80. REDCENTRIC
Redcentric (RCN), spun off from IT specialist Redstone Group and listed on Aim just under a year ago, provides managed IT services to UK companies. Its past projects range from improving the stability of Ryanair’s web booking system to rolling out wireless networks across Renault’s UK dealerships.
It’s already made some bold moves, purchasing rival inTechnology for £65m in cash last December. The deal makes it one of the market’s largest players, broadens its product range and client base, and could drive savings. For example, Redcentric plans to close three less efficient data centres and two offices.
Its finances don’t look shabby, either. In its maiden set of results for the six months ended 30 September, it earned adjusted cash profits of £3.6m on sales of just over £10m, and won or extended service contracts worth £12m over the next three years. But there were some issues. Net debt of about £12m is almost half of its equity, and administrative expenses amounted to a third of its revenues.
Redcentric’s shares soared to a high of 122p in March, and currently trade at 15 times analysts’ forecast earnings. That looks pricy at this early stage, so we reiterate our hold recommendation. Hold. TM
79. M&C SAATCHI
Multinational media agency M&C Saatchi (SAA) was created by brothers Maurice and Charles Saatchi after they were ousted in 1995 from the company they founded, Saatchi & Saatchi. It listed on Aim in 2004, and after an up-and-down decade, looks to be on the right track.
Its sales rose 5 per cent last year, as it signed up high-profile clients including O2 and Land Rover and delivered a strong UK performance. That home-turf display was driven by Saatchi’s customer relationship management (CRM) business, which analyses user data to allow personalised marketing, along with new mobile tools. Both are expected to roll-out worldwide this year.
The business also sold its majority stake in Walker Media for £36m in November, as it lacked the scale to compete effectively in the media-buying business. Shareholders received a cut, in the shape of a £21m share buy-back. But there were some soft spots – profits declined 18 per cent in Europe, and sales in Asia and Australia also slipped.
Saatchi offers an attractive, global growth profile. But its shares have doubled in the past two years, and trade at 19 times broker Numis’s forward earnings, a 35 per cent premium to the sector. That lofty rating, coupled with ongoing challenges, could keep its shares at bay for now. Hold. TM
78. TISSUE REGENIX
After nearly three and a half years as a public company, analysts are beginning to agree that York-based medtech group Tissue Regenix (TRX) is becoming an investable company. The US launch of DermaPure is still on track for the first half of 2014 and momentum in the share price has started to build as any potential risks start to be eliminated.
DermaPure works by taking human donor skin, removing the DNA and cells and using the company’s patented dCELL technology to leave a natural ‘scaffold’ that can be placed in patients’ wounds to aid natural healing by attracting the patient’s own cells to the wound area. America is a crucial market for the company: chronic wounds affect around 6.5m patients in the US. Accordingly, TRX has signed seven independent sales distribution agreements in the US, which will mobilise 40 sales representatives to promote DermaPure into acute care hospitals, veteran hospitals and institutions as well as long-term acute care hospitals.
Tissue Regenix has flown under the radar for so long, the current share price doesn’t present new investors with the cheapest buying opportunity. That said, analysts expect the shares to double in value once sales of DermaPure are generated. Buy. HR
77. LEKOIL
Aim newcomer Lekoil (LEK) experienced the perfect start to life as a listed company when its first ever exploration well discovered more than three-quarters of a billion barrels of oil-equivalent resources off the coast of Nigeria last summer. UBS analyst Daniel Ekstein described it as potentially “one of the biggest shallow water discoveries in West Africa of the past decade”.
That should have sent the company’s shares rocketing – instead, they ‘merely’ doubled – but equity markets are refusing to ascribe anything close to full value for Lekoil’s 30 per cent economic interest in the licence until joint-venture partner Afren (AFR) can prove the oil and gas can be commercially extracted.
Geological understanding of the field is still limited and an all-important flow test could not be completed last year “due to hydrocarbon kicks”. An appraisal drilling programme scheduled for the second half of 2014 could nevertheless change all that. The partners have also started shooting 3D seismic over the rest of the licence, which should refine and de-risk other prospects in the block that were previously identified by 2D seismic.
UBS’s Mr Ekstein conservatively estimates, assuming no value for the field’s gas, that oil and condensates alone justify a risked net present value of $2.9bn (£1.7) for the entire field. Lekoil’s current market capitalisation is just £185m, but we expect the market to reassess this following appraisal activity. Buy. MA
76. HELPHIRE
Helphire (HHR), which provides hire vehicles for drivers involved in accidents that aren’t their fault, has something of a chequered past. By claiming from the insurance companies of drivers that are at fault, Helphire grew fast during the 1990s but, not long into the new century, its insurance company clients began to baulk at the prices they were being charged. They responded with delayed payments and litigation and, in no time, Helphire found itself mired in trouble. The two sides eventually agreed a fixed price-setting regime and, for a time, growth once again resumed.
But growth soon evaporated once the recession hit and, after 2009, management responded with a big and successful restructuring exercise. A further move back to health came last year after Helphire eliminated its hefty debt burden through a debt-for-equity swap and a £60m placing. At the end of December’s half-year stage, the company’s pre-tax profit had recovered to £4.8m – in 2011, in sharp contrast, it suffered a £34.1m loss.
