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The Aim 100 2015: 100-91

In the first 10-company segment of our analysis of Aim's top 100 companies, we give our verdict on Ithaca Energy, Tissue Regenix, Hargreaves Services, Utilitywise, Jelf, Sprue Aegis, Dolphin Capital, Conygar, Plexus, DX Group
April 17, 2015

100. ITHACA ENERGY

Few North Sea drillers could have experienced a more troubling year than Ithaca Energy (IAE). The company’s share price has lost nearly 70 per cent of its value over the past 12 months due to plummeting crude oil prices and delays to a modification programme on its FPF-1 floating production facility. These delays have pushed back first oil from the Greater Stella offshore hub - Ithaca’s key expansion project - but Greater Stella will eventually add around 16,000 barrels a day (bopd) to production. This year, Ithaca hopes to average around 12,000 bopd, so the step up in scale is obvious.

The good news for shareholders is that the effects of the oil price slump should be mitigated by Ithaca’s aggressive hedging policy. Some 8,500 bopd have been hedged at $91 (£61) a barrel through to June 2016, while another 4,000 bopd have been covered at $69 a barrel until June 2017. And the fallaway in oil prices has at least contributed to a significant decline in operating costs. Despite taking a heavy write-down on the oil price, Ithaca produced underlying cash flow of $182m in 2014 and is fully funded through to first production at Greater Stella.

Ithaca’s shares trade at a 76 per cent discount to broker Westhouse’s sum-of-the-parts valuation of 176p a share. Even if you decide to eschew North Sea plays at the moment, it’s likely that some of the big industry players are looking to snap up assets at knockdown prices. Buy. MR

 

99. TISSUE REGENIX

You could say Tissue Regenix (TRX) is a classic Aim-traded, blue-sky story. The medical devices outfit successfully launched its DermaPure product - aimed at treating chronic wounds - in the US last year. Accordingly, its share price soared 150 per cent in the nine months to May 2014. That left the company well on the way to targeting the skin-substitutes market, estimated to be worth roughly $1.4bn (£867m).

But the share price has halved since then, and the group went through with an equity placing at the start of 2015 to raise another £20m. It’s thought the proceeds will go towards the development and launch of Tissue Regenix’s human meniscus and human ligament products, the expansion of the direct salesforce for DermaPure and the continued development and commercialisation of the company’s porcine-derived products.

Analysts at Jefferies expect TRX’s meniscus products - for knee cartilage injuries - to launch in the US and Europe by 2017, with sales of $5.6m in the first year and $19.4m in the second year. Roughly 1.5m people a year in Europe and the US are affected by knee injuries. But, until then, the company will have to rely on sales of DermaPure and even further equity fundraisings to fund its clinical programme. Buy. HR

 

98. HARGREAVES SERVICES

The weakening oil and gas industry pulled down coal prices with it last year. Naturally UK coal miner Hargreaves Services (HSP) faced challenging trading conditions in 2014. In the six months to December pre-tax profits fell by a third to £20.3m. And the pressure looks set to continue this year and into 2016.

Hargreaves Services has four trading divisions. Its production business, which comprises surface mines in Scotland and South Wales, and its energy and commodities business, which imports coal and sells it on to the UK’s power generators, account for the lion’s share of revenue. Management spent the past 12 months cost-cutting and sold off its Imperial Tankers business, with the profits used to reduce net debt by 58 per cent.

However, in response to coal prices falling to a 10-year low at the start of 2015, management has decided to carry out a second phase of the group’s simplification programme in 2015. Its commodities and production divisions will be merged to become a coal production and distribution division managed by a single team.

While deputy group finance director Danny Tobin says its much-reduced debt and increased cash balance mean the group is “placed in a very strong position to benefit from a coal price recovery”, the short-term outlook for coal looks dismal. Broker N+1 Singer has reduced its pre-tax profits forecast for 2015 and 2016 to £42.9m and £20.1m, respectively. Sell. EP

 

97. UTILITYWISE

Shares in smart-metering provider Utilitywise (UTW) - which advises businesses on how to save money on energy bills - have fallen by around a third over the past 12 months, alongside the wider fall in energy prices. This means the shares are now trading on 11 times forward earnings. However, with broker FinnCap forecasting that adjusted pre-tax profits will double by 2016, we believe this is too cheap.

