The Aim 100 2015: 80-71

Despite this spending spree, Horizon said it could still finish the financial year with £12m in the bank – not too shabby for a small healthcare services outfit. Final results out this week revealed that the company had outperformed expectations, with full-year revenues rising to £11.9m, 8 per cent ahead of consensus estimates. This is down to growing demand for Horizon’s products and doesn’t include £158m in milestone payments which could be earned in coming years. We advised buying the shares at 160p after a post-IPO dip, giving any investors who followed that advice a 30 per cent return on the bounce back to 215p. Buy. HR

79. FW THORPE

The increasing popularity of high-margin light emitting diode (LED) technology continues to be a major bull point for FW Thorpe (TFW). Management at the designer, manufacturer and supplier of professional lighting systems responded to a steady shift away from less efficient traditional fluorescent lights by doubling LED production capacity. It also disposed of its underperforming decorative and heritage lighting asset, Sugg. LEDs now account for two-thirds more of group sales than last year – 58 per cent of the total – helping to drive operating profits up 8 per cent to £5.5m in the six months of trading to 31 December 2014.

Equally pleasing is the group’s push into overseas markets. Earlier in the month, FW Thorpe confirmed the acquisition of Dutch specialist lighting firm Lightronics, which offers exposure to healthier northern European markets and a growing product range including modern street lighting, control systems and outdoor wall and ceiling luminaires. What could deter investors, however, is the punchy historic rating of 18 times. That may be less than main-market peer Dialight, but is still a lot to pay considering the question marks that continue to surround the group’s liquidity – more than half the shares are owned by the Thorpe family. Hold. DL

78. RM2 INTERNATIONAL

Shares in our high-risk speculative buy tip RM2 International (RM2) are down 13 per cent on their January 2014 listed price of 88p as the composite pallet specialist felt the strain of expanding production. Moving into a new facility has been holding back output, yet the group, which makes and hires out super-strong composite pallets used to shift consumer goods, food and drugs around the globe, still displays plenty of long-term potential.

An operational update at the end of 2014 revealed a number of long-term scalable contracts with customers, including a “substantial” US print and related services provider. The group’s plans to increase capacity at its new Canadian facility are progressing well, too, with 26 pultrusion machines installed and capable of assembling at least 4m BLOCKPal pallets per year. Management reckons that ought to cater to growing global demand, while pointing out that its revolutionary pallet design has now been officially declared environmentally friendly. By using BLOCKPal companies can reduce their carbon footprint, which should give RM2 an important competitive advantage over peers.

In fact, the group’s bosses are so bullish that they keep buying more shares. Chief executive John Walsh added to his growing tally with a further £1.2m share purchase in April, following similar moves from a star-studded board that includes chairman Ian Molson, a scion of Canada’s Molson family, and former bosses from Marks and Spencer and Diageo. Star fund manager Neil Woodford has been getting in on the act, too, having upped his stake to about 11 per cent at the beginning of the year. It could be a while before the group breaks even, but we remain bullish on RM2’s long-term prospects. Buy. DL

77. ROCKHOPPER EXPLORATION

There was good news for Rockhopper Exploration (RKH) in the early part of this month with an oil strike recorded at the first of the six wells targeting the Zebedee prospect in the North Falklands Basin. Wireline logging processes and formation test data indicates an oil-bearing interval of 27.9 metres at the well. Zebedee, in which Rockhopper holds a 24 per cent interest, is the initial target in a multi-well exploration campaign in the region that could potentially unlock a mid-range estimate of 568m barrels – 157m of which would be net to Rockhopper.

In addition to Zebedee, drilling will take place at the Isobel Deep, Jayne East and Chatham prospects through to the end of August 2015. Rockhopper’s exposure to exploration costs on this year’s programme will be limited due to an existing farm-out agreement with Premier Oil (PMO). Each well in the campaign will cost an estimated $50m (£34m), but the company will only have to commit around $25m in aggregate.

Further ahead, both Rockhopper and Premier will move towards commercialisation of the Sea Lion discovery in the Falklands. Rockhopper will fund its own share of pre-sanction costs for the project, although, once it reaches the development stage, Rockhopper will be able to utilise a substantial cost carry for the initial phase. There is no shortage of challenges facing the UK drillers in the South Atlantic, but we think a speculative buy call isn’t overly fanciful where Rockhopper is concerned, particularly in light of its reduced capital commitments. Buy. MR

76. SQS SOFTWARE QUALITY SOLUTIONS

SQS (SQS) had a great 2014, underpinned by a 52 per cent hike in adjusted pre-tax profits to €18.8m (£13.7m). Trading at the Cologne-based software developer, which focuses on large long-term contracts for blue-chips, was buoyed by several new contracts and contract extensions worth a combined €55m. In the process, it paid down its debts, widened profit margins and grew the order backlog.

The integration of Thinksoft – the business it acquired in late 2013 – is now complete, and contributed €26m to revenue growth last year. A significant portion of this came from North America, where SQS has identified “a number of growth opportunities”. However, Europe – where SQS does 90 per cent of its business – is more likely to see growth in the nearer term. In February the company acquired Italian-headquartered testing services and systems analysis group Bit Media for €6m. With a secure order book of €32.9m over the next three years, and pre-tax profits of €1.1m last year, this looks like a good deal, especially once the potential for cross-selling is factored in.

