40. IOMART
Cloud services and hosting business Iomart (IOM), which listed on Aim 14 years ago, has benefited from companies’ desire to outsource their IT and data storage needs. It owns and operates data centres in eight UK locations and boasts its own high speed fibre network, making it well-suited to the task.
Iomart’s sales rose nearly a quarter in the six months ended 30 September, as its hosting revenues climbed 31 per cent. Those gains look set to continue – in September it acquired Backup Technologies for £23m, which broadened its client base and brought with it high-profile clients including Liverpool and Everton football clubs. It also bought Redstation, which has widened its European footprint.
However, funding those deals meant Iomart’s net debt rose from under £3m to £23.5m. Another worry may be its sluggish Easyspace segment, which sells domain names and email accounts. Sales there inched up 3 per cent to £5.5m last year, solely due to past acquisitions.
Regardless, Iomart remains on track – it estimates that adjusted pre-tax profits rose 37 per cent for the year ended 31 March. But its shares trade at an expensive 27 times broker N+1 Singer’s forecast earnings, and it competes in a crowded cloud services space. Hold. TM
39. NEWRIVER RETAIL
Shop landlord NewRiver Retail (NRR) raised a few eyebrows last year when it secured a sale and leaseback deal with pub company Marston’s, in which Marston’s sold it 202 pubs for £90m. The idea was that the pubs would continue to operate while NewRiver developed its plan to turn some of them into convenience stores. And early this month it secured a deal with The Co-operative Group which will lease a significant element of the public house portfolio, with rental income agreed of between £15 and £17.5 per sq ft. The lease terms are 15 years with no break clause and an annual RPI-linked rental increase restricted to between 1 per cent and 4 per cent. Most of the stores will be built on surplus land, which means that the pubs will continue to operate, thereby generating a dual rental income stream. There is further potential for similar agreements as national food store operators look for accessible community-based food stores.
Trading at 294p, the shares command a heady premium over forecast net asset value of 241p for the year to March 2014. This may well be justified by the potential increase in the rent roll, but it leaves little room for a re-rating, and we are sticking with our current recommendation. Hold. JC
38. SIERRA RUTILE
Sierra Rutile’s (SRX) assets are located in the Republic of Sierra Leone and centre on a natural rutile deposit with a JORC-compliant resource of over 600m tonnes. Mineral sands producers like Sierra Rutile exploit a range of titanium feedstocks that are used in numerous applications throughout the construction industry, particularly as specialist pigments for paints and coatings. As a result, the industry is prone to cyclical variations, but the current downtrend in Sierra Rutile’s main markets has persisted for rather longer than the company would have wished.
Despite depressed overall demand, Sierra Rutile can point to operational progress during 2013. Production increased by over a quarter during the year to 120,349 tonnes. And the company has continued to drive down operating costs and improve operating efficiencies – cash costs were down by 23 per cent. Sierra Rutile achieved the best profit performance out of its peer group, and the company also signed a 70,000 tonne supply agreement with a leading pigment producer. However, the level of activity in the construction sector will continue to be the main determinant of the company’s performance during 2014 – and signs of improvement in the US and UK are offset by a possible construction slowdown in China. That means mineral sands prices haven’t risen as we’d have expected, and as such the shares are a hold MR
37. QUADRISE FUELS INTERNATIONAL
In many respects, Quadrise Fuels International (QFI) is a classic example of the kind of company that London’s junior market was established to attract. Quadrise has developed a proprietary fuel emulsion called MSAR. The production process involves the conversion of heavy oil residues in refineries into low-cost fuel that can be used to generate electricity, or at sea through a marine-based form of the fuel.
One of the most compelling investment points in Quadrise’s favour has been its ability to progress the development of MSAR despite a relatively modest capital outlay from shareholders. Put simply: the technology has such potential that Quadrise’s partners have been willing to stump up the lion’s share of development costs. The refinery end of the process has been conducted alongside AkzoNobel, and Quadrise has recently re-contracted its commercial relationship with the Dutch chemicals giant. In future, the companies will share IP ownership on technologies developed during the commercial roll-out, but Quadrise will be sole licensor for the MSAR technology itself, while holding worldwide rights for Akzo’s bolt-on refinery units. Quadrise has established a strong working relationship with the world’s biggest oil producer, Saudi Aramco, in addition to Mexico’s state-owned PEMEX. But the focus is on engine trials of MSAR that could eventually see the roll-out of the fuel on vessels runs by Danish container/shipping giant Maersk.
The shares have rocketed since we first suggested buying them, and while we think the technology has massive potential we want to see further commercial progress before becoming buyers again. Hold MR.
36. ROCKHOPPER EXPLORATION
Falkland Islands oil group Rockhopper Exploration (RKH) discovered the impressive 393m barrel Sea Lion oil field in 2010 – sending its share price up nearly 10-fold at one point – but it has been anything but smooth sailing since. A strategic review of the company’s options to develop the field left speculative shareholders dismayed in 2012 when the company failed to find a buyer willing to pay a hefty takeover premium. Instead, London’s Premier Oil (PMO) acquired a 60 per cent interest in Rockhopper’s licence by paying $231m cash upfront and agreeing to cover most of the capital development costs going forward.
With first oil not expected until near the end of the decade, however, and precious few catalysts in between, investors have flocked for the exits – sending Rockhopper’s share price down by three-quarters. Analysts at Westhouse Securities estimate – using a 75 per cent chance the project is successfully developed broadly on time and on budget – that it is worth around $1.5bn (£900m), or 373p a share, net to Rockhopper. At the current share price of 100p, the market is therefore only pricing in a 20 per cent probability the project will be developed. This is too harsh, in our view, and we expect the discount to unwind over the coming year as Premier Oil advances Sea Lion through several important milestones. Buy. MA
35. SMART METERING SYSTEMS
Smart Metering Systems (SMS) was founded nearly twenty years ago, but has a fairly short history as a listed company, only joining Aim in 2011. The company’s bread and butter is gas infrastructure. That involves gas connections – for example, relocating gas pipes – and more interestingly gas meters, which are becoming a hot topic as customers seek to minimise energy usage.
Smart Metering Systems owns, operates and manages commercial and domestic gas meters for gas suppliers. That puts it in a strong position to benefit from a UK government initiative requiring every home and business in the UK to have smart meter functionality by 2019 to monitor energy consumption. The company’s ADM solution aims to address this market. The product is low cost, fits to an existing gas meter and delivers half hourly usage info. Recent results revealed that the company had deployed over 16,000 of the units by the end of 2013 up from 2,000 a year earlier.
Profit figures were also impressive with earnings per share up by a half. The City expects another year of rapid earnings growth this year, but the shares look one to hold rather than chase trading on a full looking 36 times forward earnings. KG
34. OPG POWER VENTURES
Indian power plant developer OPG Power Ventures (OPG), which floated on Aim in 2008, was the brainchild of chief executive Arvind Gupta. While working for the family company he spotted the burgeoning potential in the Indian power market, developing his first power plant in 2004. That move positioned OPG to capitalise on India’s shortage of reliable electricity supply and its huge appetite for power – it is the fourth-largest consumer of electricity globally.
The company now has three coal-fired power plants in operation as well as investments in a gas-fired power station and a waste heat project. Total current operating capacity stands at 270MW and, in a sign of just how rapidly that capacity is ramping up, a further 472MW is under construction.
Recent results revealed high load factors for its operational plants and new plants coming on stream earlier than expected. Revenues more than doubled and earnings per share more than trebled. One fly in the ointment is that OPG has to import coal and use the weakening Indian rupee to pay for it. But it has been growing at a fast enough clip to offset that. So on 15 times next year’s earnings, the rating is undemanding enough to make this a speculative buy. KG
33. PETROCELTIC INTERNATIONAL
Petroceltic International (PCI) is an oil and gas production and exploration play with strong geographic diversification and a consistently busy drilling schedule. The company that we see today is the result of a strategic merger carried out with Melrose Resources in 2012. The union brought in production of around 28,000 barrels of oil equivalent per day, thereby providing much needed cash flow to facilitate the development of the large Ain Tsila gas field in Algeria.
Petroceltic has existing operations in the Black Sea, Egypt, Greece, Italy and Kurdistan, but the primary focus of its development programme is centred on Algeria. The company was recently notified that Sonatrach, Algeria’s state-controlled oil company, had exercised its right under the Isarene Production Sharing Contract (PSC) to pre-empt Petroceltic’s sale of a further 18.375 per cent stake in the project. The move will add around $180m to Petroceltic’s coffers, but more importantly, the increased involvement of Sonatrach is a clear vote of confidence in the technical and financial viability of the project. Following the deal, Petroceltic will hold a 38.25 per cent residual stake in the PSC, with Italian energy giant Enel as the other main participant. It’s unusual to find an Aim constituent of this size with Petroceltic’s balance of development and productive assets, so it’s unsurprising that it is considering a move up to the London main board. Buy MR
32. FYFFES
If readers heeded our advice in last year’s Aim 100 review to take a speculative bite in tropical fruit company Fyffes (FFY), they would have seen a massive return – the company is now in merger talks with produce giant Chiquita, in a deal expected to complete by the end of the year. Shares in Fyffes surged 43 per cent on news of the all-share merger with a company nearly twice its size. The agreement will create the biggest banana player on the planet and a company with approximately $4.6bn in annual revenue. Unfortunately for readers, while the sector remains fragmented, there’s no other company like Fyffes listed on the Alternative Investment Market. However, if you want exposure to the fresh produce industry, you could try dipping into Total Produce (TOT), a recent buy tip, or Aim-traded Produce Investments (PIL), which is in the business of growing and selling potatoes and flowers in the UK. JB
31. AVANTI COMMUNICATIONS
The costs and complexities of building telecoms networks can be overwhelming for governments, carriers and other companies. Avanti Communications (AVN) saves them the trouble, licensing out access to its three orbiting satellites, as well as its international fibre network and data centres.
Avanti, which exports to 88 countries in Europe, Africa and the Middle East, has seen strong demand for its unusual business. Its sales soared over four-fifths to $25m (£14.9m) in the six months ended 31 December, it signed up 26 new customers, and it recorded a maiden cash profit of $1m. It also completed a $370m bond issue to support the acquisition of satellite Artemis from the European Space Agency, securing spectrum and space for its next satellite, which is currently being built.
The company’s prospects look strong too. It expects to realise $76m of its $455m backlog in 2015, and recently signed contracts with Vodafone, an African government and a Turkish telecoms operator. Analysts are optimistic – broker Natixis expects Avanti’s sales to double to $146m in the next two years, and has a 450p price target on the stock. But its shares have doubled since last summer, and with profitability still distant, we recommend waiting to buy. Hold. TM
