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The Aim 100 2015: 90-81

In the second 10-company segment of our analysis of Aim's top 100 companies, we give our verdict on Fusionex International, Regenersis, Greenko, Falkland Oil & Gas, Personal Group, Retroscreen Virology, Renew Holdings, Gooch & Housego, Sirius Minerals and Central Asia Metals
April 17, 2015

90. FUSIONEX INTERNATIONAL

Organisations of all kinds are waking up to the value of the vast amount of information generated by computers and social media. The likes of Ford, Shell and Air France have turned to Fusionex International (FXI), which develops easy-to-use software that enables them to capture, analyse and garner insight from all kinds of data.

The Malaysia-based group has shifted from a licensing-and-maintenance model to multi-year subscriptions, sacrificing some short-term sales growth in favour of improved revenue visibility and lower upfront costs for customers. Robust demand in the core Asia Pacific region last year fuelled a 15 per cent increase in adjusted cash profits to about RM26m (£4.8m).

Fusionex has already inked 21 contracts for its flagship ‘big data’ offering, GIANT, since launching it in early 2014; it aims to reach 90 by end-September 2016. Its rapid adoption reflects platform improvements and partnerships with half-a-dozen leading US vendors, including Microsoft-owned Revolution Analytics.

Fusionex looks poised to profit from the explosive growth of big data. Its shares have slumped by more than a third in the past year to 362p, or 37 times forecast earnings for 2015, which prices in its prospects for now. Hold. TM

 

89. REGENERSIS

Consumer electronics repair specialist Regenersis (RGS) has enjoyed rapid growth over the past four years, thanks to the proliferation of consumer electronic devices. While its cost base has also been growing, management is pursuing higher-margin work and shedding lower-return operations.

This means growing its software and advanced solutions business. This division includes a set-top box diagnostics business and a smartphone repair business. Last year, the division acquired data erasure business Blancco, financed via a placing and leaving the balance sheet solid. The full effects of this will feed through in 2015, but the half-year figures already revealed an impressive 89 per cent uplift in headline profits on a constant currency basis.

Management expects the group’s depot solution business, which provides electronic repair services globally, to build on the steady growth it achieved during the first half. It has opened up new facilities during that time, including in Lisbon and Moscow. Chief executive Matthew Peacock expects “double-digit” revenue growth this year.

Broker Equity Development expects adjusted EPS for 2015 to grow 12 per cent to 18.1p. The share price has dropped dramatically since the company’s 2014 full-year results were reported in September and the shares are now trading on just 12 times forward earnings. However this sell-off may be down to the recent acquisition and restructuring-related costs in the full-year figures. Considering the growth profile of its advanced solutions business, the shares look attractively priced. Buy. EP

 

88. GREENKO

The gulf between demand and reliable supply of power in India provides fertile ground for renewable energy provider Greenko (GKO). The group generates wind and hydro power and last month management revealed that an increase in operating capacity of almost half, to 715MW, helped push operating profits up three-quarters to $64m, with the group outperforming the entire previous financial year in just nine months.

At 90p, the shares are down significantly on our longstanding buy tip, when shares were priced at 170p. This is potentially down to the much-reduced price of coal. However we think the group’s commitment to boosting its operating capacity, combined with India’s thirst for energy, merits long-term investment in the group. Management has set a target of 1,000MW of capacity by the end of 2015. And reduced borrowing costs and improved debt repayment should free up cash to drive future growth. The group has 362MW of wind and 188MW of hydro projects under construction and a further 1,350MW of new projects in development stage. Greenko’s shares are trading on just eight times forward earnings. Broker Arden Partners expects adjusted EPS to double this year to 11.6¢ and increase again to ¢15.4 in 2016. This looks like a good value buy for investors willing to take a longer-term view on Indian power demand. Buy. EP

 

87. FALKLAND OIL & GAS

Like its UK peers (and partners) in the South Atlantic, Falkland Oil & Gas (FOGL) will be keenly anticipating the results of a busy drilling campaign in the contested waters this year. Confidence is high on the back of separate technical surveys of the company’s northern-area licences, covering over 12,000 square kilometres of 3D seismic work. FOGL has a strong footprint in the region following a deal involving the integration of the assets of Desire Petroleum. The deal made FOGL the only explorer with assets in both the southern and northern offshore basins. FOGL has a 40 per cent stake in the Zebedee prospect, which recently delivered positive drilling results, including identification of an oil-bearing interval of 27.9 metres.

