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The Aim 100 2015: 40-31

In the seventh 10-company segment of our analysis of Aim's top 100 companies, we give our verdict on Patisserie, Petroceltic International, First Derivatives, GVC, Gemfields, Numis Corp, Advanced Medical Solutions, Burford Capital, Boohoo.com and Smart Metering Systems
April 23, 2015

40. PATISSERIE

A strong contender for owner of the best stock market ticker symbol, Patisserie – parent of the Patisserie Valerie café chain and traded on Aim as CAKE – has seen a strong performance in its shares since they listed on Aim a year ago. In fact, following the company’s announcement in November that pre-tax profit had grown 26 per cent to £10.4m in the year to 30 September, the shares have leapt in value by a third.

The interest in the stock has been underpinned by the quality brand and increased confidence in the consumer outlook, as people are spending more eating out. Against this backdrop, 20 store openings are scheduled for this financial year, in line with the company’s expansion plans. Patisserie is clearly adept at picking prime locations for its stores, as a number of those opened last year had already generated enough cash to pay back their capital outlay by November.

Analysts at Canaccord Genuity expect adjusted EPS of 11p this year, meaning the shares trade at 25 times earnings. A maiden dividend expected at the end of this year should add to the investment case, but the shares currently look at the pricier end of the sector. Hold. AN

 

39. PETROCELTIC INTERNATIONAL

In February, the shareholders of Petroceltic International (PCI) rejected a number of extraordinary resolutions put forward by the company’s largest investor, hedge fund Worldview Capital. Worldview had sought removal of chief executive Brian O’Cathain, in addition to the appointment of Worldview’s founder, Angelo Moskov, and another nominee, Maurice Dijols. The Worldview insiders blamed Mr O’Cathain for what they perceived as Petroceltic’s poor performance.

Mr O’Cathain may have survived the vote, but the incident did reflect a wider frustration at the rate of progress at Petroceltic. The driller’s key commercial project remains the Ain Tsila gas co-venture with Enel of Italy and Algeria’s state-controlled energy company Sonatrach. Other projects may have to take a back seat because of the continued weakness in energy prices. In fact, Petroceltic and its regional partner, Hess Corp, recently agreed to pull out of the Dinarta licence in Iraqi Kurdistan due to the fall in oil prices and disappointing well results. Through a successful farm-out agreement and last year’s $100m placing, Petroceltic looks to be adequately funded until 2016. But our recommendation is currently under review. Hold. MR

 

38. FIRST DERIVATIVES

It’s a hard job keeping up with the acquisition trail pursued by Newry-headquartered First Derivatives (FDP), which provides financial analysis software and consultancy services to investment banks and technology and energy companies. So far this calendar year, the company has bought the entire issued share capital of Massachusetts-based analytics group Prelytix for up to $20m (£13m), software developer ActivateClients for as much as €6.75m and Affinity Systems, a Canadian software and consultancy group focused on big data and sensor data management and reporting.

The latter deal, secured this month for a maximum total consideration of C$14.5m (£7.7m), should give First Derivatives further opportunities within the ‘Internet of Things’, an area flagged as a strategic focus for the company when it took a two-thirds stake in big data specialist Kx Systems. This was heralded by broker Panmure Gordon as a “transformational” deal, as the tie-up should help the company expand its addressable market severalfold and spawn lucrative partnerships.

At 1,134p, First Derivatives’ shares trade at 28 times forward earnings, which is to be expected given the platform the company is building. The deals each look promising, but until clearer sight of revenues and earnings as a result of its deal making emerges later this year, we are happy to sit tight. Hold. AN

 

37. GVC

There aren’t many gambling stocks that trade on a PE ratio of 10 and offer a dividend yield close to 9 per cent. That’s where GVC (GVC) proves to be exceptional. Don’t be misled, though – the risks are high. An increasingly punitive regulatory regime and lack of political support weighs heavy on the industry each year.

But chief executive Ken Alexander is bullish and told us in late March that current trading was at “record levels”. The online gambler did well out of last year’s World Cup. A €7m (£5.1m) marketing push meant customer numbers shot up between June and July – and stayed there. This prompted the first special dividend of the year – worth 1.5¢ a share – last September. The group announced a second special dividend – again worth 1.5¢ a share – at the full-year results in March. That excludes the 14 per cent hike in the annual dividend.

There’s no doubt the group will face tougher comparatives this year given the lack of the World Cup or another major football tournament this summer, and the new Point of Consumption tax is set to cost the group roughly €2m. But for the income alone, we still rate the shares a buy. HR

 

36. GEMFIELDS

Gemfields (GEM), a producer of ethically-sourced coloured gemstones, has been one of our preferred specialist mining plays. The group, which also runs the high-end Fabergé jewellery business, holds majority stakes in the Kagem emerald mine in Zambia and the Montepuez ruby operation in Mozambique. In a sense, Gemfields is attempting to replicate the success that De Beers achieved in the post-war period, in bringing precious stones to a much wider retail market – albeit with the coloured variety. Provenance is also a key driver of the group’s commercial offering, providing jewellers and wholesalers with a product to meet a retail market that is increasingly conscious of traceability – not just from an ethical, but also from a commercial perspective.

The group’s financial performance tends to oscillate through the financial year, dependent on the timing and underlying quality of its planned auctions. Nevertheless, the group’s latest production report through to the end of March demonstrated a marked increase in output and grades from the Kagem mine, along with a reduction in unit costs. Comparative quarterly performance at Montepuez wasn’t quite so impressive, but Gemfields is currently working lower quality material at the mine. The good news is that Fabergé saw the value of agreed sales orders increase by 64 per cent when compared with the same period last year.

