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The Aim 100 2015: 60-51

In the fourth 10-company segment of our analysis of Aim's top 100 companies, we give our verdict on Faroe Petroleum, GB Group, Benchmark Holdings, Pan African Resources, iomart, Nanoco, Johnson Service, MP Evans, Pacific Alliance China Land and Telford Homes
April 17, 2015

60. FAROE PETROLEUM

Faroe Petroleum (FPM) booked a £38.5m impairment charge and £132m in exploration write-offs at the full-year mark, although the consequent earnings fall was mitigated by a hefty tax credit.

But there has been a raft of write-downs on North Sea assets in recent months, and Faroe’s non-cash charges are of secondary importance to a highly prospective exploration programme in 2015. This year, Faroe is moving ahead with a fully funded four-well campaign in Norwegian waters. Hopes are high following last year’s exploration success at the Pil and Bue wells. The driller will be able to mitigate its capital commitments through the petro-state’s 78 per cent exploration tax rebate. The company expects pre-tax exploration and appraisal capital expenditure for 2015 of about £100m. Faroe had around £33m in cash at the year-end, so shareholders needn’t fret unduly over the balance sheet.

In terms of production, the company is reasonably well insulated against the prevailing weakness in oil prices, as 58 per cent of its output in 2015 has been hedged at $89 a barrel for oil and 50p per therm for gas. Faroe’s shares have been marked down along with its North Sea peers and it now trades at a 28 per cent discount to Peel Hunt’s latest risked book value. Buy. MR

 

59. GB GROUP

As corporations and governments embrace e-commerce and digital communication, they face increased risks of deceit and imposture. Barclays, HM Revenue & Customs and many other organisations rely on GB Group (GBG) – whose information databases encompass more than four billion individuals – to vet potential employees and root out fraud among their clients.

Rising demand drove sales upward in both of the identity-verification specialist’s divisions – ID proofing and ID solutions – in the six months to end-September. That was partly due to partnerships with Australian data-analytics expert Veda and Chinese payment group Netelis, which significantly enriched its datasets. It also continued to roll out and improve ID3Global, driving up adoption of the flagship ID-checking product.

GB has augmented strong organic growth with acquisitions. For instance, last year’s acquisitions, anti-fraud software specialist DecTech and transactional data expert Transactis, served to broaden its client base, bolster its product range and open up new markets. Accordingly, management estimates that full-year adjusted operating profit leapt 47 per cent to at least £10.5m. As more and more organisations move online and invest in cybersecurity, GB should prosper. But after a sharp rise this year to 180p, its shares trade at 30 times broker Peel Hunt’s full-year forecast EPS, which fairly values its rich growth prospects. Hold. TM

 

58. BENCHMARK HOLDINGS

Animal health specialist Benchmark Holdings (BMK) has only been an Aim constituent for just over a year. Having raised a modest £25m on flotation, the group managed to grow its top line by more than a quarter in the year to September. Booming sales of Benchmark’s core sea lice treatment Salmosan is behind that growth, but soaring costs left adjusted cash profits down 11 per cent at £6.6m. And that doesn’t include another £4.7m of research and development (R&D) costs on top.

But figures like these aren’t unusual for Aim-listed companies in ‘growth mode’. Last year Benchmark added 17 products to its future product pipeline, bringing the total to 47, and increased the employee headcount by 40 per cent. It also picked up several aquaculture vaccine assets from US competitor Zoetis for $3m (£2m) in February, and bought Norwegian group SalmoBreed and Icelandic outfit Stofnfiskur for close to £40m, creating a brand-new breeding and genetics division in the process. In fact, acquisitions were a main motivation for Benchmark’s London listing. Last year, chief executive Malcolm Pye said the new access to multiple sources of capital would allow the group to pursue deals considered “too good to pass up”. Hold. HR

 

57. PAN AFRICAN RESOURCES

A low-grade mining cycle at its Evander complex in South Africa meant that Pan African Resources (PAF) was restricted to interim cash profits of £12.9m, against £28.3m in the previous year. Nevertheless, unlike some industry peers, this is a gold miner that remained in the black in the face of contracting grades. It’s a meaningful distinction given that the price of the yellow metal is now 37 per cent adrift of its high-water mark in 2011.

