70. VERTU MOTORS
The booming new car market in the UK has been a real boost for car retailer Vertu Motors (VTU), which operates a string of dealerships across the country. The group’s acquisition-led growth strategy in what remains a highly fragmented market is paying off in an industry where scale is critical. Vertu has yet to report its results for the year to 28 February, but management has already flagged up that the figures will be “ahead of market expectations”, with Vertu’s new car volumes outpacing that of the wider market.
But the company’s biggest selling point is its growing, high-margin aftersales business, which accounts for roughly 40 per cent of group profit. Growth here is partly down to surging new car sales but it’s also a result of Vertu’s clever customer retention strategy. And given that the UK new car market is set for further growth, we reckon 2014 will be another good year for Vertu. High targets set for Vertu by manufacturers in the first quarter of 2014 are also encouraging as they tend to set the trend for the rest of the year. The worry is that this will lead to aggressive selling. But Vertu’s scale will allow it to ride out any margin weakness – and sweep up those businesses not strong enough to do so. Buy. JB
69. OAKLEY CAPITAL
Through its private equity fund, Oakley Capital (OCL) invests – by taking controlling interests – in companies with both growth potential and which have enterprise values of between £20m and £150m. Moreover, with economic conditions picking up, recent progress has been attractive.
In February, for example, the company reported that the end-2013 NAV was expected to reach 198p-200p – a solid 9 per cent hike on the previous year. Three realisations were also achieved last year, which returned a total of £33m to the company. That included selling Emessa, one of Oakley’s strongest investments, for a gross €95m (£79m), along with Headland Media for £15.5m. In July, meanwhile, it took control of Reddam House – which operates premium private schools in South Africa – through its stake in Ecudas and, since the year-end, Oakley has also invested in marine technology group North Technology. That leaves Oakley with a portfolio of seven companies – the other five being Daisy, Verivox, Time Out, Intergenia and Broadstone Pensions and Investments. Oakley provides debt finance to a number of its portfolio companies, too – typically through mezzanine loans with fixed interest rates of up to 15 per cent.
Management says that 2014 has “started strongly” while an improving economic backdrop should support performance at the portfolio companies. That leaves the shares, trading at roughly a 17 per cent discount to NAV, looking too cheap. Buy. JA
68. PARKMEAD
North Sea-focused oil group Parkmead (PMG) is run by petroleum engineer Tom Cross, who built Dana Petroleum from scratch into a 50,000-barrel-a-day oil producer before selling it for £1.9bn. Now, he’s out to do the same with Parkmead. Through a series of canny, bargain-priced acquisitions, Mr Cross has grown Parkmead into an Aim 100 company this past year. In the past six months alone, he has increased oil production by 700 per cent by snapping up Lochard Energy and EWE, in the process gaining a strategic foothold in the Athena oil field. Parkmead is also progressing two field development projects through the feasibility and permitting process.
On the exploration front, Parkmead made a substantial new gas discovery in 2013 and was awarded the largest number of blocks across the UK Continental Shelf of any independent company in the latest licensing round. What’s more, Parkmead dramatically increased its financial fire-power in January by raising £40m in a placing with institutional investors in February. Mr Cross is rumoured to be eyeing more deals in the current depressed market for oil and gas equities.
We’re been backing Mr Cross since late 2012 and investors who have followed our buy advice (Buy, 225p, 5 December 2013 and Buy, 187.5p, 5 October 2012) should be in the money. Yet broker Charles Stanley estimates fair value at 380p a share, representing further upside of over 50 per cent. Buy. MA.
67. STAFFLINE
Established in 1986 and floated on Aim in 2004, Staffline (STAF) has become a major force in blue-collar recruitment. The company’s OnSite model, in which it installs its own team at a client’s premises to handle their hiring needs, has proved popular with its core customer base of major supermarkets, food producers and logistics players. The first OnSite location opened in 2002. There are now nearly 200 of them.
The success of the OnSite model has helped Staffline treble its revenues twice already since the float. The company is now aiming to hit £1bn of revenues by 2017, up from £416m in 2013. In order to get there, Staffline is building a presence in new growth areas such as the government’s Welfare to Work scheme and white-collar recruitment through the acquisition of Select in 2012.
Recent full-year results beat City forecasts, with adjusted operating profit up 16 per cent and a net cash position for the first time since the float. We tipped the shares at 590p (10 October 2013) and they have done well, rising 36 per cent since our buy advice. They are not as cheap as they were, but on 16 times next year’s earnings, the rating is still sensible enough to warrant a continued buy call. KG
66. BURFORD CAPITAL
Burford Capital (BUR) provides finance to fund cases of commercial litigation, where the plaintiff cannot proceed because of a lack of finance and time. It raises income through taking a percentage of the damages awarded. Obviously, the trick is to pick the cases with a strong chance of winning, and Burford has been conspicuously successful here, with investment income from maturing cases up 20 per cent last year. These cases take place in the US, but in February 2012 it bought Firstassist, a UK-based company offering insurance against having to pay the other party’s fees.
Once again, case selection is all important, and income last year was up nearly a third. Profit creation is rather lumpy, though, because the timing of any legal outcome is impossible to predict. However, the company has a strong pipeline of cases reaching the end stages, and profits in the coming year are forecast to treble from last year. At 121p, the shares are down slightly from our buy tip (127p, 2 February 2012), but they trade at a discount to the wider financial sector and there is a decent dividend in prospect too. Buy. JC
65. BROOKS MACDONALD
Like most wealth managers, Brooks Macdonald (BRK) had to face higher costs brought on by the implementation of changes laid out in the Retail Distribution Review (RDR). These are now pretty much taken on board, and the group has been busy diversifying its business model to embrace the changes brought in by RDR and also a radical shake-up of the pensions industry.
