60. UTILITYWISE
Formed with only four employees in 2006, energy and water cost management consultancy Utilitywise (UTW) has gone from strength to strength. The company floated on Aim in 2012 and currently has around 750 employees. That growth in headcount is testament to the growth potential in Utilitywise’s core offering of helping companies to reduce their energy costs, which is proving to be a highly sought-after service as energy prices rocket. Managing thousands of energy meters for public and private sector clients and negotiating with energy suppliers to procure the best prices, Utilitywise signs up on average 60 new accounts a day.
In its last financial year, Utilitywise reported 61 per cent organic revenue growth and a recent trading update said that trading in the first half of the current financial year was ahead of expectations. The company’s broker, finnCap, expects rapid growth to continue, with forecast earnings growth of 57 per cent this year and 40 per cent next. Trading on 20 times next year’s earnings, the shares still look good value for the growth rate. So, although the shares are up strongly since featuring in our Tips of the Year (Buy, 241p, 2 January 2014), there should be more to come. KG
59. LXB RETAIL PROPERTIES
LXB Retail Properties (LXB) specialises in buying out-of-town retail sites, bringing them through the planning process, signing up tenants on long leases and then selling the development to investors looking for a decent yield. Inevitably, this procedure is vulnerable to a number of hitches, not least the daunting prospect of surviving the planning procedure. Progress is in evidence, though, and further tenants have been signed up for the group’s site at Banbury Gateway, although an ongoing appeal against planning consent means that work is unlikely to start until next year.
Better progress has been seen at the Biggleswade site, where construction should be starting now, while planning consent for the Sutton site has been granted. However, an expected outcome of the planning enquiry into the Rushden Lakes leisure and retail park has been delayed from the targeted date of mid-February. We tipped LXB at 116p (24 October 2013), since when the shares have edged up a little, but still trade at a modest discount to forward NAV. And with the prospect of selling more sites to institutions this year firmly in the pipeline, we remain buyers. JC
58. RM2 INTERNATIONAL
RM2 International (RM2) makes and hires out super-strong composite pallets used to shift consumer goods, food and drugs around
the globe. Its pallet tracking and management software tells them where they are, too. RM2, which reportedly makes about 1m pallets each year, only listed on Aim in January, raising £137m at 88p a share. It will use the money to ramp up production to almost 3m pallets in 2014, estimates broker Cenkos Securities, and 6.4m pallets the year after.
Sitting former Marks and Spencer and Diageo chiefs – Stuart Rose and Paul Walsh – on the board has clearly generated interest. Fund manager Invesco increased its stake from 28.5 per cent to over 40 per cent, too. Yet, RM2’s share price has drifted steadily lower. Canadian chairman and private equity man Ian Molson is unperturbed. In fact, a discretionary trust established mainly for the benefit of his children, has snapped up 1.5m shares for as little as 70p.
Maiden results – full-year 2013 – must be published by the end of June. In the meantime, Cenkos estimates RM2 will make a small profit this year after an underlying loss of $16.3m in 2013, and then only $28m in 2015, giving underlying EPS of 7¢, and $64m and 16¢ in two years’ time. A forward PE ratio of over 17 looks generous enough. Hold. LW
57. NANOCO
Breaking even is a distant prospect for Nanoco (NANO), which makes conductive nanoparticles for use in display and lighting products, as well as solar panels. It is yet to sign a commercial contract, and a key licensing deal with Dow Chemical to ramp up production from 60kg to 800kg won’t bear fruit until early 2015, as the construction of a new South Korean factory has been delayed.
Investors may also gulp at Nanoco’s operating losses almost tripling to £5.1m last year. But that reflects the absence of its partnering payment with Dow, the hiring of more staff and the sending out of larger samples. Its core proposition, ‘quantum dots’ that offer better colour, brightness and power efficiency than current LED technology, is certainly promising. That could attract Samsung, LG and other electronics giants. The challenge will be scaling up, as dozens of tonnes of dots will be needed to power the millions of TVs and PC monitors sold each year.
Shares in Nanoco are down 27 per cent this year, and stand at less than half Liberum Capital’s target price of 260p. Although the broker predicts Nanoco’s EPS will become positive in 2016 and then rise fivefold in 2017, myriad issues could arise in the meantime. Hold. TM
56. FIRST DERIVATIVES
First Derivatives (FDP), which sells data analysis and trading software to the financial services industry, has benefited from rising software demand and greater regulatory scrutiny following the financial crisis.
Its recent deals provide the evidence. Since December 2012, Australia’s securities regulator has used its Delta Stream product to track market activity for evidence of insider trading or other abuse. More recently, First Derivatives partnered with NYSE Technologies to use its Delta Flow product to collect, sort and store raw data from every major global exchange. That saves market participants the costs of hiring their own international support teams or building data centres.
Securing those high-profile clients seems to have spurred demand. First Derivatives’ total revenues leaped 25 per cent in the six months to 31 August, driven by 46 and 17 per cent rises in its two divisions, software and consulting. Moreover, it recorded double-digit sales across its four territories, including a 62 per cent increase in Australasia. But those gains were offset by a £6m rise in sales costs as it bolstered its sales teams, which meant that cash profits edged up only 2 per cent.