In the latter half of 2014 the group temporarily shifted the focus of its core enterprise division, which caters to smaller businesses, to renewing and extending energy contracts for its existing customers. This was in order to capitalise on the introduction of longer-term energy supply contracts by some energy suppliers to lock in current low prices. As anticipated, this meant its revenue pipeline was down almost a fifth to £23.5m compared with six months earlier. This has not affected revenue or profitability during the first half.

Management said it is focusing on new customer wins during the second half of the year. The group’s enterprise division has doubled its client base to roughly 20,000 since its flotation on Aim in June 2012, yet its market penetration is still in the low single digits. The prospect of rising energy bills over the longer term means there is ample opportunity for the group to take advantage of this highly fragmented market. Analysts at FinnCap have set a target price of 400p, almost double what the shares are currently trading at. Buy. EP

 

96. JELF

Jelf Group (JLF) is first and foremost an insurance broker and corporate adviser for small and medium-sized enterprises (SMEs), but it also provides personal insurance and financial planning. Until the financial crisis put paid to its ambitions, its strategy was to build its business by acquiring independent rivals, financed by a fair amount of debt. As the company has emerged from the crisis, and improved its debt structure, it has been on a modest buying spree, picking up smaller brokers and loss adjusters, the latest being Hamilton Bond, which it purchased in March 2015.

The market for insurance premiums is pretty flat, which drags on Jelf’s prospects. But the company is essentially a play on the SME revival - the company’s management sees its area of operations as “Middle England”. Here it is set to benefit from the recovery of smaller companies: as they grow profits and add new assets or open new offices they should need more insurance.

There is market speculation that Jelf could be picked off by some of the bigger players, but management is bullish that it will be the one doing any acquiring. Pension reforms both allowing greater flexibility at retirement and forcing SMEs to offer pension schemes should boost the company’s employee benefits business, but this will take time to feed through. Shares are up 42 per cent since the beginning of December 2014 and trade at a reasonable 16.5 times Bloomberg consensus forward earnings. Hold. IS

 

95. SPRUE AEGIS

Sprue Aegis (SPRP), the self-professed manufacturer of products that “save lives” - sold under the FireAngel, First Alert, BRK and Dicon brands - has been reaping the benefits of legislation requiring the installation of smoke detectors in houses in countries including France and Germany. That’s driven a significant order pipeline and record sales in Europe for the maker of home safety products.

But eurozone currency weakness could hit revenues in the coming year. This factor, coupled with additional shares in issue following the 2014 fundraising, means broker Westhouse Securities expects adjusted EPS figures to be flat in the year ahead at 20.2p, before rising a quarter in 2016 to 25.2p.

Although demand from France is expected to moderate towards the end of 2015, a replacement cycle in Germany is expected to compensate - it has now been 10 years since smoke detector legislation was passed there.

The launch of a new UK trade range is also encouraging. Management has been enhancing its domestic sales capabilities as it prepares to launch a raft of technologies with features such as carbon neutrality, AC powered wireless connection and smaller carbon monoxide products into a market it has yet to fully penetrate.

Sprue’s recently appointed chief executive, meanwhile, should have the expertise to drive the company forward into its next growth phase. Neil Smith, who previously worked for household names such as Kingfisher, Halfords and Boots, has extensive knowledge of Far East sourcing, brand development and international retailing. Buy. DL

 

94. DOLPHIN CAPITAL

Dolphin Capital (DCI) remains asset rich but income poor as it progresses with developing waterfront projects, predominantly in Greece, Cyprus, Croatia and Turkey. The financial crisis in Greece certainly hasn’t helped, and goes some way towards explaining why the shares are trading at a little over a quarter of net asset value. Crystallising the value locked in its development arm remains a lengthy process; meanwhile, the company has recently announced that it will streamline its development plans, monetise non-core assets and improve the alignment of interest between the investment manager and shareholders. This is designed to narrow the price discount to net asset value, but the process is likely to take some time.

