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The Aim 100 2015: 50-41

In the sixth 10-company segment of our analysis of Aim's top 100 companies, we give our verdict on Staffline, Alternative Networks, Gamma Communications, Telit Communications, LXB Retail Properties, Fevertree Drinks, Camellia, Fyffes, M&C Saatchi and Sirius Real Estate
April 23, 2015

50. STAFFLINE

Recruiter Staffline (STAF), which specialises in blue-collar staffing, has been reaping the rewards of an economic upturn during the past 12 months, with both full-year revenue and pre-tax profit up by a fifth last year. The group has been a big beneficiary of the government’s welfare-to-work scheme, which helps the unemployed get back into employment.

The business comprises two parts, the first being its staffing services division. This includes its Staffline Onsite brand, which is based on employers’ premises and provides blue- and white-collar temporary workers. The group made its largest acquisition to date last year with its £45.6m takeover of Avanta and has spent time integrating it with its existing Eos brand to form its employability division. The deal made Staffline a top-three provider of welfare to work in the UK. Its Eos brand handles contracts outside of the Department for Work and Pensions remit, including a seven-year rehabilitation contract for the Ministry of Justice won last year.

Shares in Staffline are trading on a PE ratio of 10 times this year’s forecast earnings, below its 12-month peak of 14 times. That lowly rating could be the result of uncertainty caused by the upcoming election. However, with the number of onsites at the end of 2014 increasing by a fifth year on year, its highest rate of growth since 2011, we believe this is too cheap. Buy. EP

 

49. ALTERNATIVE NETWORKS

Telecom companies have struggled to offset tumbling demand for landline services, but Alternative Networks (AN.) has overcome this by providing more lucrative managed services to businesses; the strategy helped it widen its gross margin by 2 percentage points to 41.2 per cent last year.

The information technology and telecoms group bolstered its offerings by acquiring cloud-hosting provider Intercept IT and virtual desktop specialist ControlCircle at the start of 2014. Its broadened product range – spearheaded by Synapse, a communications and billing portal – allowed it to ink 43 contracts in 14 months, and win customers in industries such as law, insurance and government security.

The group has maintained momentum in the half year to the end of March: rising order volumes are on track to drive sales up a tenth in the core advanced solutions division. Moreover, management expects strong mobile subscriber growth to drive first-half underlying sales and gross profit up about 9 and 10 per cent, respectively. And both ControlCircle and Intercept IT have bulging order pipelines.

Alternative Networks should continue to benefit from surging enterprise demand for data and connectivity. Its shares have slid since our buy tip (526p, 22 January 2015) but, at 454p, they trade at just 13 times broker finnCap’s forecast EPS for 2015. A tidy 3.5 per cent forecast yield seals the deal. Buy. TM

 

48. GAMMA COMMUNICATIONS

Gamma Communications (GAMA) is one of the newest additions to Aim, but recent full-year figures paint a picture of a mature, cash-generating company with excellent growth prospects. The telecoms company, one of the largest network operators in the UK, sells bundled voice, data and mobile services to companies through a network of 725 distributors.

Sales of new products – which grew by nearly half to £95m in 2014 – include SIP Trunks, which provide high-speed voice, video and data connectivity, and Cloud PBX, a remote telephony network. This higher-margin work helped to increase underlying pre-tax profit by 35 per cent to £16.7m in 2014. Direct sales also saw strong revenue and margin growth, following contract wins from accountancy firm BDO, the London Stock Exchange, Hearst Magazines, and Oxford, Bristol, and Ulster Universities.

Gamma is also spending heavily on its infrastructure and more than doubled capital expenditure to £12.1m in 2014. This includes the expansion of its data network and mobile services capabilities, while introducing more so-called ‘converged services’ – essentially telephone, video and data communication – within a single network. Analysts at broker Investec Securities have forecast EPS of 15.6p for 2015, which puts the shares on a PE ratio of 17 times earnings. That looks a fair reflection of growth prospects. Hold. AN

 

47. TELIT COMMUNICATIONS

Companies of all kinds are investing in ‘smart’, connected machines that can collect data and flag problems. That has benefited machine-to-machine connectivity specialist Telit (TCM): its annual revenues have leapt by an average of 27 per cent in each of the past five years.