More drill results should follow shortly, as the Isobel Deep exploration well was recently brought into play by Premier Oil (PMO) as operator. Again, the well is located within the PL004a licence, in which FOGL holds a 40 per cent share. The Isobel/Elaine complex is estimated to contain an un-risked mid-point resource of 243m barrels, 97m barrels of which is net to FOGL. The recent drill-work in the region has generated a predictable response from Argentina’s government, but political and execution risks in the region have been well documented. For now, FOGL shareholders can look forward to further delineation on prospects for the PL004a licence. Hold. MR

 

86. PERSONAL GROUP

Personal Group (PGH) has been reshaping itself over the past few years and it’s now all starting to come together. The core business comprises benefit plans for blue-collar workers for such things as death benefit, convalescence and hospital cash. The company has some big-name clients, including Network Rail and Go-Ahead Group, and last year it bought employee benefits specialist Lets Connect, which is already performing ahead of expectations. It has also designed a digital employee benefits platform called Zeus, and this will act as a channel to provide incremental services, as well as making it possible to integrate with internal customer systems, such as payroll.

There is also a card-tethering technology system. This takes details of a person’s bank card, enabling the individual to claim cash-back savings from discounts they are entitled to from their employee benefits plan. The potential for cross-selling among the different services on offer is considerable. We like the company. The business model is highly cash-generative, with recurring income as high as 80 per cent, while cash margins exceed 30 per cent. However, trading on 18 times forecast earnings doesn’t provide the ideal entry point. Hold. JC

 

85. RETROSCREEN VIROLOGY

It’s been difficult to map out the effect of last year’s Ebola crisis on London’s healthcare companies. But it seems RetroScreen Virology (RVG) – which runs clinical tests for new drugs on behalf of third-party clients – has been one such casualty. The share price has collapsed by more than a quarter since last summer after a number of pharmaceutical customers put their influenza and antiviral work on hold to divert research teams to look at Ebola vaccines and treatments. Traditionally, RetroScreen has specialised in respiratory work.

The effects of Ebola have continued into the first half of 2015 and, although these delays are abating, the company said sluggish demand for its services meant the number of trials in 2015 would run at a similar level to 2014. For the 2014 financial year, the group hopes to report sales of £18m and a cash balance of no less than £50m. Gross margins should stay stable at 25 per cent.

For now, the company is focusing on its own internal research and development (R&D) work. An update on its first influenza product is due any day, and it has already started to design a new model for the treatment of chronic obstructive pulmonary disease (COPD). Hold. HR

 

84. RENEW HOLDINGS

Earlier this month engineering group Renew Holdings (RNWH) announced that trading for the first half of 2015 would be ahead of the previous year, that its order book would be up and that net debt would be reduced. This built on record full-year results for its September year-end. The shares are 99 per cent up on our original buy tip. Yet its rapidly expanding order book and value-adding acquisitions – which have generated 64 per cent of revenue growth between 2009 and 2014 – makes us think there is more upside to come.

The Leeds-based group has profited from its shift away from construction markets and towards higher-margin engineering services. Last year, it acquired wireless infrastructure group Clarke Telecom and Forefront Group, which provides engineering services to the gas infrastructure market.