On the financial side, the last reported accounts revealed a net asset value of €638m (£468m) and total debt of €169m, giving a comfortable loan-to-value ratio of 19 per cent. Last year, we identified Dolphin Capital as a high-risk speculative buy, and the trading environment and lack of real progress in crystallising the development arm has pulled the shares down a third. The investment case still stands, though, and progress to reduce the discount to NAV may now accelerate. But until there are signs of this, the shares remain a highly speculative buy. JC

 

93. CONYGAR

The property boom has well and truly percolated out of London and the prosperous south-east of England. But has it reached as far as Wales? Property developer Conygar (CIC) is well placed to benefit if it has, and a 13 per cent increase in book value in the year to last September suggests that interest in regional property assets is growing quickly now.

Conygar specialises in bringing land through the planning process and selling it off in parcels to retailers and housebuilders. This is where the hidden value is; a 93-acre site at Haverfordwest, for example, is on the books valued at £17.2m, but a 10-acre chunk sold to J Sainsbury fetched five times the book value. Following completion of infrastructure work, Conygar will be marketing the residential land on the site, and already has planning consent to build 729 houses.

At Holyhead, the gateway to Ireland and an area ripe for redevelopment, planning consent has been secured that could accommodate 326 waterfront apartments, a 500-berth marina and 50,000 square feet of retail and leisure space. All of this is on the books valued at just £10m. The shares are modestly ahead of our buy tip (180p, 5 December 2014), but trade at a significant discount to a very conservative book value. Given the locked-in value, that looks unjustified. Buy. JC

 

92. PLEXUS

As another one of Aim’s stronger innovation plays, Plexus Holdings’ (POS) proprietary POS-GRIP wellhead systems can accurately be described as disruptive technology. Its latest product variants, which are being developed alongside oil industry heavyweights, are targeted at the markets for subsea and high-pressure or high-temperature drilling - two growth areas of the global energy mix. Commercialisation of these areas is expected to gain momentum through 2015.

The Plexus offering is unique, but the company operates in an industry that is surprisingly slow at adopting new technologies. Nevertheless, it recently entered into a highly promising Framework Agreement with Yantai Jereh Oilfield Services, a major Chinese oil services provider, whereby the two parties will work together to formalise a binding licensing agreement to enable Jereh to manufacture and sell Plexus’ wellhead equipment to the Chinese and wider Asian oil and gas markets. That came on the heels of another deal with Centrica Energy, which will see the utilisation of Plexus’ new product, POS-SET Connector, in a previously abandoned well of Centrica’s. This is again highly significant given the size of the oil and gas decommissioning market. In a post-Macondo world, it’s hard to believe that the enhanced safety and commercial benefits of Plexus’ product offering won’t achieve critical mass. The shares are highly rated and with good reason. Buy. MR

 

91. DX GROUP

Shares in DX Group (DX) have endured a rocky ride since the logistic operator listed in February 2014 at 100p. Although earnings have largely been in line with consensus expectations, the struggles of peers such as Royal Mail and UK Mail, triggered by pricing pressures in a declining UK parcels market, have weighed on sentiment.

But while letter delivery and document exchange services are falling out of favour, work behind the scenes at DX shows that these issues are being addressed. For example, the group is midway through its ‘OneDX’ integration and investment plan designed to better integrate operations and develop more services in faster-growing niches such as last-mile city delivery. Money has been poured into improving operational efficiency, too, namely by upgrading IT facilities and investing in the group’s distribution network.

Activities such as shedding unprofitable freight activities have already helped to lift margins to about 11 per cent. Analysts at Cantor Fitzgerald are bullish that they will continue to widen as the benefits of ‘OneDX’ trickle through, and also note that a strong balance sheet creates plenty of headroom for more earnings-enhancing acquisitions.

Moreover, despite some heavy investment to improve the business, free cash generation has been so strong that DX is expected to treble the dividend to 6p. At the current depressed share price of 82p, that gives a whopping yield of 7.1 per cent with cover of 1.9 times. The shares, meanwhile, trade at a hefty discount to peers on just seven times 2015 earnings. Buy. DL

 

Back to introduction

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