70. Victoria
Victoria (VCP) is a flooring company with operations in the UK, continental Europe and Australia. At the end of March, the bulk of these activities had been closed by the Covid-19 pandemic, with the exception of the Netherlands and Australia. The absence of UK deliveries until the end of June is expected to lower sales by around £68m, according to house broker Peel Hunt, leading to a full-year decline of 24 per cent.
The company has been hungry for acquisitions and looked primed to persist with this strategy before the coronavirus outbreak, having raised €500m (£435m) through two bond issues in July 2019 and January 2020. This approach will have to be put on hold over the short term, and the proceeds from these bonds, which mature in July 2024, is likely to go towards sustaining the working capital needs of the business during this fraught period. But without any certainty on the resumption of trading, and with questions over renewed demand for flooring as we enter a likely recession, we think this is one to avoid. Sell. AJ
69. dotdigital
Software company dotDigital (DOTD) anticipates softer revenue for this year, which is hardly surprising given the wider cuts to marketing budgets across most industries. Management flagged in an update in late April that it had seen an expected slowdown of new business wins due to the cancellation of events and decision referrals.
While earnings are likely to be squeezed in the medium term, the group has strong future revenue visibility, with 90 per cent of sales recurring. And despite the current hostile trading environment, dotDigital has noted continued growth in messaging volumes and omnichannel usage from existing customers, supporting customer loyalty and its core services business model.
Naturally, temporary closures by some customers are affecting sales, but dotDigital’s overall client base is well diversified, and no single client represents more than 1.5 per cent of total revenue. The shares look well positioned to weather the disruption, given the group's robust subscription-based model and £22m net cash as at the end of March. Buy. LA
68. Brooks Macdonald
Since 2018, Brooks Macdonald’s (BRK) underlying operating profit margin has climbed from 18.8 to 21 per cent, bucking one of the more dominant themes within the broader asset management sector. With demographic and policy trends creating greater needs for financial advice, the group is also well placed in a mid-market ripe for consolidation. All told, there’s a decent growth story here even as prices of clients’ assets dip, which explains why chief executive Caroline Connellan could describe “a positive outlook over the medium term” as recently as mid March.
Of course, the “medium term” world in which Ms Connellan lands depends a lot on what happens in the currently fog-drenched financial markets it bases its sales on. So far, the group says net flows have held up reasonably well, even if fees will have been knocked by sharp declines in global markets. Should equity markets fall further, Brooks’ bottom line could look vulnerable. Other matters – including when economic fundamentals stop their free fall and whether wealth managers can prove themselves amid the chaos – remain tough calls. Hold. AN
67. Kape Technologies
Cybersecurity software provider Kape Technologies (KAPE) is more defensively positioned than many other Aim constituents in the wake of the disruption caused by the Covid-19 outbreak. The group has already reported increased demand for its products following the global switch to home-working, particularly within its digital privacy division.
Demand for digital privacy products was already indicated by last year’s 40 per cent organic growth in subscriber numbers to 2.35m, alongside an 81 per cent retention rate. In December, the group completed the acquisition of Colorado-based Private Internet Access for $127m, which expanded its presence in North America and should result in up to $4.5m in savings this year. After taking into account that boost, management is guiding towards revenues of between $120m and $123m and adjusted cash profits of $35m-$38m in 2020. Hitting the lower end of that second forecast would amount to a 140 per cent increase, year on year. Buy. EP
66. Applegreen
Applegreen (APGN) is a roadside convenience retailer and parent of the Welcome Break brand, which it acquired in 2018. At the time of writing, the company’s last update was alongside full-year results at the end of March. Unsurprisingly, Covid-19 has seen footfall plunge. But the results did bring the positive news that pre-tax profit more than doubled in 2019 thanks to the first full year contribution from Welcome Break.
While Applegreen’s outlets remain open during the crisis, the company expects a significant hit to profits this year and has withdrawn its guidance. It hinted at the need for flexibility on its banking covenants during this period, with net external debt having edged up 4 per cent to €545.4m (£475.3m) between the year-end and 20 March, while it spent €19.2m of its cash. Applegreen has undrawn facilities and should maintain a low hum of trading until restrictions are peeled back. Its 2020 prospects look grim, but as long as the company has room to breathe on its debt obligations, last year’s performance leaves us expecting better things in the medium term. Hold. AJ
65. AB Dynamics
AB Dynamics' (ABDP) half-year results in April revealed net cash of £35m, which will cushion the automotive testing specialist against the effects of coronavirus, which caused car production around the world to collapse and prompted customer deferral of some of the company’s higher value orders. AB Dynamics hasn’t observed any significant disruption yet and has sufficient inventory and work in progress to support its production schedules, although it expects its second-half order intake to suffer.
