90. Mattioli Woods
The goal: to build a vertically integrated wealth manager. Starting out as an employee benefits provider, Mattioli Woods (MTW) has been steadily adding businesses to diversify into wealth management and pensions consultancy.
The investment and asset management business has led the way in revenue growth so far during this financial year. Income from advising clients on personal and pension investment grew by 30 per cent during the six months to November, while portfolio management charges were up £1m to £5.1m. Like its peers, Mattioli Woods is benefiting from an increase in the money it manages on a discretionary basis – where it takes charge of the day-to-day investment management – which also delivers more recurring revenue. Referrals from the employee benefits business have assisted here.
So far this financial year Mattioli has added five businesses. The largest of these was MC Trustees, a pensions administrator that brought with it £442m in assets. That’s not to say organic growth is absent – in fact, the growth rate doubled during the first half to 14 per cent. At 815p, the shares are trading at 24 times forward earnings, a demanding rating both against the wider London market and against Mattioli’s peers. However, we like the level of diversification, recurring revenue and structural drivers. Buy. EP
89. Arbuthnot Banking
Buy tip Arbuthnot (ARBB) is undergoing sizeable changes to its structure. During 2016 it reduced its holding in fellow challenger bank Secure Trust (STB) from 52 per cent to 19 per cent, banking a £100m gain. This meant investors were also rewarded with special dividends totalling 325p a share last year. Yet the real benefit of the sale is the capital that management now has to play with to diversify its business. That’s not to say its traditional private banking business is not growing. Last year customer loans within the private banking business were up a tenth to £683m. Investment gains during the year meant assets under management for its investment business grew a quarter to £920m.
However, one of the most important aims for the bank during 2017 is to diversify its activities. Part of this strategy involves developing its commercial lending business. This launched in September 2015, and built up £72m in lending balances by the end of December. It also hired 31 staff and opened offices in Manchester and Exeter. The business caters predominately to owner-managed businesses and started with lending to real estate and media businesses. It now has teams focusing on sectors including legal services, private education and healthcare.
Having additional capital on its balance sheet following the sale of Secure Trust means acquisitions are also on the cards. Last year Arbuthnot acquired the loan book of private bank Duncan Lawrie, worth almost £45m. It also bought vintage car specialist Renaissance Asset Finance, which also lends to small- and medium-sized businesses for asset finance. Chief operating officer Andrew Salmon has told us further acquisitions are planned but would be bolt-ons, rather than large purchases.
Arbuthnot has a prudent approach to lending, with an average loan-to-value ratio of just 45 per cent. Its leverage ratio is also one of the lowest in the banking sector. Management has also set a target of 20 per cent return on capital for new business. Analysts at house broker Numis expect adjusted net tangible assets of 1,506.8p a share for December 2017. At 1,470p, the shares are trading at a slight discount to this measure. For a capital-rich business, with a fast-growing loan book, we don’t think this is justified. Buy. EP
Midway through last year, Blinkx changed its name, effectively unifying its advertising trade entities under a single brand – RhythmOne (RTHM). The move seems to have had the desired effect, with the shares more than doubling over the past 12 months.
The whole point of the rejigged commercial offering is that its advertisers will be able to access an expanded target audience through a single access point, covering a fully integrated range of formats beyond desktop and mobile video. Those capabilities were enhanced following the December deal to acquire Perk, a Canada-based platform that exploits the interests of consumers, advertisers, and publishers by offering consumers rewards.
The efficacy of the move was brought home by January’s third-quarter update, which revealed sequential monthly growth in revenue and cash profit, with particularly strong growth in programmatic – ie, automated – platform revenue. A full-year trading update projected a return to cash profit, on an adjusted basis, in the year to March 2017. Hold while the dust settles. MR
87. Manx Telecom
Manx Telecom (MANX) does what it says on the tin, by providing telecoms services on the Isle of Man. In an attempt to increase revenue in what is a market with limited penetration potential – just 90,000 people live on the island – Manx has been investing in a new fibre optic delivery system and the promotion of 4G. All this has dented profits, although the benefits of this investment programme are likely to start showing through in 2018. It has also launched a wholly owned subsidiary called Vannin Ventures, with the express remit of identifying new business opportunities.
And Partitionware was acquired last December to support development of innovative products and services. The shares are barely changed since our buy tip (202p, 11 February 2016) as growth over the last few years has been relatively pedestrian. However, with investment in new products including promotion of 4G, revenue growth is expected to accelerate. Buy. MB
Market newcomer Joules (JOUL) makes its debut in this list. The clothing chain has been hailed as one of the better-quality floats on the junior market in recent years, despite arriving on the London Stock Exchange shortly before the somewhat disruptive EU referendum. However, the group’s fortunes have moved with the market, and the shares are trading around £1 ahead of the IPO price of 160p.