Shares in First Derivatives have more than doubled in the past year, and trade at 31 times forecast earnings. That’s expensive, even for a fast-growing business with products that could prove valuable to numerous industries. We recommend holding for now. Hold. TM
55. FAROE PETROLEUM
As its name might suggest, Faroe Petroleum (FPM) is focused principally on exploration, appraisal and production opportunities in the Atlantic Margin, the North Sea and Norway. The company moved back into profit in 2013, after it was forced to book some fairly hefty exploration and evaluation expenses in the previous year. And following a largely fallow 2012 on the exploration front, Faroe announced a significant gas and condensate discovery on the offshore Rodriguez/Solberg prospect in Norway during 2013. The North Sea driller followed this up with a discovery at the Snilehorn prospect (again in the Norwegian sector), which was way up on pre-drill estimates. The operator’s initial volumetric estimates came in at between 57m and 101m barrels of oil equivalent (boe), leaving Faroe with a net share of around 4m-8m boe. The good news continued in the early part of this year with another find at the Pil well in the Greater Njord area. Production testing is under way, ahead of a possible side-track drilling programme to assess the full extent of the resource. Maintenance shutdowns could weigh on production through the course of this year, but the share price could benefit from near-term drilling targets. Buy. MR.
54. MP EVANS
Like many palm oil producers in southeast Asia, MP Evans (MPE), which operates plantations and mills across Indonesia and Malaysia, has had a rough ride over the past 12 months as falling palm oil prices and wet weather have taken a toll on profitability – the average price for crude palm oil slid 23 per cent in the first half of 2013. The group also has a stake in a property development business in Malaysia as well as cattle operations in Australia, although the latter represents less than 2 per cent of total turnover and was loss-making at the half-year stage in June.
The good news, though, is that crude palm oil prices are picking up and a weakening Australian dollar is having a positive impact on export prices for beef. Management seems upbeat about production prospects at its majority-owned Indonesian estates and expects output to rise by nearly 60 per cent by 2015. Extraction rates are improving and
there is also scope to expand acreage. The IC understands that when market conditions are right, MP Evans might even look at selling the cattle business. The shares have come off in recent months, and now trade on 14 times forward earnings, which is in line with the peer group and seems about right given the risk and limited upside potential. Hold. JB
53. FUSIONEX INTERNATIONAL
Social media and internet-connected devices constantly broadcast a flood of information known as ‘big data’, which companies are increasingly using to target their advertising and tailor their products. Fusionex International (FXI), which makes analytics software, looks well-placed to profit.
It marked its big data entry with the launch of GIANT late last year, a software package that can quickly analyse data from several sources, and even offer predictions. It’s also simple, allowing users to point and click rather than code, and works on all kinds of devices and servers. Fusionex has since partnered with three distributors, and seen some early success – it signed contracts with three clients in the leisure, retail and aviation spaces this year.
Fusionex’s big data profits are far from giant, but its core analytics products should tide it over. Its total sales rose 42 per cent to 44RM (£8.2m) last year as it signed up high-profile customers such as Volvo and Guinness, and cash profits climbed 35 per cent. But overdependence may be a risk – Fusionex earns over three-quarters of its sales in Asia Pacific.
Investors seem to have clocked on to Fusionex’s promise. Its shares have climbed over 150 per cent in the past year, and trade on 66 times forward earnings. That’s exceptionally pricy, even with its big data opportunity factored in. Hold. TM
52. XCITE ENERGY
Xcite Energy (XEL) is a heavy oil development company, with current interests in six blocks in the UK North Sea. The primary focus of Xcite’s activities is in the Bentley oilfield located on the East Shetland Platform in the UK Northern North Sea, southeast of the highly-rated Bressay field that is operated by Norway’s Statoil.
A reserves assessment report of the Bentley field was produced in February. It upgraded previous estimates to 257m barrels of proven and probable (2P) reserves, together with 32bn cubic feet of gas, based on an initial 35-year production period. That implies a net present value of $2.1bn. The scale of the resource is certainly at the upper end of North Sea deposits, but its very size has left Xcite with a dilemma regarding how best to move forward towards exploitation. The company has pursued partners to take a significant stake in the project over the past year or so, but Xcite has now decided to largely manage the development of the Bentley oil field by itself.
To this end, it has secured new debt financing via $80m in unsecured loan notes. Xcite has also signed a memorandum of understanding with UK oil services group Amec (AMEC), setting out commercial principles for future cooperation on the Bentley field. It’s turning out to be an arduous process towards commercialisation, but the Bentley discovery is 10 times the size of the average North Sea find, so we think the shares rank a speculative buy. MR
51. TUNGSTEN CORPORATION
Tungsten (TUNG) only floated in October but it has already purchased OB10 – the world’s largest e-invoicing platform. Reflecting the cost benefits from e-invoicing, it’s a business that’s also growing fast. Indeed, Tungsten boasts 127 blue-chip customers and the OB10 platform processed £109bn-worth of invoices last year alone – up 12 per cent year on year. There should be plenty more growth ahead, too. By 2016, for example, all EU public procurement should be performed electronically and nations such as Russia, India and Brazil are currently passing legislation that allow for e-document recognition.
Tungsten also wants to provide invoice financing and is currently working with Blackstone Tactical Opportunities to establish a special purpose financing vehicle with an annual capacity of $10bn-$12bn. In order to provide financing to US suppliers, the group has also teamed up with America’s PNC Bank – it will integrate OB10 with its own invoice automation platform. The group is seeking approval from regulators to buy the UK arm of First International bank of Israel, too – potentially another source of funds. Tungsten hopes to receive approval for that during May.
True, Tungsten is loss-making, isn’t forecast to make a pre-tax profit until end-April 2015, and dividends aren’t likely for years. But e-invoicing is a robust long-term growth story and broker Canaccord Genuity’s sum-of-the parts valuation suggests fair value at 292p – suggesting 20 per cent upside from the current share price. Buy. JA
