20. CLINIGEN
As one of the runaway stocks of 2013, Aim success story Clinigen (CLIN) finally saw its share price lose momentum at the start of 2014. After the share price rose from 200p to more than 600p over the course of last year, the latest set of results from the speciality pharma group panicked investors. The shares crashed 17 per cent in early trading on the morning the half-year results were released, as the group revealed current profit margins were unsustainable.
The profit margin in the clinical trial supply (CTS) division rose four percentage points to 16.5 per cent as gross profits grew from £5.8m to £6.5m. But chief executive Peter George admitted the gains were unlikely to be sustained for the full year of trading. Sales in the division were also down 13 per cent to £39.5m, which did not help soothe concerns the shares had overheated.
But Clinigen has made some progress: revenues are slowly becoming more evenly distributed across various divisions and an over-reliance on CTS is unlikely to continue. That said, a hefty rating of 30 times forward earnings doesn’t look credible now the company has lost its ‘hot stock’ status among investors. Hold. HR
19. SECURE TRUST BANK
While consumer-focused lender Secure Trust (STB) was incorporated as long ago as 1954, the group only floated on Aim in November 2011. Despite that, however, the lender still remains 67 per cent owned by Arbuthnot Banking (ARBB), which can leave the shares looking a little illiquid.
Still, that shouldn’t detract from the lender’s robust performance. Buoyed by improving consumer conditions and a robust car market, for instance, the group’s motor finance unit saw its loan book jump 28 per cent in 2013. Improving economic conditions are proving good for Secure’s personal loan business, too, while last year’s acquisition of retail finance business, V12 – as well as 2012’s purchase of sub-prime loan unit, Everyday – will also help further bolster growth and drive diversification. But that growth did help push up the impairment charge by 75 per cent last year, significantly boosted by the Everyday deal – sub-prime operations typically carry relatively higher impairments. Secure also funds its book exclusively with retail deposits. That’s pricier than wholesale funding, in today’s ultra-low interest rate world, but it does offer security against sometimes volatile interbank markets.
Growth prospects do look attractive, as does the lender’s chunky 31 per cent return on equity. But a dividend yield of around 2 per cent is nothing special and the shares – trading on around 20 times broker Canaccord Genuity’s 2014 EPS estimate of 135p – look well up with events. Hold. JA
18. HUTCHISON CHINA MEDITECH
‘China’ has become a buzzword in modern-day pharmaceuticals, but with the national media questioning the growth of the Chinese economy it’s far from clear what prospects lie there for global healthcare companies. But Hutchison China Meditech (HCM) continues to benefit from heavy investment in widening China’s state sponsored healthcare system.
The company makes both prescription and non-prescription drugs and any intellectual property rights that they own are well protected. They have also built strong sales forces covering key markets and the consumer business is reaping reward from an emerging Chinese middle class, albeit having undergone a restructuring effort to the tune of $7m in 2012 to strip out loss-making operations. Its research and development division is also well-supported by big pharma, including AstraZeneca and Nestle Health Science which are helping to develop cancer and inflammatory bowel disease treatments respectively. In fact, the group just announced a second phase trial for its compound fruquintinib in colorectal cancer patients in China.
The company is a long-time favourite at the Investors Chronicle and shareholders shouldn’t be put off by the toppy rating of 25 times forward earnings – it’s justified given turnover more than doubled from 2012 to 2013. Buy. HR
17. ITHACA ENERGY
Oil and gas equities have been in the doldrums for nigh on two years now, amid a flat to falling price environment for hydrocarbons. This past year alone, the Aim Oil & Gas Index has tumbled by nearly a quarter.
North Sea group Ithaca Energy (IAE) has nevertheless been a rare bright spot. Its share price has risen nearly 40 per cent since last summer and, if broker Westhouse Securities’ calculations are correct, there is still plenty of room left for the shares to run from here. The company produced around 10,000 barrels of oil a day in 2013 from several fields in the North Sea, more than double 2012 levels. This year output is expected to rise to between 11,000 and 13,000 bopd, but 2015 is when things get really interesting. Production is expected to swell to 25,000 bopd when the Greater Stella Area (GSA) development project comes on-stream around the “end of 2014”.
Ithaca’s shares appear screamingly cheap trading on just three times broker Westhouse Securities’ 2015 earnings estimates, which assume production from GSA ramps up successfully. True, there is project execution risk and a heady level of gearing to consider, but recent positive appraisal drilling results have substantially derisked the project and debt position in our view. Buy. MA
16. BREEDON AGGREGATES
Breedon Aggregates (BREE) was created from the ashes of quarry, cement and asphalt group Ennstone following the latter’s demise, and the intention has been to consolidate what remains a very fragmented industry. All of the other big players like Hanson and Aggregate Industries have been acquired by foreign companies, and Breedon has been carefully picking up selected assets and building a strong platform to exploit the long awaited acceleration in infrastructure spending. It now has over 400m tonnes of aggregates in 38 quarries, as well as 22 asphalt plants and 51 ready-mixed concrete plants. Aggregates are expensive to transport, so Breedon is keen to expand its assets around the country.