Gemfields is a well-managed, unique company, but with its shares trading at 30 times forecast, we think the market is up to speed. Hold. MR

 

35. NUMIS CORP

This year, Numis (NUM) celebrates 15 years since it sold its private client business, changed its name, and set off towards becoming the stockbroker and corporate adviser business that it is today. Over that time it has built both the number and size of its clients considerably, and now serves 175 companies with an average market capitalisation of £540m – sitting in a secure second place to JPMorgan Cazenove in client numbers.

In its half-year update to 31 March, the company announced it had completed 23 equity transactions, including six IPOs. This tracks reasonably against the 44 transactions and 16 IPOs completed over its last full year to the end of September 2014, when it increased revenues by a fifth to £92.9m. The company has won 15 new clients since its year-end, compared to 24 new clients over the previous 12 months, but it has also lost 10 clients. One strength of the business is how it cross-sells services from corporate finance to research.

The issue with being a listed broker is that analyst coverage is practically non-existent, given the patent problems with passing sensitive information to competitors. Its shares currently trade at 14 times historic earnings, which is better value than they were a year ago, but not good enough to make us change our recommendation. Hold. IS

 

34. ADVANCED MEDICAL SOLUTIONS

Medical devices and equipment companies often fly under the radar of their big pharma cousins. But, last year, if the share price performance is anything to go by, wound-care specialist Advanced Medical Solutions (AMS) came into its own.

Currency headwinds might have masked last year’s progress, but even on a statutory basis revenue grew 6 per cent last year and pre-tax profit by 16 per cent to £15.2m. The company is known for its ‘next-generation’ hernia fixation devices – mesh implants used in patients undergoing hernia operations. But, traditionally, sales of its surgical glue product LiquiBand continue to boost the company’s top-line. Liquiband sales grew 43 per cent last year to £4.1m at constant currencies. That helped push AMS’s share of the lucrative US market up towards 9 per cent – half of its target market share of 20 per cent.

The company is also known for its consistent M&A strategy. City analysts reckon a new £30m credit facility and projections for net cash of £27m come the end of the current financial year imply AMS is gearing up for another deal. That remains to be seen, but a forward PE ratio of 20 appears to have priced that prospect in. Hold. HR

 

33. BURFORD CAPITAL

It is difficult to think of a better case of aligned investor-investee interest than Burford Capital (BUR), which lends money to fund litigation, and in the event of a victory is paid back its investment plus its agreed cut.

The company will also lend against other intangible litigation assets, before or after judgment is handed down, allowing companies to free up capital to grow their businesses. The desire to ‘monetise’ litigation in this way, especially as companies shy away from per-hour legal costs in the years following the financial crisis, boosted operating profit by 43 per cent last year to $60.7m (£40.7m), leading Burford to increase its dividend by a third to 7¢. Its insurance business, where it covers claimants against adverse costs, should not be ignored, either. Good performance in its historical book drove income up 16 per cent last year.

The legal sector is easily ignored by investors given the sector’s conspicuous absence from the stock market. But Burford is a good way to play it, and its shares are up a fifth since our late 2014 buy tip. The business is also generating a good amount of cash, supporting the prospect of further dividend increases. And with its shares trading on a PE ratio around 12 times forward earnings, there is still value on offer. Buy. IS

 

32. BOOHOO.COM

Boohoo (BOO) has turned out to be quite the sob story since floating on the stock market a year ago. After a promising – and much hyped – start in March 2014, shares in this online fashion retailer have dive-bombed, driven by a hefty profit warning in January this year. It seems sales aren’t growing quite as fast as promised, despite big marketing spend, and there are woefully few catalysts for a re-rating this year. Barriers to entry in this market are low and there’s plenty of competition around which will keep margins down. What’s more, Boohoo’s target audience – teenagers and young twenty-somethings – is a pretty narrow, and cash-restricted, range.

Brokerage Panmure Gordon says the stock is “crying out” for an activist investor to offer a helping hand. “With £54m of net cash, Boohoo could provide a cash-rich entrepreneur with a low-cost route to market,” says analyst Michael Stewart. “Boohoo is a fundamentally sound business operating in an attractive trading environment but the group’s brand, marketing and IT capabilities require assistance. An activist investor with a suitable skill set could unlock significant value and help the shares realise their fundamental worth.” We’re less convinced. The rating is worryingly high, which means any further signs of slowdown will send the shares tumbling. Sell. JB

 

31. SMART METERING SYSTEMS

By 2020 the government requires all businesses and homes to have installed smart meters, which tell the user how much energy they are consuming and how much this costs. Smart Metering Systems (SMS) is a natural beneficiary of this, as suppliers press ahead with installations. The group, which listed on Aim in 2011, connects, owns and operates meters for major energy companies and energy brokers.

The group has been steadily growing its meter portfolio, with capital expenditure last year peaking at £35m. In line with this, Smart Metering has made some major contract wins. These include deals with BES Utilities, Total Gas & Power and an agreement with British Gas Business to install half of its gas meter points. Management has renegotiated a £105m club lending facility to increase its meter investment further this year and its order book stands at a healthy £85m. Cenkos expects pre-tax profits to grow by 42 per cent to £15.8m this year. However, this growth already looks priced in – the shares have risen sharply during the past month and are now trading on 22 times forward earnings. We advise investors to hold. EP

 

30-21: CVS to Monitise

20-11: Safecharge International to Secure Trust Bank

10-1: EMIS to Asos

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Aim 100 2015 Part 1