Broker Panmure Gordon has forecast pre-tax profits of €22.6m, and EPS of 48.5¢ for 2015. At 603p, the shares therefore still trade on 17 times forward earnings, which isn’t expensive by the standards of most software companies. Buy. AN

75. TUNGSTEN CORP

Tungsten Corp (TUNG) is trying to profit from the move to paperless commerce, providing electric invoicing for buyers and suppliers. If that sounds good on paper, investors certainly thought so, with £160m raised at its flotation in October 2013.

But a concerted short-selling campaign has given its shares a torrid six months. The bearish sentiment focused partly on concerns that the company is spending more cash than it generates – following cash and equity-fuelled acquisitions of OB10, which became Tungsten Network, and FIBI Bank, now called Tungsten Bank. However, a healthy £734,000 investment by chief executive Edmund Truell last month has pushed its shares up by a quarter.

Whether you buy this company comes down to whether you accept its argument about the potential size of its revenues. Its interim report in January said that the annual value of the invoices on its network, once fully approved, would be $2.7 trillion (£1.8 trillion), which represents only 12 per cent of all globally traded goods and commercial services. Even if these numbers tend to the grandiose, we think the market has been a little tough on the company’s necessary investment outlay, and the shares should yet recover further. Buy. IS

74. SINCLAIR IS PHARMA

The future of dermatology-specialist Sinclair IS Pharma (SPH) is still unclear. At the last results announcement in February management said it wanted to sell “all or part” of the company this year, either through a formal merger or acquisition, or a licensing partnership. An offer period – which started at the end of November – was extended so bosses could find a suitable “form of co-operation”. Equally, the board has insisted the company is in good enough shape to run independently until a deal is struck. Regardless, speculation over what might happen has driven the share price to a three-year high.

In the meantime, Sinclair has some operational issues to grapple with. Regulatory delays in Russia mean the company hasn’t been able to launch its Silhouette brand there, and a weak euro won’t help a company that gathers two-thirds of its income in that currency. The devaluation of the rouble could also hurt international sales – which account for nearly half of group revenues – in the second half. The group also has some ground to make up after acquisition costs, roughly £7.7m with other one-off charges, brought pre-tax losses up to £10.8m at the half-way stage in December 2014 (compared to losses of £2m in 2013). Hold. HR

73. VELOCYS

Velocys (VLS), formerly Oxford Catalysts, has pioneered a way of commercialising smaller-scale gas-to-liquid (GTL) production for waste management firms and natural gas producers. It essentially enables end users to convert landfill (biomass) emissions and natural gas into valuable, drop-in liquid fuels. 2015 promises to be a watershed year. The company, which has also developed a range of specialist biomass-to-liquids (BTL) applications, is set to open its first commercial plant using its proprietary technology. Once construction is completed at the Oklahoma-based plant it will proceed through to first liquid delivery in 2016. The complex is being developed through a joint venture involving Waste Management, NRG Energy and Ventech.

The opening of the complex follows 15 years of development, involving over $300m (£201m) of investment. Importantly, the strength of Velocys’ intellectual property base was brought home last year when it successfully brought an infringement claim against Abingdon-based rival CompactGTL. The High Court legal ruling sent out a positive signal to the market, providing reassurance over the legal status of Velocys’ substantial patent portfolio. Velocys is a technological leader in a largely untapped area of the global energy market. In many respects, Aim-traded Velocys represents the archetypal company for which London’s junior market was conceived – or at least it should be. Buy. MR

72. VERTU MOTORS

March marked the highest monthly level of new car sales in the UK since the turn of the century. So it would stand to reason that the chief executives of the nation’s car retailers must be feeling pretty positive. Robert Forrester, the boss at Vertu Motors (VTU), is certainly confident. He expects the group to report record sales and profits when it unveils its full-year results to February next month.

Mr Forrester runs a tight ship, with a heavy focus on customer service. Vertu is also a big player in this fragmented industry and has the spare cash to snap up smaller businesses. That’s not only a good commercial strategy, but it builds vital scale in a sector where margins are wafer thin. A preference for newer fuel-efficient cars by customers, combined with continuing economic recovery, strong sterling and cheap financing deals have and will continue to drive the new car market, and that bodes well for Vertu.

However, there are reasons to be cautious. Growth will slow this year and Vertu has already reported that trading conditions are tightening. There has been more margin pressure, too, in the second half, as manufacturers push to get volumes through. That leaves us comfortable with our hold recommendation. Hold. JB

71. OAKLEY CAPITAL INVESTMENTS

Oakley Capital Investments (OCL) received a fillip in March when it raised £130m from institutional investors in order to fund co-investment opportunities, where it invests alongside limited partnerships. These structures have become popular among institutional investors as a way to reduce fees and build relationships with investment partners, but have long been employed by the Bermuda-based company.

Oakley has worked to build a diversified portfolio of private UK and European businesses, sized between £20m and £150m, where it looks to create shareholder value via methods including restructurings and development capital. The company has managed these holdings well, exiting four holdings during 2013 for aggregate proceeds of £33m and an internal rate of return of 43 per cent, as Simon Thompson highlighted in his buy advice last year. At the end of the year Oakley closed its second fund at €524m (£379m) and has already made five investments, from Italy’s largest car insurance broker, Facile, to German online dating agency Parship. But the share price recovery since the beginning of this year has cut the discount to net asset value to 12 per cent, and the buy argument has lost some of its lustre. Hold. IS

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