We continue our review of the junior market’s largest companies
40. FYFFES
We became bullish on Fyffes (FFY) after its mooted merger with rival Chiquito fell through, partly because we felt it would remain a takeover target. A buyer hasn’t transpired since, but it looks as though management hasn’t let itself be distracted over whether it will be bought or not. Revenues rose strongly in the 2015 financial year and while reported profits were knocked, this was due to some one-off factors, including a €12m (£9.7m) charge linked to the closure of its Irish defined-benefit pension scheme.
In fact, the company has now turned buyer in what is a fairly fragmented market. Management said in February that it was “actively pursuing a number of attractive acquisition opportunities” and in April announced it had purchased Canadian mushroom business Highline Produce for CAD$145m (£78m). Chairman David McCann said the deal would be “immediately accretive for Fyffes” and lead to a 13 per cent increase in its current 2016 target adjusted EPS range on an annualised basis. The acquisition is being funded by debt, but its net debt to ebitda ratio will still only be 2.5 times and should fall below two times in two years’ time. The acquisition diversifies the business and suggests more such moves could be forthcoming. Buy. BG
39. SCAPA
Scapa's (SCPA) appointment of turnaround specialist Heejae Chae as chief executive in 2009 could go down as one of the greatest managerial changes of this generation. Under his leadership the emphasis has been on reducing the cyclicality of the tape and adhesive supplier, while implementing an under-promise, overdeliver approach. Multiple profit upgrades and a surge in the share price from 16p tell you all you need to know about how this game plan has panned out.
Plenty of success has been achieved by deepening customer relationships and exploiting M&A opportunities in the flourishing healthcare sector. As large pharmaceutical companies increasingly seek to outsource solutions, the development of a one-stop service has translated into very impressive returns for Scapa. Recent triumphs include a focus on developing solutions for advanced woundcare, medical devices, consumer wellness and drug delivery. Addressing the wearable market boom through the launch of its Medifix Solutions platform also proved to be a smart move.
Business in the industrial sector hasn’t been quite so smooth sailing. The uncertain global economic environment sparked a period of cautious capital investment, forcing Scapa to close plants and spend less on new products. This strategy is driving adjusted profits upwards, although the costs associated with streamlining operations means statutory numbers will be affected in the current trading period. Fortunately, there have also been some pockets of success, including a steady stream of orders from automotive clients.
While this is all very exciting, remarkable progress over the past five or so years hasn’t gone unnoticed. The shares now trade at a premium to peers on 23 times forecast earnings, which looks about right considering its track record and glowing prospects. Hold. DL
38. SIRIUS REAL ESTATE
Sirius Real Estate (SRE) has done well to capitalise on the demand for commercial space in Germany, and has set about a twin strategy of acquiring new rental sites and maximising the potential from its existing portfolio. This includes making greater use of previously unlettable sites covering around 100,000 square metres of space. To date, around 65 per cent of this has already been transformed into providing a rental stream, and annualised rental income exceeded €60m (£48m) for the first time covering the year to March 2016.
Sirius has also been busy refinancing its debt facilities, and is at an advanced stage of renegotiating a £111m outstanding facility with BerlinHyp/PBB. Under discussion is a new £137m facility at an improved rate and over a longer period. As an example of the funds that can be saved, the recent acquisition of a business park in Mainz was part-financed with a new €16m, five-year facility with a fixed interest rate of just 1.58 per cent. This, together with a reduction in costs, is expected to boost cash flow and help to fund further acquisitions. Buy. JC
37. AMERISUR RESOURCES
Last year, Amerisur Resources (AMER) made some smart strategic moves, even if the company’s recent history contains enough moments to frustrate shareholders. Faced with a plummeting oil price, the oil explorer’s management took a big decision to cut production until the cross-border OBA pipeline was operational or WTI crude rebalanced. Factor in an average realised price of $42.85 per barrel in 2015 and the financial results did not look good; Amerisur swung to a $25m pre-tax loss as revenues dropped from $199m to $61m. But, sensibly, the balance sheet and reserves were not sacrificed at the altar of anaemic cash flows.
The company believes it can rebound this year. Once the OBA pipeline between Colombia and Ecuador is completed, costs will come down considerably, and production should steadily increase to 7,200 barrels a day by the end of the year. A $62m capital expenditure programme, funded from existing cash reserves and March’s $35m capital-raise, should also improve the reserves profile, which was given a boost last month when the company reported 2P resources of 23.7m, considerably ahead of analysts’ expectations. The Platanillo pipeline, which has taken an age to approve and build, should be finalised next month and add considerable (if overdue) weight to the buy case. AN
36. GB GROUP
Mounting concerns about online fraud and identity theft have driven Nike, Harrods and other high-profile organisations to GB Group (GBG), whose software can verify customers’ identities, run background checks on employees and root out criminal activity. Strong demand drove first-half sales up 36 per cent in the identity proofing business and 43 per cent in the identity solutions segment, which enables clients to register, track and engage with customers.
A recent trading update from GB – which can validate the identities of more than 4bn people across 40 countries – revealed strong gains in the full year to 31 March. Despite investing an additional £3.4m in senior management, international expansion and developing new products, the group grew adjusted operating profits by an estimated 24 per cent to £13.4m. Moreover, deferred revenues swelled 39 per cent to almost £14m. Management also marked its third acquisition in two years with the purchase of Loqate, a US-based location software business. The bad news was veteran boss Richard Law’s announcement that he will step down once a successor is found.
