60. Next Fifteen Communications
Next Fifteen Communications (NFC) is all about growth through acquisition, so it should be no surprise that the company has recently made further purchases. This includes marketing agencies Elvis and Velocity, as well as research businesses Circle and Charterhouse. The purchase of Elvis meant that new global clients, including Honda and Stella Artois, have been added to Next Fifteen’s portfolio, while Charterhouse has pushed the group into the financial sector. Together these helped boost the group’s billings to £243m - a 21 per cent increase on the previous year.
Next Fifteen’s chairman, Richard Eyre, is confident that the group will be able to continue to develop alongside the “extraordinary” pace of technology across the sector. So far this seems to be the case. At the full-year results in April, sales were up 15 per cent to £197m while reported pre-tax profits came in 358 per cent ahead of the year before at £13.3m. This marked a recovery from a weaker first half that was made difficult by political and economic uncertainty, according to Mr Eyre. The strengthening of sterling acted as a headwind, offset by organic growth and acquisitions, but investors might wonder how much of an impact currency will have on the business in future, especially if growth hits a more prolonged slow period.
The group reported growth across ass its regions apart from Asia, so investors may be wondering whether Next Fifteen can produce a better performance in this region by the next set of full year results in the year to January 2019. In the meantime the company is putting a keen eye on its spending. It’s done well to find synergies from recent acquisitions, helping to offset some added staff costs. This aided a 70 basis point improvement in the operating margin to 15.3 per cent. If this attention to spending is maintained then the margin should have support in the future.
Organic sales growth for Next Fifteen was already up by high single digits at the start of the current financial year. Brokers are forecasting that acquisitions made during the latter half of the group’s now ended financial year will start to pay off in the year to January 2019. Given the company’s good track record with identifying acquisitions and finding synergies, this looks encouraging. But with growing competition in the sector, we’ve recently taken a step back from our buy tip. Hold. JF
59. WANdisco
When we tipped live data company WANdisco (WAND) last December (568p, 7 Dec 2017), we flagged that it was a momentum stock – buoyed by news around contract and partnership signings. The group has deals in place with tech giants including IBM (US: IBM) and Amazon (US: AMZN) and the shares have been supported by strong full-year results to December 2017 with record bookings growth.
The group, which replicates customers’ data to the cloud without disruption, signed its first original equipment manufacturer contract in China in March with none other than internet behemoth Alibaba. Its reach in China has thus significantly expanded, paving the way for greater impetus there.
Still lossmaking, WANdisco must maintain or improve its growth rate to keep investors happy amid intensifying scrutiny of highly valued software companies. Its diversification into sectors beyond financial services, including healthcare and retail, should breed new opportunities, helping to keep the shares on an upwards trajectory. Buy. HC
58. Oakley Capital Investments
Shares in Oakley Capital (OCI) may have put in a sluggish performance during the past 12 months, but the group has demonstrated its ability to squeeze value out of its investments. The company generates cash by taking stakes in ventures established by its associated limited partnership Oakley Capital Private Equity, a provider of mezzanine debt finance. These investments include £79m in Time Out, £62m in sailmaker North Sails and £50m in online real estate advertiser Casa & atHome.
In January, the listed entity revealed that its net asset value had increased by at least 5 per cent in 2017. That’s short of the 16 per cent rise the year before, but Oakley has realised some of its investments at an impressive premium on its original stake. One striking example of this trend came in February, when one of the private equity funds it invests in sold a 38.5 per cent stake in online dating company Parship Elite and a 9.9 per cent stake in energy and telecoms price comparison website Verivox, for an aggregate £51m - a 26 premium to their carrying value at the end of 2017. At 170p, the shares trade at a 31 per cent discount to net asset value. Buy. EP
57. XLMedia
In 2017, investors began to overlook their concerns with XLMedia’s (XLM) Israeli heritage and its exposure to the loosely regulated gambling industry. Still, an enterprise value to adjusted cash profits valuation of 6.4 times looks stingy considering the group’s pace of growth. In 2018, revenues are forecast to rise 11 per cent even without accounting for the expected acquisitions in the cyber security and financial services space.
Once XL emerges from its period of investment, there is great potential for profit growth to outpace that of revenue as more of its websites start to turn a profit. In 2017, only 10 per cent of the 2,300-strong portfolio was profitable. Not that the group’s current profitability is anything to complain about: operating margins in the publishing business currently stand at 80 per cent and they’re improving in the media business – where the group drives traffic to its partners’ websites – as XL increases its focus on quality customers. Buy. MB
56. ECO Animal Health
Having conquered the animal antibiotic market with its flagship product Aivlosin, Eco Animal Health (EAH) is now turning to vaccines. Alongside its US peer Pharmgate, the biotech group has founded a joint venture in Ireland through which it will develop novel vaccines for farm animals. Initially, the JV will sell Pharmgate’s existing products in Europe and the UK, but management is hoping to launch new products in three to five years to challenge the current leaders in the animal vaccines world.
This will add another revenue stream on top of Eco’s novel antibiotic Aivlosin, which has achieved strong momentum as global demand for medicines which are not resistant to bacteria, soars. Pre-tax profits are expected to grow 9 per cent in 2018 thanks in part to the recent approval of the drug to treat respiratory and gut problems in pigs and chickens. That growth doesn’t come cheap though and a forward price to earnings ratio of 23 times leaves us at hold. MB
55. FW Thorpe
Despite occasional flashes of life, shares in FW Thorpe (TFW) have stayed pegged to the level they were at at the start of January. Conflicting signs of optimism and pessimism were also found in the group’s figures for the last six months of 2017. Although the lighting specialist unveiled increased sales for the period, pricing pressures in the group’s TRT business weighed heavily on the operating margin. Come full-year results, investors will be looking for signs of improvements in the second half, following the recent completion of a new factory for the aforementioned road and tunnel lighting division.
