The Aim 100 was the best performing of all the UK’s broad indices in the past 12 months
70. NUMIS CORPORATION
UK brokers are seeing a perfect storm of declining broking margins, a volatile equity issuance market and legislation threatening to reduce research and execution commissions. However, Numis (NUM) is weathering these conditions well, generating a 7 per cent uplift in pre-tax profits in the year to the end of September 2015. This is in comparison to rival Panmure Gordon, which swung to a pre-tax loss of £16.7m last year as slower market activity took its toll.
Numis has been increasingly acting as corporate adviser rather than broker for its clients. The group has been bumping up its advisory clients, which stood at 31 at the end of September. Equity issuance has also started to pick up, with Numis completing 27 equity transactions so far this year. This includes 10 IPOs, compared with 11 during the whole of the last financial year.
The Markets in Financial Instruments Directive II (Mifid II), which includes rules to unbundle research and execution commissions from fees charged to clients, looms on the horizon for all brokers. The regulation, set to be introduced in 2018, will force brokers like Numis to rethink how they monetise their research arms. With an historic yield of 4.3 per cent and trading on 11 times historic earnings (a forward multiple is unavailable as Numis is reluctant to give information to its rivals in the broking business), we reckon the shares still constitute a buy. EP
69. VERTU MOTORS
Car retailer Vertu Motors (VTU) has shown it’s still highly committed to building the business via acquisitions, following its March placing to raise an additional £35m to spend on new businesses. The group’s buy-and-build strategy has already paid off: this year revenues and profits are expected to be significantly ahead of market forecasts.
March continues to be the most important month for motor retailers due to the registration plate change. Vertu bosses said the order book for new cars (on a like-for-like basis) was tracking 11.6 per cent ahead of 2015 as of late February. While management said there was still a way to go before finishing strongly in March, all indications were looking good.
For the remainder of 2016, Vertu said it expects the new car market to stabilise, although the group still expects to grow across the used car and aftersales segments. In terms of future deals, the company hasn’t named any target businesses specifically, but the recent fundraising shows there must be ideas percolating. Management also revealed it was considering expanding its borrowing facilities to include property-backed, fixed-interest, long-term debt – in turn giving the company more financial flexibility. Buy. HR
68. M&C SAATCHI
M&C Saatchi (SAA) was created by brothers Maurice and Charles Saatchi after they were ousted from the company they founded, Saatchi & Saatchi. A possible chip on its shoulder has only helped the advertising agency, which continues to win big clients, tap into fast-growing territories through acquisitions and roll out tried-and-tested services such as customer relationship management (CRM) and public relations (PR). The strategy led to higher comparable sales across all five of its territories in 2015, propelling adjusted operating profits up 16 per cent to around £19m.
The key UK business cashed in on strong demand for mobile and CRM services and signed high-profile clients including Samsung and Airbus. The group also won work with Becks and ING in Europe, Nando’s in South Africa and Woolworths in Australia. Moreover, management is currently launching CRM and PR services overseas. And it recently took majority stakes in two US agencies: MCD Partners – a digital CRM specialist that counts AT&T and Johnson & Johnson among its clients – and SS+K, which works with JW Marriott and Comcast.
Broker Numis expects the international rollout of services to underpin double-digit sales growth and widen profit margins over the coming years. M&C Saatchi’s shares trade at 17 times forecast EPS for 2016, which looks enticing given the rich growth potential and stellar track record. Buy. TM
67. CAMELLIA
Crops-to-financial services conglomerate Camellia's (CAM) shares haven’t had the best run lately, down nearly 16 per cent since interim results last summer. A pre-close trading statement in February confirmed that financial growth at the company will be hindered by a £6.5m provision the group will be forced to make in response to new employment legislation in Bangladesh. New laws there now require companies to make a payment on retirement to all employees, based on compensation and length of service. Camellia estimates that it employs around 18,000 people in Bangladesh.
Excluding these one-off expenses, management says underlying profits should reach market expectations when the group announces annual results at the end of April. As previously indicated, tea prices in Kenya strengthened during the first half of the financial year, and they remained significantly higher than 2014 during the second half of the year too. Prices for the avocado and macadamia crops have also exceeded the group’s expectations.
What was missing from Camellia’s trading update was information relating to the company’s production. Last summer, poor production figures bore down on results, keeping sales flat while squeezed margins contributed to a slump in profits. It’s these figures that will drive the market’s opinion on results day. Sell. HR
66. PAN AFRICAN RESOURCES
Pan African Resources (PAF), like most UK-listed gold producers, has seen its share price re-rate since the turn of the year thanks to a rally in the yellow metal spot price. But the South Africa-based miner’s timing has been better than most: last year, all-in costs fell from $1,283 to $910 an ounce, thanks to operational improvements, and a drop in expansionary capital commitments and rand-based costs.
That meant the operator of the Evander and Barberton mines doubled group earnings in 2015, and that allowed it to reduce net debt by 41 per cent. This improvement in cash generation should be good for dividends, too. As an asset, gold is normally treated as a store of value, rather than a source of income – a feature that appears to be borne out in the low yields of several other gold stocks – but Pan African is committed to its progressive dividend policy and should be able to hike the pay rate this year if current spot prices remain robust. The recently completed acquisition of the Uitkomst Colliery coal deposit in KwaZulu Natal should also add another source of free cash flow and earnings with no correlation to the gold price. Buy. AN
65. VERSEON CORPORATION
Biotech group Verseon (VSN) raised a healthy £65.8m at IPO in May 2015. But shortly after it listed the biotech index came crashing down, which has consequently resulted in a pretty dismal first few months for its share price. Verseon epitomises small biotech; it generates no income, but is spending big on research and development of its drugs pipeline. This means that it has already chomped through a substantial amount of the cash raised at IPO.
