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The Aim 100 2015: 20-11

In the ninth 10-company segment of our analysis of Aim's top 100 companies, we give our verdict on Safecharge International, Summit Germany, Nichols, Young & Co's, Clinigen, Breedon Aggregates, Quindell, Mulberry, Dart and Secure Trust Bank
April 23, 2015

20. SAFECHARGE INTERNATIONAL

Safecharge International (SCH) is a newcomer to Aim, having listed in April last year at 162p a share. The group – which is two-thirds owned by Israeli billionaire Teddy Sagi, the man behind gambling software group Playtech (PTEC) – provides payment solutions to online gambling companies. Its shares have gained momentum since listing and are now priced at 270p, which leaves them trading on a PE ratio of 22 times forward earnings. However, judging by the group’s full-year figures, it is not hard to see why Safecharge demands a high price.

The company has a track record of strong organic growth, which looks set to continue. Its customer numbers are growing rapidly, which led to a 78 per cent increase in revenue last year. The business is also highly cash generative, with cash flows from operations in 2014 double what they were the previous year. This, along with $122m net proceeds from the IPO, has helped keep the group debt free.

Its cash pile will help the group build on the acquisitions it made last year, namely Irish group 3V Transaction Services and Israeli payment processor CreditGuard. The former acquisition is intended to provide the foundation for the group’s new card services division to become operational during the second half of this year. Analysts at Numis expect sales to grow by more than a quarter this year and EPS to grow by a fifth to 17.3¢. With further potential upside to come from merger and acquisition activity, plus strong organic growth prospects, we think the price tag is easily justified. Buy. EP

 

19. SUMMIT GERMANY

Summit Germany (SMTG) has been busy since its flotation in February last year. The company buys, holds and manages office and retail space throughout Germany, with most of its customers comprising corporation, government agencies and other public sector agencies.

Most recently, the company raised €120m (£87m) through a share placing to fund a pipeline of office purchases. Finances have been given a wash-and-brush up, with almost 90 per cent of its bank debt refinanced on attractive terms and over seven years. Since flotation, like-for-like net rents have risen by €1.2m or 2.7 per cent, with leases signed at a premium of 7 per cent to passing rent. Further leases at a late stage of negotiation would add a further €0.6m to the rent roll, while occupancy levels in the company’s core portfolio have risen to 90 per cent. Growth in the value of the portfolio will help to offset earnings dilution as a result of the placing, while other key metrics look strong. The forecast dividend yield is 7 per cent, with the payout fully covered by rental profits and, at 87¢, the shares trade at a significant discount to forecast book value. Buy. JC

 

18. NICHOLS

Nichols (NICL) is a Merseyside-based soft drinks manufacturer, which numbers consumer favourites such as Vimto, Panda and Sunkist among its brands. The group is chaired by John Nichols, the grandson of the founder John Noel Nichols, and members of the Nichols family are still prominent on the share register. The business is conservatively run, yet has demonstrated a willingness to return excess profits to shareholders.

A quick glance around your local convenience store reveals that Nichols obviously has a strong position in the domestic soft drinks market, but it has enjoyed a substantial market abroad for decades; Vimto can be purchased in over 70 countries across the world. The group recently revealed another encouraging trading performance from its Middle Eastern operations. Nichols supplies Vimto concentrate to its bottling partner in the region – Aujan Coca-Cola – which then bottles and distributes the finished product across the region. And while it may seem unlikely given its origins in the north west of England, on the Arabian Peninsula Vimto is the beverage of choice for the sunset feast during the month of Ramadan. At 1,198p, Nichols’ shares trade on a PE ratio of 21 times forecast earnings – but this still represents a marked discount to its historic earnings performance versus peers, which means more upside in prospect. Buy. MR

 

17. YOUNG & CO’S BREWERY

Last November’s Commons vote against the historic ‘beer tie’ – an arrangement obliging pub tenants to purchase supplies from the pub owner and slammed as uncompetitive by critics – has hit some of the UK’s largest pub companies more than others. The size of Young & Co’s Brewery’s (YNGA) tenanted estate – which comprises just 5.5 per cent of turnover – means the dent to revenue streams will not be significant, though chief executive Stephen Goodyear still labelled the change in laws “unfortunate and unnecessary”, shortly after the vote.

The company’s geographic profile will also be of comfort to Mr Goodyear and Young & Co’s shareholders: its estate of 245 pubs is concentrated in London and the Home Counties, where consumer sentiment has been resilient and sales growth has outstripped peers. Last October’s addition of four pubs in London through the £10.4m debt-free acquisition of pubco 580, should boost revenue and earnings figures further in 2015.

Analysts at JPMorgan are forecasting adjusted earnings per share of 48.5p, rising to 52.2p in 2016. That puts the shares, which currently trade at 1,039p, on 21 times this year’s earnings, reflecting a fair price for a quality company. Hold. AN

 

16. CLINIGEN

Clinigen (CLIN) burst on to the scene in 2012, and soon became an Aim hot stock, increasing its share price threefold by the end of 2013. But last year proved trickier, after management admitted margins were unsustainable. The shares crashed 17 per cent in response as fears grew that the stock had overheated in typical Aim style. At that point we downgraded our own advice from buy to hold. By September the story had changed again, as trading updates put the company on track to report strong full-year numbers. We put the shares back on a buy ahead of an inevitable re-rating.

Clinigen operates in three parts: speciality pharma, global access, and clinical trial supply. The latter provides commercial medicines for use in clinical trials, while the speciality pharmaceuticals business has oncology product Cardioxane, herpes treatment Foscavir, and chemotherapy drug Savene in its portfolio. The global access business manages access to unlicensed, licensed, or end-of-lifecycle products to patients who need them the most.