Telit has shifted away from hardware products towards more lucrative connectivity and cloud services. Sales of its m2mAIR wireless platform more than doubled to $20m (£13.7m) in 2014, helping to widen the group’s gross margin to 39.6 per cent. Moreover, Telit’s purchase of automotive connectivity business ATOP added new vehicle security and computing modules to its product range, bolstering its foothold in the ‘connected car’ space. Rising demand for high-speed 3G and 4G wireless technology in point-of-sale devices, healthcare and remote monitoring translated into strong overseas growth. But the situation isn’t as sunny in Europe due to geopolitical tensions, lukewarm economies and a sluggish shift to faster connectivity standards.

Telit offers prime exposure to the ‘Internet of Things’ and its future looks bright: first-quarter sales were up 23 per cent to about $65m, and management expects robust automotive and platform sales to increase full-year revenue by about a fifth. Yet, at 236p, its shares trade at 15 times forecast EPS of 23¢, which doesn’t do justice to its prospects. Buy. TM

 

46. LXB RETAIL PROPERTIES

Retail park developer LXB Retail Properties (LXB) indicated late last year that discussions are taking place that could lead to the disposal of three investments at Sutton, Biggleswade and Rushden. Contracts for these disposals are now in place, although conditions on the sales mean that the full amount will not be realised until late this year or early next year. After costs, these are expected to deliver around £150m, of which a substantial amount will be returned to shareholders. About £69m of payments due are expected by the middle of May this year.

However, since any proposed return of capital will require approval at an emergency meeting, the timing of the meeting will coincide with a delayed annual meeting to be held in mid-May. As the company is subject to a continuation vote, any decision by shareholders to wind up LXB could mean the potential uplift in net asset value (NAV) generated by the sales may not be fully realised. We first tipped the shares at 116p in October 2013), but as they still trade at a significant discount to the potential book value, we tipped them again last week at 145p. Buy. JC

 

45. FEVERTREE DRINKS

Fevertree Drinks (FEVR) came into being 10 years ago, when its founders, Charles Rolls (formerly of Plymouth Gin) and Tim Warrillow, spotted that there was no high-end range of mixers to match the premium brands taking an ever greater share of the spirits market. The market in drinks mixers has been dominated by a limited number of suppliers, most notably Schweppes. But messrs Rolls and Warrillow think that many consumers are willing to pay more for a suitable mixer to complement their gin and tonics. In other words, they have tapped in to the luxury end of the food and beverage market.

The emphasis of its products is on taste over cost, so the co-founders travelled to remote and occasionally dangerous regions of the world to source specialist natural ingredients. Currently, around a third of sales are generated domestically, of which 60 per cent is attributable to pubs and clubs. But off-trade sales are rising strongly through retailers such as Waitrose. Meanwhile, sales in the US grew by 59 per cent in 2014, driven by a near doubling in take-up for the company’s ginger beer brand. Fevertree’s share price is up by 83 per cent since it was admitted to Aim last November, and while it’s difficult to assess the company’s eventual market catchment, it’s London-to-a-brick that it will eventually be snapped up by a drinks heavyweight. Buy. MR

 

44. CAMELLIA

Camellia (CAM) may be the most varied listed business you have never heard of, with activities spanning from tea plantations in India to private wealth management in London and metal treatment in Norfolk. The company, which moved from the main market to Aim last September, has the slight majority of its shares held by a charitable trust, which uses its investment incomes to engage in charitable acts in the area where it operates. Remarkably, this includes repairing cleft palates for the local community in its plantations’ on-site hospitals.

Diverse as the areas of operations are, the company made an underlying pre-tax loss of £3.4m in the six months to the end of June 2014 after droughts hit tea production in India and Bangladesh, and frost affected citrus production in California. It also decided to shut down its AKD Engineering subsidiary after years of losses.