FW Thorpe is now turning its attention to its proposed European Application Centre, which will showcase the products and systems from its Lightronics, Thorlux and group business lines. In January, the group bought the Lightronics factory and neighbouring property for €3.4m (£3m) to serve as the centre of the site.
At 316p, the shares are trading close to their 52-week low. With net cash and growing sales, the company is in a solid position, but until margins begin to strengthen we see no reason to buy in. Hold. TD
54. Numis Corporation
Even prior to the introduction of the pithily named Markets in Financial Instruments Directive II (Mifid II), falling corporate retainer fees and squeezed trading commissions made it a tough environment for brokerages to succeed in. Since January, the unbundling of equity research fees from dealing charges is forcing asset managers to become pickier over the research they are willing to pay for.
Against that backdrop, Numis (NUM) has positioned itself well. While some brokers – notably formerly UK-listed Panmure Gordon – have floundered, Numis has managed to consistently grow profits during the past three years. Part of the reason for that is its shift towards focusing on corporate broking and advisory work, which provides a steadier income stream. In the 12 months to September, revenues in that business grew 15 per cent to a record £85m. During the period its work included 38 secondary fundraisings for clients including John Menzies and fellow Aim 100 constituent Learning Technologies (LTG), as well as 37 pure advisory roles. It has also been successful in signing up larger companies. The average market capitalisation of its corporate clients grew more than a quarter last year to £726m.
However, Numis’s fortunes are still inextricably linked with corporate and investor sentiment towards the London markets. That’s particularly the case for its equities business, which accounted for more than a third of group revenue last year. Yet that seems to be holding up well, despite the inevitable nervousness from companies about listing in a pre-Brexit UK; a recovery in the latter six months meant its IPO haul for the full financial year came to seven, including the listing of Premier Asset Management (PAM).
The group looks set to continue its strong run this year. In last month’s trading update, management said revenues for the six-month period to 31 March would be materially higher than the same period in 2016-17. Figures for the half-year - due on 4 May - will also give investors some idea of the impact, if any, on its equities revenue. The shares have risen more than 40 per cent in value during the past 12 months, bucking the wider industry trend, and at 376p trade at 14 times historic earnings. Brexit remains a potential headwind to investor sentiment, but with the corporate advisory business going strong, we see the shares’ rating as unduly pessimistic. Buy. EP
53. Hotel Chocolat
Shareholders in Hotel Chocolat (HOTC) will be wondering whether the confectionery group can continue to buck the trend within retail by increasing sales, margins and profits. So far there’s been no indication that it will falter - something of a rarity in the retail sector given rising costs.
That’s not to say that Hotel Chocolat has been immune to such pressures, but the management team has worked hard to offset higher costs. In the six months to December, capacity increased year on year by a quarter thanks to a more efficient use of assets, and better production scheduling. This is expected to improve further following January’s commissioning of a project aimed to increase liquid chocolate capacity by 180 per cent.
The current period should also benefit from recent store openings and a stronger online presence. This segues neatly into plans for geographical expansion: analysts reckon the chocolate maker’s new IT platform could help to streamline international websites alongside new wholesale agreements. A recently opened store in Hong Kong has provided some encouragement, while new partnerships with Amazon and Ocado could open new channels of distribution. Like its chocolates, the company’s shares are dear, but the momentum remains strong. Buy. JF
52. Iomart
According to market intelligence provider IDC, global spending on public cloud services and infrastructure is set to reach $160bn (£114bn) in 2018, a rise of 23 per cent on last year. Reassuring news - you’d think - for cloud computing companies everywhere, Iomart (IOM) among them.
It’s rarely that simple, and Iomart must operate in a crowded market within which giants such as Amazon Web Services (AWS) compete. But in terms of public sector cloud hosting, the Aim company’s broker Shore Capital notes that AWS primarily handles very large contracts with knowledgeable customers, whereas Iomart’s skills and consultancy benefit medium-sized enterprises “without deep IT skills”. Clearly, there’s room for both markets. For Iomart, a historic combination of organic growth and well-integrated acquisitions points towards continued momentum.
Encouragingly, a recent trading update for the group’s financial year to March stated that sales and adjusted pre-tax profits would meet consensus expectations – unsurprising given Iomart’s high levels of recurring revenue. At 365p, the shares trade at 20 times finnCap’s forecast adjusted EPS for FY2018, which we think offers reasonable value for a growing computing company with a healthy dividend yield. Buy. HC
51. Patisserie
It’s full speed ahead for growth plans at Patisserie (CAKE). The owner of Patisserie Valerie opened 20 new stores across 12 geographies in the year to September 2017, and has a similar rollout strategy for the current financial year. Rapid expansion plans can be a cause for concern if the rate of growth is debt-fuelled (see various pizza restaurant chains), but this hasn’t been Patisserie’s trajectory. So far, new openings have been funded entirely from operating cash flows, which increased by 10.9 per cent to £24.4m at the last set of results.
Analysts forecast a net cash position of at least £30m for the September 2018 year-end, increasing to around £56m in 2020 – and this is all after capital expenditure and dividend payments. Further encouragement can be found in sales from online orders, where revenue increased by more than a quarter last year. The icing on the cake - a partnership with Sainsbury’s - is not yet material to results, but analysts have called sales at 18 stores so far “promising”. We think the growth prospects are accounted for in the current share price, so continue to hold. JF
For the first half of our Aim 100 analysis see below:
