year to March 2016. Moreover, broker N+1 Singer expects compounded annual EPS growth of 19 per cent between FY2015 and FY2018. But Pinewood’s shares trade at a punchy 33 times forecast earnings for this financial year, pricing in its strong progress and the potential for a buyout. Hold. TM
41. PURPLEBRICKS
Purplebricks (PURP) views itself as an online hybrid estate agent falling somewhere between the conventional estate agency model and the purely online offering. Two things have become clear since its flotation last year, the first being its rapid expansion from a relatively modest start. Operating through an expanding chain of local property experts, the company’s business model centres on providing all the services offered by a conventional estate agent, but using an online model at considerably reduced cost. The concept is controversial to say the least and has managed to ruffle more than a few feathers. Secondly, there are some major attractions, not least the fact that there are no costs associated with maintaining a string of offices, and that allows it to offer a fixed-rate service considerably cheaper than most estate agents. In just 18 months, it has captured 60 per cent of the online market and is now the UK’s fourth largest estate agency chain. Expanding the network is likely to leave the group making a headline loss until 2017, and there is no dividend. However, gross profits are forecast to grow very strongly over the next two years, the only danger being its total reliance on the health of the housing sector. Buy. JC
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