The good news is that Pan African is moving out of the low end of the cycle and should be exploiting higher-grade material for the next couple of years. That should have a beneficial effect on unit costs, productivity and, ultimately, earnings. Another positive point for shareholders is that the tailings operation at Evander is now ready to kick in, eventually contributing around 10,000 ounces per year to total output.

Admittedly, market sentiment towards gold mining stocks remains lukewarm at best. And a probable US rate rise later this year won’t help matters. But Pan African is better placed than many peers on London’s junior market to cope with reduced assumptions on the gold price. That’s worth bearing in mind given that a 20 per cent fall in the miner’s share price over the past 12 months means they now offer a dividend yield of 6.7 per cent. We currently ascribe a hold rating to the stock, but we could revise our position once we receive positive news on the grades issue. Hold. MR

 

56. IOMART

Cloud computing may have only been fully absorbed by the mainstream business lexicon in the past couple of years, but iomart Group (IOM) has been a leader in the field since the beginning of the century. This strong industry reputation has resulted in a sticky client base – last December the group said 90 per cent of its revenues were repeat customers – but also puts iomart in an excellent position to win new business from organisations wanting to back up their systems to data centres.

This should be reflected in full-year numbers, in which the cloud services hosting segment is expected to have performed exceptionally well, and contributed significantly to an increase in adjusted pre-tax profits for the full year to 31 March of £16.6m, up from £14.6m in 2014. As broker finnCap points out, this is currently the highest profit margin in the cloud computing sector, and looks to have put the company back on track with the double-digit growth investors had come to expect. FinnCap this month described the share price as “inexplicably low” and the “most obvious value opportunity” in the sector. We agree, especially since, at 202p, the price hasn’t appreciated much since that recommendation. Buy. AN

 

55. NANOCO

If you’re not familiar with the term ‘quantum dots’ you probably don’t know much about Nanoco (NANO), which produces these tiny technical gizmos. Quantum dots enhance the colours of flat-panel television screens and Nanoco’s variety can be easily and cheaply integrated into manufacturers’ existing infrastructure and, crucially, produced at high volumes and without the use of heavy toxic metals, namely cadmium.

It’s always difficult to predict what the next big trend in tech is going to be – and how long it will last – but we’re pretty sure that quantum dots will become standard in the display industry, given that LG and Samsung have already started to adopt the technology. And here, we believe Nanoco’s dots will lead the way. The Manchester University spin-out has already sealed a 15-year exclusive deal with Dow Chemical Company. Under the agreement, Dow will use Nanoco’s technology to mass-produce quantum dots from a manufacturing plant being constructed specifically for this purpose in South Korea. The factory will be the first of its kind. In return, Nanoco will get royalty payments from Dow, with production expected to begin in mid-2015.

Encouragingly, Dow recently signed a partnering agreement with LG Electronics, which will see it supply Nanoco’s quantum dots for use in LG’s HD televisions, due to launch this year. Management maintains that electronics giant Samsung will eventually partner with Dow, too. There are, of course, huge execution risks, so investors should tread carefully. But, should the LG launch go well and were Dow to begin manufacturing on time, the shares should gain momentum. Buy. JB

 

54. JOHNSON SERVICE

The recession took its toll on textile business Johnson Service (JSG), particularly its dry-cleaning business, represented on the high street by its Johnson Cleaners and premium-service Jeeves brands. Management has consequently focused the business increasingly on providing textile rental services. In 2014 it consolidated its foothold, acquiring Bourne, which provides high-volume hotel linen. This strategy seems to be paying off, with adjusted profits for the division increasing by a quarter in 2014.