In terms of good news, former KPMG global chair of corporate finance Tom Franks has joined the board as deputy chief executive. It would be surprising if its full-year results – expected soon – were not better, but until there are fresh data and analyst coverage, investors should wait and see how much. Hold. IS

 

43. FYFFES

Fyffes (FFY) is one of our 2015 Tips of the Year. This Dublin-domiciled banana, melon and pineapple trader has had a rather eventful ride these past 12 months. In October, an attempted all-share merger with produce giant Chiquita (US: CQB) fell through at the eleventh hour, after Brazilian juice-maker Cutrale and investment firm Safra weighed in with an offer for Chiquita that was too good to refuse.

That was a shame for Fyffes, but, as we outlined in our tip, it only goes to reinforce our view that the global fruit producer’s lowly valuation, solid, efficient operations and robust balance sheet makes it primed for a takeover in an industry that remains hugely fragmented. Fruit and vegetable production is a mature business, so big, cash-rich players are adopting acquisition-led growth strategies to keep shareholders happy. The recent flurry in M&A activity across the board – Heinz and Kraft, BG and Shell, TSB and Banco de Sabadell, to name a few – only strengthens this view.

The big hurdle for Fyffes this year is the sticky issue of the strengthening US dollar, which is pushing up costs. To offset this, the group is raising prices. Nonetheless, management has retained full-year guidance and says it is “actively pursuing a promising number of attractive acquisition opportunities”. Should that fail to materialise, investors can at least expect a return of surplus cash. Buy. JB

 

42. M&C SAATCHI

Brothers Maurice and Charles Saatchi created M&C Saatchi (SAA) in 1995 after their ouster from Saatchi & Saatchi. The storied advertising agency is driving growth by focusing on digital media, global clients and overseas investments.

Revenues in the core UK business rose 9 per cent in 2014. That reflected buoyant demand for M&C Saatchi’s mobile and customer relationship management (CRM) services, and new business wins with the likes of Land Rover, Oxfam and Douwe Egberts. But sales dipped in Asia and Australia due to the loss of a key account and the group’s closure of its underperforming New Zealand office.

Recent joint ventures in India and China sent profits from associates up more than eightfold to £1.4m. That trend could continue: M&C Saatchi recently took a stake in São Paulo-based agency Santa Clara, and acquired a third of New York-based SS+K. And its latest takeover, of a Tel Aviv-based agency, should help it cater to Israel’s budding technology sector.

M&C Saatchi’s overseas investments and the international rollout of CRM, mobile and other offerings bode well for growth. But, at 327p, M&C Saatchi’s shares trade at a pricey 18 times forecast EPS for 2015 and come with an underwhelming yield of 2.1 per cent. Hold. TM

 

41. SIRIUS REAL ESTATE

Operating as a business parks operator in Germany, Sirius Real Estate (SRE) has been busy repositioning its land assets by selling off or transforming non-income producing land, strengthening its finances and making selected acquisitions. The latest of these include two multi-let business parks in Aachen and Bonn for €21.8m (£15.8m) that generate annualised rental income of €2.2m at a net initial yield of 9.02 per cent. These acquisitions offer Sirius the opportunity to promote its higher-margin workspace solutions in areas where quality flexible workspace suitable for smaller companies is in short supply.

Chief executive Andrew Coombs is confident that the existing vacant space can be used to attract new tenants. Group finances have been strengthened by a number of placings and refinancing of the entire debt, which has been extended to five years before maturity. And steps are being taken to extend this further to 10 years. The loan-to-value rate is reducing steadily towards a target of 40 per cent. Despite the dilutive effect of the share placings, underlying book value is expected to have risen to 47¢ by the March year-end and, despite rising from our share tip (Buy, 32¢, 22 May 2014), the shares are still trading at a discount to forecast book value. We remain buyers. JC

 

40-31: Patisserie to Smart Metering Systems

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