The group provides essential maintenance work and renewal of assets to highly regulated areas, a market that offers high barriers to entry. This means much of its work – around 80 per cent last year – is secured via frameworks and limits the competitive environment. In particular the group has expanded its footprint in the nuclear and railway sectors. Network Rail, for example, has appointed Renew’s AMCO Rail subsidiary to work on seven infrastructure frameworks, with an advertised value of £450m over the next five years. Analysts at Numis have set a target price of 335p for the shares, which are currently priced at 239p. Buy. EP

 

83. GOOCH & HOUSEGO

Subdued trading conditions in its core industrial markets spurred Gooch & Housego (GHH) into cutting costs and acquiring businesses in a drive to move up the value chain and branch out into higher-growth areas such as aerospace and life sciences. Those measures helped the manufacturer of photonic systems, components and instrumentation overcome the adverse effect of a strong pound to post sales and profit growth last year. Management recently told us that the closure of surplus facilities is now complete, yet analysts still think further operational efficiencies will widen adjusted profit margins by an extra three percentage points to 20 per cent.

New product launches and sprouting exposure to burgeoning markets will be key to this improvement. Adding value, too, is a factor that continues to stand out, as Gooch’s move to supply easier-to-install integrated subsystems has been a hit with the group’s growing customer base. Investors will also be encouraged by the engineer’s strong cash generation and balance sheet. That offers scope for further bolt-on-acquisitions after a successful 2014 in which new arrivals such as specialist lens manufacturer Spanoptic contributed 10 per cent of the group’s overall growth. Site rationalisation charges should ease, too, although the potential of a fitter and leaner Gooch & Housego hasn’t gone unnoticed – at 650p, the shares now trade on a punchy 18 times forward earnings. Hold. DL

 

82. SIRIUS MINERALS

Sirius Minerals (SXX) has proved to be a source of consternation for IC writers. The company is looking to develop a large-scale potash industry in North Yorkshire through the York Potash Project. It is attempting to establish a commercial market for polyhalite, a naturally occurring mineral that contains four of the six macro-nutrients required for plant growth. A number of off-take agreements have already been made in relation to the planned annual output of 13m tonnes. And the efficacy of the polyhalite product has also been successfully established through an independent global crop study programme; the latest testing revealed significant yield increases in potato cropping.

There are genuine reasons to think that any eventual output from York Potash could find a ready market. Unfortunately, the proposed development has become bogged down in regulatory issues, which have also proved a major drain on the group’s cash resources. At the moment, planning applications for the mine and mineral transport system and the materials handling facility are being assessed by regional authorities, with decisions on both applications expected by mid 2015. The group’s share price has ticked up since March, when Sirius announced it would raise new equity. But the group continues to burn cash and, even if York Potash receives necessary approvals, it won’t generate any revenues for years. The best shareholders can hope for is a post-approval asset sale; but the prudent course of action would be to ditch the shares. Sell. MR

 

81. CENTRAL ASIA METALS

Central Asia Metals (CAML) is a copper, precious and base metals company operating in Kazakhstan and Mongolia. The miner recently garnered a number of institutional buy recommendations following release of full-year figures that detailed rising production at the group’s Kounrad copper project in Kazakhstan, along with a one-third uplift in operating profits. The result was all the more impressive considering copper prices averaged $6,794 (£4,560) a tonne last year, compared with $7,114 a tonne in 2013.

Although copper prices have been volatile over the past year, Central Asia is a low-cost producer. To an extent, this insulates its shareholders from the vagaries of commodity markets. Central Asia gained full control of Kounrad in May after it secured the outstanding 40 per cent stake in the project from Kazakh businessman Kenges Rakishev. But the company is looking to expand its operations elsewhere; this includes plans to complete a preliminary feasibility study for the Copper Bay project in Chile. Even though Central Asia’s shares were marked up on release of its full-year metrics, they still yield in the region of 7 per cent. And the company’s policy is to return a minimum of 20 per cent of revenues from Kounrad to shareholders. A frontier income option if ever there was one – buy. MR

  

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