Join our community of smart investors

The Aim 100 2015: 30-21

In the eighth 10-company segment of our analysis of Aim's top 100 companies, we give our verdict on
April 23, 2015

30. CVS

You might never have heard of CVS (CVSG), but if you’ve got pets, your vet may well be part of its network of animal care conglomerate. The group has four main business areas: veterinary practices – with 256 surgeries that usually trade under local business names – diagnostic laboratories, pet crematoria and Animed Direct, an online dispensary.

The group has been busy buying up vet clinics in a market dominated by small, one-man outfits looking to retire. But it’s also enjoying solid, double-digit like-for-like sales growth, driven by an upswing in consumer confidence and greater proliferation of pet insurance. Veterinary profits grew by a quarter at the half-year stage in December, but the other business divisions are also performing well: laboratory sales are running 29 per cent ahead and crematoria revenue doubled in the first half. That was enough for us to put the shares back on our buy list a few weeks ago. Since then, the stock has risen by 20 per cent to 609p, but don’t let that put you off as we think there’s more to come, given the improving economic backdrop, scope for further acquisitions and the margin benefits of scale. Buy. JB

 

29. AMERISUR RESOURCES

Amerisur Resources (AMER) has enjoyed considerable success in Colombia’s nascent oil and gas industry – up until recently that is. During the second quarter, the driller revealed a 6 per cent downward revision to its proven (1P) reserves, following an independent report by Petrotech Engineering. And the company was also forced to book a $26.5m write-down on its Fenix block in Colombia due to ‘geological complexities’. Amerisur had to pare back its reserves due to disappointing initial production from the Platanillo-15 and -16 wells, together with reduced assumptions on the amount of drilling that will take place due to the fall-away in crude oil prices.

Even so, the company’s 1P reserves still amount to 16.2m barrels of oil, while proven and probable (2P) resources stand at 24.55m barrels – that represents a substantial step-up since the company commenced drilling in 2012. It subsequently achieved a 100 per cent success rate through its drill-work at the 14,341 hectare Platanillo licence block, located in Colombia’s Putumayo Basin.

Amerisur is pursuing other projects in Colombia and Paraguay, but the near-term investor focus is on the finalisation of a dedicated pipeline that will connect production from Platanillo into Ecuador. Completion should remove current production capacity constraints and potentially reverse the reserves downgrade once full production is re-established. A share price of 30p – less than half of its 12-month peak – represents a buying opportunity. MR

 

28. AVANTI COMMUNICATIONS

Surging demand for mobile devices, online video and high-speed ‘4G’ connectivity has left network providers scrambling to increase their bandwidth and data capacities. Vodafone, the UK government and many others have turned to Avanti Communications (AVN), whose cutting-edge ‘Ka band’ satellites provide cellular backhaul and broadband in Africa, Europe and the Middle East. The group signed more than 140 contracts in the 18 months to December, and ended the year with a revenue backlog of $410m (£275m).

Avanti is successfully tapping into soaring demand for data and wireless communication in Africa. For instance, the UK Space Agency recently tasked it with delivering broadband internet, training and e-learning solutions to up to 250 rural schools in Tanzania. It has also doubled down on growth: it’s currently building its fifth satellite, Hylas 4, which promises to more than double total capacity. Management has earmarked $300m for its construction and pencilled in a launch date of early 2017.

Avanti is signing up large customers, expanding its satellite fleet and developing invaluable exposure to ‘big data’. Given time, management expects the group to generate $500m in annual cash profits. But for now it remains heavily indebted and loss-making, which could curtail near-term upside for the shares. Hold at 236p. TM

 

27. OPG POWER VENTURES

The recent drop in the price of coal will put a dent in the balance sheets of some companies this year, such as coal miner Hargreaves Services. However fellow Aim 100 constituent OPG Power Ventures (OPG) will likely experience a boost to its bottom line. While a decline in the rupee dampened last year’s sales figures, the Indian electricity producer was already reaping the rewards of lower coal prices. Management also minimises its overheads by using a blend of Indian and Indonesian coal to power its stations, which are already cheaper.

The group is nearing its target of reaching 750MW of generating capacity in notoriously power-constrained India. Its Gujarat plant became operational last week, providing 300MW in additional capacity. Its Chennai IV plant is expected to commence sales later this month and will generate 180MW of power. Once this capacity becomes profitable – expected to be during the first quarter of the 2015-16 financial year – management expects to set out its dividend policy. The group is also expected to announce new investment opportunities, which may lie outside the thermal power sphere.

India’s insatiable demand for power as well as Prime Minster Modi’s efforts to expedite decision-making regarding infrastructure projects, keep us bullish on the shares. Analysts are forecasting a doubling of cash profits by 2016, and we remain buyers. EP

 

26. REDDE

If the coalition government is right that the UK is on the road to economic recovery, then accident support services group Redde (REDD) – formerly known as Helphire – will be waiting at the side of the road.

UK car sales, as a strong indicator of consumer spending, had a record March, and government figures show that as the economy recovers, drivers spend longer on the road. More cars and longer, cheaper journeys unfortunately mean more accidents. For Redde this means more business from insurers for its claim management, vehicle replacement and repair management services. Revenue jumped by just short of a third in the second half of last year to £122m, helped by a 7.9 per cent growth in repair cases. Its gross profit margin was boosted by the acquisition of personal injury law firm NewLaw, and management has set aside a further £25m in cash to pick up further assets. Its shares jumped a fifth in February on the back of these strong half year figures, which included a 4p interim dividend.