While its dry-cleaning business is still the group’s weak spot, management is in the process of restructuring this arm. Its new focus is on providing customers with “highly convenient collection and delivery points”. This includes a partnership with Waitrose, where services are available at the retailer’s customer service desks. In tandem with this, management has closed down a swathe of underperforming branches and intends to close another 109 during the first half of this year.

Shares in Johnson Service Group are up 22 per cent since we tipped them at 60p in September. As a result the shares have increased slightly in price and trade on a PE ratio of 13 times forward earnings, still an undemanding multiple. Investec Securities has set a target price of 90p and, as increased cost synergies in its dry-cleaning business kick in and the benefits of its beefed-up textile rental business feed through, we agree there is more upside to come. Buy. EP

 

53. MP EVANS

The palm oil sector has been a bit of a dog this past year, depressed by weak prices and unusual weather patterns. The upshot is that there has been a flurry of bid activity. As land available for cultivation grows increasingly scarce, the big industry players have been snapping up their smaller peers to secure long-term expansion strategies. Most recently, palm oil giant Sime Darby launched a generous bid for New Britain Palm Oil (NBPO), which has now gone through.

We think MP Evans (MPE) might be next. This palm oil producer is small, but well-invested, and its plantations are among the youngest in the industry, which should make it appealing to an acquirer. Crucially, much of the oil it produces comes with an ‘ethical’ label, making it acceptable for big food producers, such as Unilever (ULVR), which are under pressure from environmental groups to ensure their ingredients aren’t threatening natural habitats.

Even if a bid doesn’t transpire, macroeconomic and demographic trends ensure that MP Evans will remain a resilient long-term story: demand for palm oil will only grow as the global population increases and people in developing countries grow richer. Palm oil prices might be low now, but, like all commodities, they will eventually rebound. Buy. JB

 

52. PACIFIC ALLIANCE CHINA LAND

Although its name suggests a trans-continental military pact, Pacific Alliance China Land (PACL) is in fact a closed-end fund investing in Chinese property. It has done very well, despite the slowdown affecting parts of the property market in the world’s most populous country. Listed in 2007, the vast majority of the fund is invested in just four strategies, ranging from suave Beijing apartments to a stake in Walmart China. The fund has also outperformed by investing in companies before successful IPOs, and picking up distressed assets on the cheap following the global financial crisis.

But any investors wanting to jump onboard will have to act fast: the fund is in realisation, meaning that as its investments reach the end of their lives, returns are passed back to shareholders via stock redemptions rather than reinvested. Management expects the majority will be realised by July 2016. Fresh buyers will have to be sure of the fund’s valuations of its assets, with data on that not readily available. But a NAV of $2.56 (£1.75) would represent a return of 27 per cent on the current share price by next July, and the house broker maintains the fund has “consistently realised investments at or above book value”. For the short-term investor, the shares are a speculative buy. IS

 

51. TELFORD HOMES

Telford Homes (TEF) specialises in building apartments and some houses predominantly in the east end of London. It has been a buy tip since April 2010, and in five years the share price has risen from 101p to 379p, as the niche builder has successfully positioned itself to take advantage of a seemingly inexorable demand for living space close to London. For the most part, apartments have been sold off-plan to a mixture of overseas investors looking to place funds in a safe market at a time of global uncertainties and low interest rates, as well as buy-to-let landlords and owner occupiers. Most homes for completion this year and next have already been sold, with significant numbers reserved for the two following years.

Its targeted margins when appraising new opportunities are relatively high at 24 per cent, but some developments, such as the Avant-garde joint venture in east London, are delivering margins of up to 40 per cent. Demand is such that the forward order book exceeds £500m, and the development pipeline stands in excess of £1.1bn. Despite the meteoric rise, the shares are trading on 13 times forecast earnings and 1.9 times historic net assets, which makes it cheaper than bigger rivals such as Berkeley Group (BKG) and Persimmon (PSN). Given the growth profile and extended order book, we remain buyers. JC

  

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90-81: Fusionex International to Central Asia Metals

80-71: Horizon Discovery to Oakley

70-61: Globo to Scapa