So, later this year it can exercise an option to buy Levitas Investment Management Services, which will provide exposure to the individual pensions market in the wake of auto-enrolment legislation. It has also bought a 60 per cent stake in North Row Capital that will allow it to offer investors the opportunity to enter the global real estate market. And a property fund launched at the end of February has already attracted investments of over £15m. Total funds under management last year grew by 11 per cent to £5.68bn, and crucially this was a combination of a £255m positive investment performance as well as a £315m net inflow of funds. However, trading on 20 times forecast earnings, a premium to the sector average, the shares look up with events. Hold. JC
64. GVC HOLDINGS
Last year’s joint bid for Sportingbet alongside high street bookie William Hill (WMH) means analysts expect earnings and dividends at GVC Holdings (GVC) to rise rapidly in 2014. The deal, which saw GVC and William Hill pay a total of £493m for the online sports betting group, has increased the scale of GVC’s existing online business and given GVC a boost to its already cash-strong balance sheet.
The dividend policy has always been aggressive: the company consistently hands back 75 per cent of generated cash. As long as this continues, this puts the shares on a 11.2 per cent dividend yield for 2014 and helps set GVC apart from its peers, as the online gambling sector looks set to be squeezed by further punitive regulation this year.
Growth beyond 2014 is still expected, albeit at a slower rate than in the current financial year – a special dividend of 4.5¢ rounded off a strong 2013. Analysts still believe GVC carries certain risks due to the level of exposure to unregulated markets – for example, Turkey. But for those investors willing to take on the high-risk profile, the dividend yield and cash pile should serve as incentives to pick up the shares. Buy. HR
63. ALTERNATIVE NETWORKS
Corporate appetites for cloud-based and mobile computing have benefited Alternative Networks (AN), which floated in 2005 and sells fixed-line, mobile and managed IT services to businesses. It managed to turn around a first-half sales slump last year through sales, technical and marketing investment, and also added money-printer De La Rue International and housebuilder Persimmon to its client list.
Alternative’s progress has continued this year – it spent £53.2m to acquire Control Circle and Intercept, which provide managed hosting and cloud services to businesses. The deals bolster Alternative’s product portfolio, and offer both cross-selling opportunities and cost savings. Moreover, they further show the company’s willingness to use its cash pile – it returned £14m to shareholders last year, and is planning double-digit dividend increases this year and next.
But there are some concerns. Although Alternative’s mobile subscribers grew 5 per cent to over 81,000 last year, average revenue per user fell 7 per cent to £41. That was driven by EU regulators capping data roaming charges and a decline in business travel, which ate into roaming revenues.
That hasn’t hurt its shares, though, which are up two-thirds since the start of last year. Strip out cash, and they trade on 17 times forward earnings. That’s pricy for an inconsistent performer in a flat, competitive market, even with the yield factored in. Hold. TM
62. PLEXUS HOLDINGS
Aberdeen-based Plexus Holdings (POS) was admitted to Aim in 2005. In the intervening period it has carved out a unique position in the North Sea and international oil and gas markets through its proprietary POS-GRIP wellhead system. The POS-GRIP technology is the brainchild of Plexus’s founder and chief executive, Ben van Bilderbeek. It was developed with the aim of preventing the types of blow-outs typified by BP’s 2010 disaster in the Gulf of Mexico, and it has been used on over 300 wells worldwide. However, the POS-GRIP wellhead system also offers safety and performance advantages for drilling conducted at extreme pressures and temperatures.
So given the beefed up regulatory environment in the wake of BP’s (BP.) Macondo disaster, coupled with the industry trend towards unconventional oil and gas targets, its understandable why Plexus’s management believes that the technology’s utilisation could expand substantially in coming years. The key is achieving critical mass in markets outside Plexus’s traditional North Sea catchment – and the company has made a number of potentially significant moves in this regard. Plexus recently secured its third client in Australia in the form of Eni, while deals were completed with Glencore Exploration and Svenska Petroleum for drilling in West Africa. It’s a great stock but the valuation currently looks too rich for us. Hold. MR
61. HIGHLAND GOLD MINING
Highland Gold Mining’s (HGM) business model is centred on the acquisition and development of gold mining projects in the Russian Federation, with major activities located in the Khabarovsk and Zabaikalsky regions of Russia as well as Kyrgyzstan in central Asia. In aggregate, the company’s existing portfolio of gold mining assets account for a JORC audited resource estimated at 11.1m ounces.
In common with other Aim-traded gold miners, Highland Gold’s headline numbers have suffered due to last April’s fall-away in precious metals prices, which is regrettable given that the company has made significant operational progress. Production during 2013 was up by 8 per cent to a record 233,696 ounces. This encompassed the combined output of both the MNV and NOVO mines, while first gold was poured from the Belaya Gora complex. Output for 2014 (MNV, Novo and Belaya Gora) is expected to increase to between 300,000 and 320,000 ounces. Highland Gold has been able to partially mitigate the fall in gold prices by driving down cash costs. This has been made possible because the miner’s average processed grades were 25 per cent higher than in the second half of 2012, and 14 per cent in advance of the first half of 2013. But, with questions over precious metal prices, we’re sticking with a hold recommendation for now. MR