Redde boasts some influential backers, with star manager Neil Woodford’s eponymous fund house having increased its stake to 14 per cent of the company – but with the shares now trading on a PE ratio of around 15 times forward earnings, we see little obvious upside. Hold. IS

 

25. RWS

RWS (RWS) provides patent translation and filing services for industries including medical, legal and financial. The highly cash-generative group first listed on Aim in 2003 and operates in countries including the UK, US, Japan and Germany. Growth is driven primarily by the group’s core patent translation business, which accounts for just over half of overall sales.

A key focus for its patent translation business is continued expansion into China – which put in the ‘standout’ performance during the first-half of this year, according to management. Growing demand among US and European patent filers for Chinese services has resulted in the group increasing headcount in the country and it continues to develop production and training facilities in three Chinese universities. However, elsewhere trading has been more difficult. The commercial translation business has been hit by increased competition in the UK and Switzerland, although trading in Germany has now stabilised. Business at its recently acquired Inovia business also got off to a slow start this year, and as with many UK listed companies, adverse currency movements also continue to be a bugbear.

With these factors in mind, management has said it expects first-half revenues to be down on the prior year and for pre-tax profits to be flat. This has prompted analysts at Numis to downgrade their full-year EPS forecasts by 4 per cent to 7.7p. We reiterate our hold advice. EP

 

24. POLAR CAPITAL

Complicated as their fortunes are, the fates of asset managers on the stock markets can be rather simpler. Fund management Polar Capital (POLR) continues to be hit by deterioration in investor appetite for its core range of Japan funds – that’s meant a steady reduction in its assets under management, weighing on its share price.

Net inflows of $0.3bn (£0.2bn) to its other funds over the 12 months to the end of March were more than outweighed by $2.3bn of outflows from its Japan funds, with 70 per cent of that money leaving in the second half. Investors are uncertain about the course of the Japanese stock market, and the rush for fixed income at a macro level has squeezed out equity managers. The cyclical, recovery stocks that Polar Capital’s managers generally favour have also suffered.

But the company is not for turning. It is sticking to its process, and the reduced tilt towards Japan highlights other well-performing funds generating strong performance fees. It is well-placed for a reboot in investor sentiment, and Japan’s domestic institutional investors are leading the way by moving more funds from bonds to equities. But a forecast PE ratio of 15 means we’re not quite ready to invoke the animal spirits. Hold. IS

 

23. IMPELLAM

Recruiter Impellam (IPEL), which operates 15 brands including Blue Arrow and Tate, enjoyed a strong performance last year. Management spent the year restructuring its staffing businesses into two segments – specialist staffing and managed services – in order to better focus the group, leaving it well-placed to benefit from a further pick-up in the UK jobs market.

The group operates primarily in the UK – where spend under management increased 16 per cent last year – and North America, with smaller operations in Australasia, Ireland and mainland Europe. Its specialist staffing business provides bespoke recruitment services, while the latter businesses manage the supply of temporary, permanent and contract staff in large organisations. Management is now focused on reducing outsourcing expenses in key areas of the business. It made some inroads into this by acquiring IT staffing businesses Lorien Resourcing and Career Teachers last year.

Analysts at house broker Cenkos raised their adjusted EPS forecasts by 15 per cent for 2015 following the Lorien deal. What’s more, the highly cash-generative nature of the group means there is ample room for it to continue its strategic acquisitions. On a forecast PE ratio of 10 its shares trade at a discount to the sector, and as a result we advise investors to buy into the group’s earnings potential. Buy. EP

 

22. NEWRIVER RETAIL

NewRiver Retail (NRR) is using its purchasing power to pick up fast-recovering regional property assets with a view to enhancing rental income. The firepower to do so has come from more borrowing, a successful share placing and disposing of existing assets for a profit. This has been used to buy three large shopping centres that were previously part of a distressed property portfolio owned by Royal Bank of Scotland (RBS), at an attractive initial yield of 8 per cent. Having been poorly maintained, there is significant potential for generating greater rental income following refurbishment.

More recently, NewRiver raised a further £75m to buy out one of its joint-venture partners that will give it another five shopping centres. Covering an area of around 1m sq ft, the group will inherit 200 tenancies with an outstanding average lease of seven years. These will be developed to encourage new tenants, although the acquisition will also bring debt of £43m secured against the portfolio.

Shares in NewRiver Retail are up since our buy tip (282p, 30 October 2014) and, given the scope for sweating more income from the portfolio, together with a very attractive dividend, we’re sticking with that advice. Buy. JC

 

21. MONITISE

An abrupt shift in strategy, the sudden departure of chief executive Alastair Lukies, a nixed sale and three revenue warnings have sent shares in Monitise (MONI) tumbling over the past year. The group, which enables the likes of Santander and MasterCard to offer mobile banking, payment and e-commerce services to their customers, divided investors by moving from a licencing-based model to selling products and subscriptions.

The new strategy centres on its new ‘bank and pay’ platform, co-developed by global partner IBM. It will speed up clients’ implementation of Monitise’s technology, improve integration and enable cloud-based product delivery. The group also explored a sale or partnership earlier this year, but scrapped plans after an attractive offer didn’t materialise.

But Monitise’s pitfalls haven’t completely sapped its momentum. Registered end-users grew by 18 per cent to 33m in 2014, driving the annualised value of transactions initiated by its technology up by almost half to $101bn (£66bn). Management forecast a cash loss of up to £50m this year, but expects to turn a cash profit in 2016. The long-term goal is still to attract 200m users, each paying an average of £2.50 a year. Monitise boasts innovative technology and blue-chip partners and customers, but its ambitions are nevertheless pinned on an unproven strategy and platform. Hold at 14.3p. TM

 

20-11: Safecharge International to Secure Trust Bank

10-1: EMIS to Asos

Back to introduction

Aim 100 2015 Part 1