Challenges remain, however. Last year’s ban on the receipt and payment of referral fees in relation to personal injury cases, for example, meant an £11.4m fall in turnover at 2013’s first-half stage. And the Competition Commission’s probe into the motor insurance market also raises uncertainties. Broker Cenkos is forecasting flat earnings until at least the end of June 2016 (of 0.3p) and the shares already trade on a demanding 23 times forecast earnings. The 4.4 per cent prospective yield looks good for existing shareholders, but there’s little to attract new investors just yet. Hold. JA
75. VELOCYS
A heavily-oversubscribed share placing at 125p late in 2012 marked a sea-change in attitudes to Velocys (VLS) – formerly known as Oxford Catalysts. New and serious commercial backers emerged including Chelsea Football Club owner Roman Abramovich’s Ervington Investments (it still owns 4m shares). Yet, despite further newsflow, the share price has traded sideways between 125p and 175p for over a year. However, a joint venture just signed in the US could, according to broker Charles Stanley, be “the breakthrough for Velocys that the market has been waiting for”.
Chief executive Roy Lipski certainly thinks so. America’s largest waste company, landfill operator Waste Management, and Houston-based electricity giant NRG, do, too. They want to use Velocys’ gas-to-liquids (GTL) technology to generate renewable biogas, which when combined with cheap natural gas can be turned in valuable liquid fuel. “This is first time that big companies have come out and said we’re doing small-scale GTL,” Mr Lipski told us. “It’s a milestone.”
Of course, we have heard this before, and timing is always uncrtain. Nonetheless, if Charles Stanley’s figures are right, Velocys, which lost £18m last year, could generate underlying pre-tax profit of £3.4m in 2015. That would be progress, and makes Velocys’s shares a speculative buy. LW
74. SIRIUS MINERALS
Last year didn’t exactly go according to plan for Sirius Minerals (SXX). First, the company had to withdraw its mining permit application for the York potash project – located on the outskirts of a national park in Yorkshire – after third-party consultants for the park authority said more environmental studies were required. Then global potash prices tanked after the surprise break-up of the world’s largest producer cartel.
Sirius plans to resubmit its application in July but the year-long delay resulted in a cash crunch. A £43m placing completed in March will hopefully be enough for Sirius to see out the UK’s lengthy permitting process; following the mining permit, the company will still need to obtain a “materials handling plant and storage” permit as well as a Teeside port permit. At the earliest, this will take until April 2016.
After that, Sirius would have to raise $2.2bn (£1.3bn) for phase one construction. That’s a lot to ask for any junior miner but it could prove even more difficult since the specific type of potash mineralisation found at Sirius’s York project is new to the market. The risks here are numerous to say the least, and we continue to recommend avoiding the shares. Sell. MA
73. GEMFIELDS
Gemfields (GEM) is an Aim constituent with a business model adapted to appeal to consumers of luxury goods with a conscience. The company markets ethically-sourced emeralds from the Kagem mining complex in Zambia, but it is moving into the commercial phase at the Montepuez ruby deposit in Mozambique. Eventually, Gemfields intends to add sapphires to its product offering. And Gemfields’ ability to market its gemstones to well-heeled consumers was enhanced substantially by the 2012 all-share deal that brought the luxury jewellery brand Fabergé within its fold.
The gemstones have hitherto been sold through international wholesale auctions conducted in Jaipur (India), Singapore and Zambia’s capital, Lusaka. However, Gemfields had to enter into protracted negotiations with Zambian authorities through much of last year. The dispute centred on the proposed locations of the company’s emerald auctions after the Lusaka government insisted that all emeralds produced in Zambia should be sold domestically. Gemfields told us that it has come to an equitable solution with the government; a point borne out by a subsequent auction of high-quality emeralds in Lusaka that attracted record prices and volumes. Looking ahead, Gemfields has two more auctions scheduled before the close of its financial year in June, but the real shareholder focus is on the first auction from the highly promising Montepuez deposit. We think it could mark the start of a long-term growth story. Buy. MR
72. IMPELLAM
Impellam (IPEL) was formed in 2008 through the merger of recruitment companies Carlisle and Corporate Services Group. Initially weighed down with debt and facing tough market conditions in the UK and US, prospects for the new business looked challenging. But several years of restructuring, management change and paying down debt have placed it on a firmer footing and Impellam began paying dividends in 2012.
Impellam focuses on specialist areas of the staffing market such as lawyers, teachers and accountants, and is the leading provider of locum doctors to the NHS. Recent full-year results showed the benefit of gradually improving end markets, with adjusted earnings per share up 5 per cent. But heavy provisioning for troublesome contracts left Impellam in the red on a statutory basis.
The City expects a slight dip in earnings per share this year, which looks rather dull compared with other small/mid-cap recruiters that are broadly expected to grow earnings. This inferior growth explains the laggard performance of Impellam’s shares versus peers and its lower rating. Impellam trades on only seven times forward earnings against peer Matchtech on around 15 times. Impellam still has some way to go to convince the market it can offer reliable earnings growth, but its lowly rating makes it a speculative buy. KG
71. TELFORD HOMES
Telford Homes (TEF) specialises in building residential apartments and some houses predominantly in the East End of London. And with demand from overseas and domestic buyers from landlords, owner occupiers to real estate investors, showing no signs of abating, Telford’s progress has been little short of meteoric.
Profits last year rose nearly three-fold, and in normal trading conditions trading at nearly twice book value, the shares might look expensive. But conditions are far from normal, with strong demand from investors looking for a safe haven in an appreciating asset. Many sales are made before the foundations are in place, and the group has considerable earnings visibility. Targeted sales for the year to March 2015 are already more than 80 per cent secured, while over 60 per cent of sales for 2016 are in the bag. Investors in the shares are also starting to see the benefits of a progressive dividend policy. The half-year dividend was lifted by 85 per cent but is still three times covered by after-tax earnings. The shares are up nearly 250 per cent since our buy tip (101p, 22 April 2010), but with such vibrant growth and a fast increasing dividend, we remain buyers. JC