More opportunities are likely to arise from the proposed merger of Holcim and Lafarge, from which there will almost certainly be some forced asset sales to comply with the merger. The shares are up sharply from our buy recommendation (29p, 19 September 2013), but given the fact that demand is only now starting to show real signs of accelerating, Breedon’s value has yet to be fully realised, and we remain buyers. JC
15. DAISY
Daisy Group (DAY), which provides IT and telecom services to small and mid-sized UK companies, has made only modest gains in a challenging macroeconomic environment. It continued to shift away from declining fixed-line sales in the six months ended 30 December – that business contributed 12 per cent of total revenues, down from 14 per cent a year earlier. Moreover, Daisy’s better product mix helped its gross margin climb from 36 to 39 per cent.
Its adjusted cash profits also edged up 2 per cent to about £30m, driven by it buying a basket of different businesses last year. That has created cross-selling opportunities, and the addition of NetCrowd and Indecs to its partner services division seems to be paying off – it signed a five-year partnership agreement with Virgin Media in February to provide IT services to its enterprise customers.
Investors have welcomed Daisy’s recent gains, doubling its stock price since the start of last year. Its shares don’t look too pricey, trading at 14 times forward consensus earnings, less than half the sector average. But its strategy seems to be predicated on acquiring other businesses to offset fixed-line declines, which could prove unsustainable. The yield is nothing special either. Hold. TM
14. AFRICAN MINERALS
Shares in mining companies often amount to leveraged bets on commodity prices. Certainly, this has been the case with iron ore miner African Minerals (AMI) over the past few years. Its share price has been falling since 2011 and tumbled 40 per cent in the past 12 months alone as the price of iron ore slumped by a fifth.
There have been other factors, though. Production at African Minerals’ Tonkolili mine in Sierra Leone has taken two years longer than initially expected to ramp up to a rate of 20m tonnes of iron ore per annum (mtpa). Meanwhile, profitability has been hit by teething problems during the wet season, and the company’s chief executive and chief financial officer resigned last year.
But operations at Tonkolili now appear to be running smoothly, and new management is cautiously optimistic that the next stages of expansion, to 25mtpa, and then 35mtpa, could prove more lucrative. Granted, African Minerals doesn’t yet have the money to carry out the second and third phases of the expansion. Finding the money could prove tricky, too, as the company has already borrowed heavily; it had net debt of $473m (£283m) at the year-end. But forthcoming cash flows from operations and a rich Chinese partner who has promised to cough up $990m for a 16.5 per cent economic interest in the project would certainly help. That said, the risks involved are still much too great for our liking. Hold. MA
13. ADVANCED COMPUTER SOFTWARE
Business and healthcare software specialist Advanced Computer Software (ASW), grabbed headlines last March when it bought Computer Software Holdings for £107m. That purchase helped drive its sales up almost three-quarters last year, while its adjusted cash profits soared 68 per cent.
It has also improved its revenue outlook. Recurring sales accounted for 65 per cent of its revenues last year, and its contracted future revenues rose 79 per cent to over £207m. And it made strides in its healthcare segment – five NHS trusts exiting the national programme, including Oxford Health Foundation Trust, have chosen it as their preferred software supplier.
Investors won’t be dreading its upcoming results, either. The company has said it expects both sales and adjusted cash profits to grow over two-thirds, to at least £202m and £45m. But one concern may be its balance sheet, with recent acquisitions expected to turn last year’s net cash of £31m into net debt of nearly £50m.
That hasn’t weighed on its shares though. They hit an all-time high in February, and now trade at 19 times broker Panmure Gordon’s forecast earnings. That looks expensive, even with the company’s strong growth and positive outlook taken into account. We downgrade to hold. TM
12. VINACAPITAL VIETNAM OPPORTUNITY FUND
Founded in 2003, VinaCapital (VOF) specialises in making investments in listed and unlisted companies, debt and other investment opportunities in Vietnam and surrounding Asian countries. The group manages three closed-end funds trading on Aim and also co-manages a venture fund. Trading has been made tougher by the withdrawal of funds, following the start of a mild tightening by the US Federal Reserve. However, running a current account surplus, and with GDP growth matching the inflation rate, Vietnam has performed better than many other countries, although the high level of non-performing bank loans remains a worry.
The group generates a decent amount of cash flow and has continued to use this to buy back shares, adding 5¢ per share to net asset value in the six months to December 2013 and 33¢ since the beginning of the buyback programme in October 2011. Even so, at 244 cents the shares trade at a significant discount to NAV of 302¢, reflecting investor caution over emerging market assets in general. With that in mind, the shares are a hold. JC
11. AMERISUR RESOURCES
We first highlighted the investment case for Amerisur Resources (AMER) in August 2011 when expectations of near-term expansion were buoyed by an encouraging independent reserves report on the Platanillo field in Colombia. Three years on and the South American oil and gas explorer can lay claim to 32.8m barrels of proven and probable (2P) reserves. And the latest certification by Petrotech Engineering gives Amerisur an even-money chance of exploiting another 35.3m barrels in prospective resources within the field. According to Petrotech, those 2P reserves represent a net present value (after royalties but before tax) of $1.97bn undiscounted and $1.25bn at a 10 per cent discount rate.
As Amerisur is developing its business in frontier oil and gas markets, it’s difficult to make long-term projections in terms of both its reserve base and production rate, but the company has easily surpassed initial expectations. Importantly, the recent reserves upgrade was achieved in tandem with a step-up in production rates. This underlines Amerisur’s ability to sustain a viable reserves replacement ratio, thereby preserving shareholder value. In addition to ongoing progress at Platanillo, the company has a portfolio of large exploration targets, with advanced exploration plans for Putumayo 12 and the San Pedro block in Paraguay. The share price more than reflects this, though, especially as future capital commitments are high. Hold. MR