Broker FinnCap expects adjusted cash profits to leap 16 per cent this financial year, but GB’s shares trade at 31 times forecast EPS for FY2017, potentially limiting upside for new investors. Hold. TM
35. SMART METERING SYSTEMS
The march of digital technologies continues to open up opportunities across the corporate sphere – with ‘first mover’ status the preferred option. Glasgow-based Smart Metering Systems (SMS) has been profiting from a mandate from the Department of Energy and Climate Change governing the installation of smart meters in every home and small business across the UK by 2020. The metering edict was delivered in a bid to reduce industry and household costs, but also in response to pan-European environmental legislation.
Whatever the catalysts for the change, it has certainly worked to the benefit of SMS. The group’s gas and electricity metering and data assets increased by more than a quarter to approximately 979,000 units through 2015. Gross profits were up by a third to £36.5m, but perhaps the most encouraging statistic from management’s perspective was that recurring revenues have hit £34.7m, roughly two-thirds of overall sales – high visibility on the top line usually translates into firming shareholder support. Not that the group’s shares are failing to attract investor interest judging by their forecast earnings multiple of 24, which we think adequately reflects near-term growth prospects. Hold. MR
34. POLAR CAPITAL
Abenomics has been a thorn in the side of fund manager Polar Capital (POLR). Since the introduction of the Japanese president’s economic reforms in 2012, Polar’s Japanese funds have underperformed the market by a considerable margin. As a result, its funds have suffered outflows, which, combined with a negative investment performance, meant Japanese assets under management fell by a third during the first half of the year. Last year these outflows outweighed inflows into its other strategies. The financial year ended 31 March 2016 closed on a disappointing note. In its pre-close update, management said Japanese outflows had picked up again. As a result, total assets under management were down 10 per cent on levels reported at the end of December.
However, investors can expect some positive news when the fund manager reports its full-year results in June. Inflows into non-Japan strategies have increased by $204m and, despite a reduction in earnings, management intends to maintain the dividend at last year’s level. That was 25p a share and, as a result, analysts at Peel Hunt are forecasting a yield of 7.1 per cent. The shares are trading at 16 times forecast earnings for this year. Hold for the income. EP
33. YOUNG & CO’S BREWERY ‘A’
There’s going to be a new hand on the ale pumps at the Wandsworth-based brewer after long-serving publican Stephen Goodyear steps down at the July annual general meeting. He’ll be handing over control of the Young &Co's (YNGA) bar to Patrick Dardis, who at 56 has also had high-level experience at other similar companies, including Wolverhampton & Dudley Breweries (which became Marston’s) and Courage. Mr Goodyear’s shoes are big ones to fill, though, given that the shares have risen by an astonishing 450 per cent (adjusted for a four-for-one share split in 2008) during his time as chief executive, a role he took on in 2003 having been with the group since 1995.
A prominent plank of the business strategy has been to focus on the premium end of the market and holding on to this will be ever more challenging given growing competition for the affluent pub customer, notably from the likes of Fuller, Smith & Turner and increasingly Marston’s. Young’s purchase of Geronimo Inns in 2010 was a shrewd one given its well-established London gastropub estate. Building this brand out or buying a similar company could be something management is considering if it is to maintain and grow its market share. Hold. BG
32. SIRIUS MINERALS
A lot has changed for Sirius Minerals (SXX) since our last Aim 100 survey. In July 2015, after four years of campaigning, the potash prospector’s application for its polyhalite mine finally won approval from North York Moors National Park’s planning authority. The decision then passed through a judicial review period without appeal, and in March this year the company published its definitive feasibility study.
The sheer scale of that proposal certainly matches Sirius’s ambitions to become a world leader in the fertiliser industry. Production could be as high as 20m tonnes of polyhalite a year, which – depending on “various volume and price outcomes” – might generate annual cash profits of between $1bn and $3bn. That gives the project a discounted net present value of $15bn, according to Sirius, but in two key ways the forecast remains a long way off. Firstly, the company needs to raise $3.56bn through a combination of loans, equity, project finance and high-yield bonds. Given Sirius’s £365m market capitalisation, that would be some feat for a more traditional mining project. But the still nascent use of polyhalite worldwide makes the fundraising challenge even more significant. Hold. AN
31. CONVIVIALITY
Discount retailers have got a bad rap lately. One exception, in our view, is Bargain Booze owner Conviviality (CVR), which has spent the past few months working to integrate its high-profile acquisition of drinks wholesaler Matthew Clark (once owned by stricken pub group Punch Taverns). The group now works under a new structure: the Conviviality Retail division, which contains the aforementioned Bargain Booze and another high-street brand, Wine Rack, while leaving the Matthew Clark brand intact. The integration of Matthew Clark is going so well, in fact, that Conviviality bosses reckon that business should start significantly boosting earnings by the 2017 financial year – well ahead of original expectations.
But another key driver behind recent – and hopefully future – growth at Conviviality is the effort made to foster the expanding franchisee network. Sixteen franchisees joined the group in the first half of the financial year, which resulted in 19 new store openings compared with just eight the previous year. The response from the market has been overwhelmingly positive, sending the share price up nearly two-thirds over the past 12 months. Sadly that makes the shares a tad expensive, but it’s still worthy of core-holding status. Hold. HR
For the full run down click on the links below:
