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The Aim 100 2015: 70-61

In the fourth 10-company segment of our analysis of Aim's top 100 companies, we give our verdict on Globo, Restore, Brooks Macdonald, Vernalis, Redcentric, Earthport, Majestic Wine, Arbuthnot Banking, Manx Telecom and Scapa
April 17, 2015

70. GLOBO

Globetrotting workforces and growing usage of smartphones and tablets for work are fuelling demand for mobile security and connectivity. Globo (GBO) provides those services to the likes of Intel and SAP, and owns a mobile app development platform. It has shifted its focus from consumers to the enterprise market, which offers shorter payment cycles and more reliable licensing revenues. That has significantly improved its free cash flow, a historic bugbear.

Globo is also expanding aggressively in the US: first-half administrative and distribution costs spiked by more than four-fifths as it built up brand recognition, chased customers and secured partnerships across the pond. Globo more than doubled its employee-device and consumer-app licences to 834,000 and 31.8m, respectively, in 2014. It also introduced new mobile management and cloud features, and acquired Sourcebits, a US-based app developer whose clients include Coca-Cola and Hershey’s. Those fuelled an estimated 90 per cent rise in GO!Enterprise sales and strong consumer revenues last year, sending group sales up 48 per cent to €106m.

Globo offers exposure to the mushrooming enterprise mobility and app markets. Its shares have risen strongly this year, but at 48p they trade at just seven times broker Canaccord Genuity’s forecast EPS for 2015. Buy. TM

 

69. RESTORE

Document storage may not sound very exciting, but Restore (RST), which specialises in just that, has enjoyed sturdy growth over the past four years. Last year, cash profits grew by more than a fifth to £14.8m, and it looks as though there is more to come.

The group’s document management division is the driving force behind this growth, with revenues rising by an impressive third to £37.4m in 2014. Likewise its relocations division, which provides office relocation services, grew revenues by 16 per cent, thanks to an upturn in market conditions. Growth for the business is generally driven by acquisitions, since most clients rarely change their document storage provider, according to chief executive Charles Skinner. With that in mind, Restore bought six businesses last year, including shredding business Cannon Confidential. This year Mr Skinner predicts significant growth will come from public sector clients, since only around half currently outsource their document storage.

Shares in Restore have generated stellar growth of more than 300 per cent since we first tipped the company’s shares as a buy in 2011. The group’s range of businesses, including a scanning company, means it has good cross-selling opportunities. The shares are trading on 16 times forward earnings, which, considering the group’s upside potential, we consider worth paying. Buy. EP

 

68. BROOKS MACDONALD

Brooks Macdonald (BRK) celebrated its 10th anniversary on Aim last month and, on a 10-year view, it has opened a chasm above the index. Look at it over 12 months and the picture is worse, although solid results last month, including a 9 per cent rise in underlying pre-tax profit in the six months to 31 December 2014, seem to have steadied the ship.

Originally set up as a London-focused investment manager in 1991, the group now consists of six companies spread across wealth management, financial planning, offshore investment management and even property management. The current focus for the company has been a full refresh of its IT infrastructure, which should be completed next year.

Out of these business lines, investment management accounts for the lion’s share, and saw decent 9 per cent revenue growth in 2014. Financial planning was the only area where revenues fell, but management predicted a stronger second half. The company should be bolstered by pension reforms that keep people invested in its funds past the traditional point of retirement. With its shares trading at 15 times Bloomberg consensus forward earnings, now could be a decent entry point, but potential buyers may be wise to wait until the internal rebuild is nearer completion. Hold. IS

 

67. VERNALIS

It’s a waiting game over at cough-and-cold specialist Vernalis (VER). The company still hopes to launch a new slow-release Tuzistra product aimed at treating common cold symptoms in the US as soon as the US Food and Drug Administration (FDA) gives it the green light. Until that happens, chief executive Ian Garland has said Vernalis’ financials will be messy.

Last year group sales dipped 16 per cent, leaving the group with running losses of £5.2m. But the board has also altered the group’s financial year-end going forward from December to June. Explaining the decision, Mr Garland said the prime cough and cold season in the US runs from October to March, so a calendar year-end would split the natural sales spike in half.

Tuzistra is not the only product Vernalis is working on, though – it has another four undergoing clinical development. Over the next year-and-a-half, Mr Garland said investors could receive “up to 10 further updates” on the clinical programme. Mr Garland has said that Vernalis could join the ranks of US “speciality pharma” companies – namely, those that develop a range of products and technologies in-house and take them through a full-scale commercial launch. Buy. HR

 

66. REDCENTRIC

Since being carved out of Redstone Group in 2013, managed IT services provider Redcentric (RCN) has been busy scaling up. It paid out £64m in cash for rival InTechnology in its first year as a standalone company, and this month announced the acquisition of Calyx Managed Services for £12m, which analysts at finnCap believe will add 7 per cent to EPS this financial year, and boost revenue by 8 per cent to £110m. The acquisition strategy comes amid wider consolidation in the fragmented managed services mid-market, which just last month saw Redcentric rival and serial acquirer Accumuli (ACM) bought by cybersecurity group NCC (NCC).

Further deals notwithstanding, momentum in Redcentric’s underlying business looks strong, and management expects organic recurring revenue growth reported in the interims – when repeat business stood at four-fifths of income – to continue in the full-year figures. Predictable cash generation should also help to deliver a reduction in net debt, while a new banking facility agreed in March will assist with the Calyx purchase. At 13 times forecast forward earnings for 2016, the shares appear to have found a bit of value and, given the excellent growth profile, now rate a speculative buy. AN

 

65. EARTHPORT

Banks, retailers and money transfer groups are keen to capitalise on the rise of international trade and e-commerce, but many have struggled to navigate the maze of cross-border payment regulations. Earthport (EPO) has tackled the issue by building a network that can transfer small sums between more than 60 countries. Contracts with Bank of America, HSBC and Standard Chartered suggest Earthport’s disruptive ambitions aren’t quixotic. It signed up 17 new clients in the six months to end-December, and a further 32 customers are implementing its technology. That helped it to more than double its first-half underlying sales and narrow its adjusted operating loss by nearly a third to £2.3m.

Earthport added foreign-exchange capabilities to its platform by acquiring Baydonhill in 2013. That has helped it attract clients outside of financial services, who are applying its technology to areas such as mobile wallets and e-commerce. It’s also expanding internationally; recently acquired ASPone has deepened its local knowledge and foothold in Asia, and it raised £26.6m through a share placing in September to fund expansion into India and other regional markets.

Earthport’s shares have more than doubled since our buy tip (22p, 18 Jul 2013) to 45p. Robust earnings forecasts, validation from blue-chip clients and its innovative technology continue to underpin our bullish stance. Buy. TM

 

64. MAJESTIC WINE

Poor old Majestic Wine (MJW) must be feeling slightly corked. We changed our view on the shares in mid-January to a ‘hold’ after the vintner reported relatively good Christmas sales, but warned that profits would be lower because it had to cut prices to compete in a cut-throat market. That led to widespread downgrades – by as much as

6 per cent. Recently, long-standing chief executive Steve Lewis unexpectedly stepped down, too. The dividend has also been axed until further notice. So, without the support of a juicy yield, and with the low debt position scuppered and the recent management shake-up, we’re cautious.

But Majestic has announced it is to acquire online wine business Naked Wines for £70m – funded by a combination of debt and equity – and Rowan Gormley, founder and chief executive of Naked Wines, is to become chief executive of the enlarged group. Management says the two businesses complement each other: Naked’s online and e-commerce skills are a good fit for Majestic’s national store network, while the transaction also opens up international growth opportunities. However, Naked Wines reported a £3.3m cash profit loss last year, despite reaping sales of £74m. So while Majestic has a good niche in the wine market, offers great service and boasts well-invested operations, we remain holders until we see further details of what benefits this acquisition might bring. Hold. JB

 

63. ARBUTHNOT BANKING

The oddity with Arbuthnot Banking Group (ARBB) is how its 52 per cent stake in subsidiary Secure Trust Bank (STB) – which it spun out in a public offering in 2011 – is worth more than the group’s market cap. The lender, which has focused its business on personal, motor and retail finance, provides the vast majority of group earnings, and grew pre-tax profits by 53 per cent last year. Its smaller sibling is Arbuthnot Latham Private Banking, which includes wealth planning and investment management services.

Times are good for both these areas of operations. The benign credit environment is encouraging borrowers for Secure Trust – retail banking customer numbers increased 22 per cent between 2013 and 2014. In private banking, assets under management grew by just over a quarter to £666m at the year-end, while customer lending balances were up more than half. Secure Trust is set to benefit from the lift-off of its asset financing division, where it should benefit from the recovery among smaller companies that has lifted contemporaries such as Close Brothers (CBG). And the clever way for investors to profit from the growth at Secure Trust is through Arbuthnot. Despite a strong six months for Arbuthnot’s shares, they only trade at 15 times S&P Capital IQ consensus forward earnings, giving them room to grow. Buy. IS

 

62. MANX TELECOM

Shares in Manx Telecom (MANX) have done very well since the company’s private-equity-backed flotation in February 2014, rising by 31 per cent to 186p. However, in its drive to expand the business, previous owners Hg Capital also left the company with a sizeable debt pile, equivalent to four times 2014 earnings.

What Manx has in its favour is a captive market, to put it mildly. The company is the primary provider of broadband and telecommunications on the Isle of Man, controlling three-quarters of the island’s network. This year’s big focus is on 4G services for its pay-as-you-go mobile customers, which it can now offer to 99 per cent of the island’s population. The signs have been positive so far: since January the vast majority of Manx’s pay-monthly customers have already switched to 4G. Another challenge for the group in 2015 involves replacing long-serving chief executive Mike Dee, who is set to step down later this year.

At 15 times forward earnings the shares look like good value for the telecoms sector, but given that debt repayments are likely to chip away at earnings, it’s hard to see a continuation of the momentum they’ve shown thus far. Hold. AN

 

61. SCAPA

Boss Heejae Chae’s pledge to reduce the cyclicality of tapes and adhesive company Scapa (SCPA) has richly rewarded investors who followed our buy advice back in 2011. Shares rose 181 per cent on that call as the manufacturer of bonding tapes for automotive, medical, industrials and electronic sectors transformed a self-help story into a real growth play.

The group remains on track to achieve double-digit margins, while sales continue to rocket as it builds a footprint in lucrative healthcare markets. March’s acquisition of UK-based designer-manufacturer of wound dressings First Water certainly won over the City as its R&D and innovation capabilities provide Scapa with a unique one-stop solution for customers. Despite that acquisition, however, management expects net debt to be about £3.4m for the full financial year, thanks to successful working capital controls and strong cash generation. That news was presented in the group’s third upgrade of the year, along with further reports of strong trading and the potential closure of an industrial manufacturing site in Switzerland.

Full-year results, due in May, will also be lifted by the appreciation of the US dollar. The lion’s share of Scapa’s sales is generated abroad, meaning the previous strength of sterling somewhat overshadowed the group’s progress. But a forward PE ratio of 20 suggests this potential is priced in for now. Hold. DL

  

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60-51: Faroe Petroleum to Telford Homes