The group, which was founded in 2002, owns a drug discovery platform that it uses to assess millions of compounds for the potential development of new drugs. It currently has three programmes under way; the most advanced of which – currently undergoing pre-clinical trials – concerns an oral treatment for blood clotting.
The blood-clot market is largely under-served and the only oral treatment currently available comes with unpleasant side effects. Verseon aims to target this market, which is said to be worth $12.5bn. But the group is currently a long way off commercialising its products, and with R&D expenditure at its current rate, it’s likely that the current cash balance won’t see it through to that point. Analysts are wary, with no coverage yet on the group, and we also remain on the sidelines. Hold. MB
64. VERNALIS
The launch of flu product Tuzistra in the US in September 2015 was a big step for biotech company Vernalis (VER). Although the group was already generating revenue from royalty payments for a migraine treatment, this is the first drug that it has developed and is selling via its own channels. The development of a marketing and commercialisation division has been highly costly, but with net cash in the bank, Vernalis is well funded to continue its expansion.
A milder winter was a disappointment for the group as it resulted in a lower demand for Tuzistra in its first few months, meaning full-year revenues are expected to be slightly behind expectations. But the market for the drug, which is the only slow-release cough and cold product in the US, is very exciting. Additionally, the group has recently announced that it has bought the US rights to a once-a-day antibiotic, Moxotag. And, following positive clinical trial results, it is likely to register two more flu drugs – known as CCP-07 and CCP-08 – by the end of 2016.
Disappointment that Tuzistra hasn’t had the perfect first few months on the shelves has sent the share price down recently, but we are excited by the longer-term growth prospects. Buy. MB
63. POWERFLUTE
Buying underperforming assets on the cheap with a view to improving them doesn’t always work out for the best. But, as results for the year to December 2015 testify, it did when Powerflute (POWR) snapped up coreboard manufacturer Corenso.
Then again, this wasn’t your average deal. At €81m (£65m), Corenso significantly increased the Finnish paper and packaging specialist’s scale and global presence, doubling the size and profitability of the group in the process. If anything, that helps to explain why revenues more than doubled to €357m last year. Of course, operating in an environment where businesses and consumers can’t get enough of paper and packaging solutions is a huge bonus. And credit should also go to the vastly experienced board, which includes Dermot Smurfit, one of the brothers behind Irish packaging giant Smurfit Kappa
Given the uncertain global economic outlook, Mr Smurfit’s know-ledge of the sector could be more important than ever now. Although the latest outlook statement was relatively bullish, there was a mention of order books weakening in the fourth quarter. The most vulnerable part of its business is its industrial arm. As many companies in the supply chain have been destocking rather than investing in capital goods, packaging activity for electrical appliances, automotive components and bulk dry chemicals is likely to waver.
Nevertheless, the long-term outlook for this market is encouraging, and we’d expect to see further benefits from the transformational Corenso deal. With that in mind, the shares, which yield 3 per cent and trade at a discount to peers on 10 times forecast earnings, still offer plenty of value. Buy. DL
62. ALLIANCE PHARMA
The year 2015 was a real turnaround story for Alliance Pharma (APH). The struggles of the previous few years have been dissipated by recent boosts in the drugs portfolio, which has resulted in revenue and profits back on the rise.
Alliance is an unusual small-cap pharma company in that it doesn’t do any of its own research and development, but markets and distributes already approved drugs. Its drug portfolio has been built through acquisition and this year received its largest bulk-up to date, when the group acquired the entire healthcare division of fellow Aim group Sinclair Pharma. Although this acquisition was only completed in December, in one month alone the products contributed £0.8m to group revenue. The 27 new products have also given Alliance a larger global reach.
The acquisition was in part funded by extended banking facilities, which has led to an increase in net debt. But as the company is highly cash generative, management is confident that it will be back to its normal debt levels by the end of 2016, and ready to acquire again. As we don’t feel the market has yet priced in the upside of this acquisition, we recently moved to a buy recommendation. Buy. MB
61. GEMFIELDS
The most recent financial year was troubling for Gemfields (GEM), operator of the largest emerald mine in the world at Kagem in Zambia. The problem wasn’t the quality of precious stones, but ballooning costs and depreciation, which resulted in full-year earnings well below market expectations. The fact that 80 per cent of gross profits were booked in the first half of the year didn’t help sentiment either.
Underlying earnings again fell in the six months to December to $35.6m, although management has pinned hopes on two emerald auctions before July, and another sale of mixed rubies and corundum. The first of those auctions took place at the end of March in Lusaka, and was hailed by chief executive Ian Harebottle as a “record result at a time when global commodity and diamond prices remain volatile and uncertain”. Most encouraging was the average per carat sale value of $70.68, 21 per cent higher than the last emerald auction in September. This disguised a drop in the percentage of lots sold by weight and a slight fall in total sales realised. Last year’s 70 per cent increase in sales at the wholly owned Fabergé brand offered another source of encouragement. Buy. AN
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