Essentially, Clinigen is a well-run, diversified business. The speciality pharma business is still in growth mode and it is steadily adding to its product portfolio. But its services divisions are facing tough competition, and analysts at Investec just downgraded longer-term EPS forecasts to reflect this. Hold. HR

 

15. BREEDON AGGREGATES

Breedon Aggregates (BREE) hopes to consolidate a largely fragmented aggregates industry by making bolt-on acquisitions. It is already the UK’s largest independent aggregates business, with 500m tonnes of mineral reserves in 53 quarries, as well as 27 asphalt and 60 concrete plants. The challenge is to turn this into a regular revenue stream, and with spending on housing and the infrastructure stepping up a gear, gravel in the ground is turning into money in the bank.

As this value is unlocked, the group’s significant operational gearing starts to take effect. In 2014, for example, turnover grew by 20 per cent but pre-tax profit almost doubled. Cash flow generated from ongoing activities grew by two-thirds last year, and this will help to finance further acquisitions. This is important for two reasons. First, regulatory hurdles have made it almost impossible to open new quarries. Secondly, it’s important to increase the geographical spread of quarry locations because of the high cost of transporting aggregate any great distance. The shares are up since our buy tip (42p, 9 October 2014) and, given the growth profile and operational gearing, we stick by that advice. Buy. JC

 

14. QUINDELL

Former city darling Quindell (QPP) suffered a precipitous fall from grace in 2014. The shares doubled to over 600p then plunged below 50p as the insurance claims processor and telematics specialist courted controversy and riled investors.

Several events fuelled distrust and disillusionment. Three of Quindell’s directors took part in an opaque share transfer agreement that culminated in the ouster of founder and chairman Rob Terry. The group’s joint broker resigned, the board granted unorthodox share options to new directors and joint-venture partner RAC terminated plans to install 2m of Quindell’s ‘black boxes’, which can record driver performance and inform insurance premiums.

The situation has improved in 2015. Quindell recently agreed to sell its core professional services division to Sydney-listed law firm Slater & Gordon for £637m. The planned return of up to £500m – 113p a share – to investors, a strengthened board, a relatively innocuous independent review of the company’s finances and management’s pledge to tackle its accounting and governance failings have sent the shares back up to 130p.

Quindell is shifting gears to concentrate on insurance-focused technology and ‘connected car’ services. That could prove lucrative, but the new management team will take some time to find its footing and overhaul deep-seated accounting and governance practices. Hold. TM

 

13. MULBERRY

Things couldn’t get much worse for Mulberry (MUL). A strategy to take the posh handbag maker up a notch in the world of luxury retailing backfired as charging much higher prices for the same goods didn’t go down well with shoppers. Add to that weaker demand from Asia and Europe and it was a recipe for disaster.

But after a string of profit warnings and management chaos, the company finally appears to be turning a corner. The group has a new creative director, and in March Mulberry finally announced that Thierry Andretta, who has a long history in the luxury retailing, would take up the role of chief executive. Encouragingly, trading is improving. Retail sales are ticking up, following the reversion to more realistically priced products, and online sales are growing at 18 per cent a year. The wholesale business is still in decline, but careful cost control means full-year profits will be slightly ahead of market expectations.

That seems to have put some momentum behind the shares, which have risen by one-third to 901p since November. However, competition in the mid-range leather goods market is heightening, exacerbated by the hugely popular launch of Michael Kors in the UK. It’s also far too early to tell whether the new strategy – and chief executive – makes for a meaningful, and sustainable, recovery. Hold. JB

 

12. DART

Airline company Dart (DTG) surprised the market last month when it announced underlying operating profit for the financial year ending 31 March was ahead of current market expectations and broadly in line with last year’s figure of £49.2m. This followed “lower than anticipated winter losses” for the Jet 2-owner, and was further boosted by strong forward bookings in leisure travel bookings for summer 2015, with over 50 per cent of the season already sold. Throw in the potential benefits from the oil price fall and positive consumer sentiment, and the picture looks a lot rosier than it did half a year ago.

This good news was all the more welcome following a Supreme Court ruling in October that Dart must pay Jet 2 passengers compensation for historical flight delays, which forced the company to make a £17m provision in its half-year accounts and distorted an otherwise positive set of reported profits.

Following a positive trading statement from rival Thomas Cook, broker Canaccord reiterated its adjusted pre-tax profit forecast for Dart to £48.1m with EPS of 25.7p, rising to £52.3m and 28p in 2016. That translates to a forward PE ratio of 15 this year, which looks fair, despite the momentum in the shares. Hold. AN

 

11. SECURE TRUST BANK

Secure Trust Bank (STB) is the other half of the equation mentioned in last week’s Aim 100 write-up of Arbuthnot Banking (ARBB), which owns a majority, though recently reduced, stake in the challenger bank.

Like other providers of alternative finance, Secure Trust is currently the beneficiary of a benign credit environment. Last year it saw revenues boosted across its key areas of operations – personal lending, motor and retail finance. Customer lending balances saw year-on-year growth of 59 per cent at £622.5m, and customer numbers were up a fifth. The growth potential for the lender is in asset financing, where it enables a business to finance a new piece of equipment, for example. It is an area of growing interest among the challengers, which are keen to benefit from the revival in confidence among small businesses. This has boosted profits at Close Brothers (CBG), while OneSavings Bank (OSB) has also signalled its intention to move into the area. For Secure Trust, this area of business may not turn a profit on its own until 2016.

On a forward earnings ratio of 18, the company’s shares are expensive for the sector. Hold this stock, and buy Arbuthnot to profit from Secure Trust’s further growth. IS

 

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Aim 100 2015 Part 1