Car manufacturers are piloting measures to reopen their plants, which should aid the resumption of normal demand levels. AB Dynamics’ focus on long-term automotive trends including autonomous driving may take longer to deliver desired benefits, owing to the likely scale-back of research and development budgets (automotive R&D budgets are expected to fall in 2020 and 2021, according to IHS Markit). But with adequate liquidity to weather the short term and its eye on technologies that are largely uncorrelated with the expected shift away from conventional automotives, the company represents a long-term, defensive bet. Hold. AJ
64. Focusrite
Focusrite’s (TUNE) half-year results are due on 12 May, in which the music and audio products group is set to report a 24 per cent hike in half-year revenues to around £50m. Its acquisitions of studio monitor business ADAM Audio and loudspeaker company Martin Audio in 2019 contributed £12m of this turnover, while an additional £2m of revenues from orders in hand have been deferred into Focusrite’s second half after coronavirus disrupted its stock position.
Focusrite’s two acquisitions, together costing £54m, have pushed the company into a net debt position of around £20m as of 29 February 2020 – this includes a £40m facility. Focusrite has been targeting expansion in China, Japan and Latin America. Coronavirus may set these aspirations back, although the near resumption of normal Chinese trading conditions could provide a quicker-than-expected rebound in demand here, yielding yet another analyst upgrade, a trend that will be familiar to long-term Focusrite holders. The company faces a sticky patch in the short term, but its habitual growth and prospects in new markets make it an enticing proposition. Buy. AJ
63. IMImobile
IMImobile (IMO) provides cloud-based communication software that allows companies to automate digital customer messages. Among its client base are brand names such as Hermes, AA and Vodafone. The group has focused on growing the proportion of revenues that recur on a monthly basis – now 88 per cent of the total – as well as its global reach. Last year, it turned its attention to North America with the $53.2m (£41m) purchase of US cloud-based mobile customer engagement platform 3Cinteractive.
While Covid-19 has yet to materially impact operations, cost-cutting measures have been introduced to offset an anticipated drop in messaging volumes and delayed projects. A worst-case scenario could dent gross profits by £90m this year. To help manage the strain, institutional investors were recently tapped through a £22.2m share placing.
Those investors can put their faith in a solid track record that has seen organic growth in recurring revenue for 17 consecutive years, and an average gross profit growth rate of 21 per cent for the past five. Hold. EP
62. MP Evans
MP Evans (MPE) saw crude palm oil (CPO) production surge by a fifth to 231,900 tonnes in 2019, having increased both its total crop processed and extraction rate. But with CPO prices remaining depressed for much of the year – on average 5 per cent lower than in 2018 at $566 a tonne – gross profit dropped by over a third to $17m.
As global production fell and inventories were wound down, CPO prices did improve towards the end of last year, reaching $860 a tonne. But this progress was undone when Covid-19 hit China, one of the world’s largest palm oil importers. The CPO price should rally as the pandemic abates and demand returns. Supply should constrict amid drier weather conditions and higher biofuel mandates in Indonesia and Malaysia, two of the biggest palm oil producers. With MP Evans set to ramp up production over the coming years, costs per tonne will come down, boosting gross margins. As the timing of the global recovery remains uncertain, the shares remain a hold. NK
61. Next Fifteen Communications
Public relations agency Next Fifteen Communications (NFC) is naturally vulnerable to the economic impact of Covid-19, as marketing budgets are typically among the first costs companies cut in a downturn. Management expects two-thirds of its portfolio to be impacted by coronavirus, with sales down anywhere between 5 and 25 per cent depending on sector and specialism, which will dampen profitability this year.
However, there is reason to believe that the group is poised for growth on a longer-term horizon. Global technology companies account for around 55 per cent of sales, with a significant skew towards US giants Google, Facebook and Amazon, where digital media budgets remain strong. In the 12 months to January, organic revenues from the data and analytics division grew by almost a fifth to £45m. Balance sheet gearing – which stood at 56 per cent as of January – is also low relative to some peers. That keeps us bullish on the group’s long-term prospects. Buy. EP
In the links below you will find our round-up of the constituents of the Aim 100, as it was configured at the end of March. Our survey of the index’s 50 largest stocks will follow next week.