Investors were particularly impressed with the latest set of results. Pre-tax profit in the six months to November 2016 grew by a whopping 80 per cent thanks to a 16 per cent surge at the top line and a 101 basis point improvement in gross margins. Even better, the group is fully hedged up until the end of its financial year in May 2018 and is confident an uptick in volumes will be sufficient to convince its suppliers – with whom it trades in US dollars – to compromise on prices. This means customers shouldn’t suffer sterling-based price increases this year.
The group is striking the delicate balance between online and offline growth: a central challenge British retailers face in satisfying the modern consumer. At last count, e-commerce sales were up by 30 per cent to £19.7m, compared with an 11 per cent increase in store-based retail sales to £34.5m. The group also has a wholesale operation, selling to independent retailers and department stores at home, in the US and Germany. Wholesale sales surged by 17 per cent during the first half.
International revenue now represents more than a tenth of total group sales and there are also plans to bring parts of its US distribution operation in-house, which will require additional investment this year. That explains why some City analysts have kept their profit forecasts static for the current financial year, despite a significant outperformance of expectations during the first half. That said, the US decision should have a positive impact on margins in the long term, which will help the company offset rising costs even further. On home soil, the group is also investing, and plans to open more physical retail locations. During the first half, the group opened 10 net new stores, taking the total estate number to 107 by the period-end.
Don’t underestimate the resonance of this middle-market casual-wear brand. Although the shares trade on a punchy 30 times forward earnings, we still think Joules is one to watch. Hold. HR
85. Alliance Pharma
Recent results from Alliance Pharma (APH) suggest its acquisition spree is bearing fruit. The 27 products bought from fellow Aim group Sinclair Pharma (SPH) are now fully integrated. Despite the aforementioned hitch with one drug (see number 97), this bought-in business has expanded Alliance’s European reach, helping to double group sales, cash profit and cash flow. Don’t worry about the underlying business, either – sales on this basis have peaked at £53.7m, while underlying EPS rose 11 per cent.
But this shopping trip hasn’t come without consequences. Looking at the balance sheet, net debt amounting to 2.8 times cash profit now looks pretty toppy. Thankfully, management is confident that the group’s strong cash flow can bring that ratio down to around two times come the end of the financial year. What’s more, Alliance can look forward to UK approval of nausea medicine Diclectin, due later this year, as it could generate up to £40m-worth of licenced European sales for the company. Trading on 12 times forward earnings, the shares still lag the company’s historic average. Buy. HR
Despite the headwinds, CareTech (CTH) is demonstrating it is still possible to make a success of running a string of care homes. There has been pressure on rates charged by care homes as local authorities strive to keep costs down, while the introduction of the national living wage has increased costs going forward.
However, CareTech is working closely with local authorities to achieve fair increases in fees, and it is also expanding to achieve economies of scale in what remains a highly fragmented sector. In February, it raised £30m through a ground rent transaction and used it to make another acquisition, and in March it raised a further £39m through an oversubscribed share placing. More acquisitions can be expected to add to the existing portfolio of over 195 properties.
Trading so far this year has been encouraging, with good demand for its services. The living wage started on 1 April, but ongoing fee discussions are expected to achieve a positive change compared with 2016. Buy. JC
VinaLand (VNL) gained a reprieve late last year when shareholders voted to extend the proposed wind-up order so that the company would have more time to sell off its portfolio of property in Vietnam.
This is a high-risk area to invest in, which explains the chunky discount in the share price to net asset value (NAV). However, in the second half of 2016 it did manage to sell three properties. These were the Resort Project in Danang which realised $7m; Project Ceana in Quang Nam for $7.6m; and a project in Binh Duong for $10.9m. However, this is small fry given that there are $318m of assets on the book.
There is no dividend paid out, but in the second half of 2016 the company bought back $23.6m of shares and also achieved full redemption of the zero dividend preference shares. Shareholders will have also seen an 11 per cent increase in the share price since April 2016. Buy. JC
82. Crystal Amber Fund
Activist investor Crystal Amber (CRS) has significantly boosted its NAV recently, sending the shares up more than half during the past 12 months. Its 14 per cent holding in Hurricane Energy (HUR) has delivered particular benefits to the investment group. The oil exploration group announced several positive field results during the latter part of last year, nearly tripling its share price. At the end of March, Hurricane announced further encouraging results at its Halifax site, keeping bulls interested, and which obviously bodes well for the value of Crystal Amber’s holding.
Overall, the investment group’s NAV climbed 42 per cent during the six months to the end of December. Hurricane’s gains accounted for a third of this rise. There is also reason to think its 3.4 per cent holding in the UK’s largest listed residential property holder Grainger (GRI) will generate further gains. Grainger’s board is investing £850m in the private rented sector by 2020, of which £389m has already been secured and a further £347m is in the legal or planning process. At 237p, the shares are trading at a 9 per cent premium to net assets. However, given the progress at its core holdings, we stay bullish. Buy. EP
Rising competition in the gambling industry is proving lucrative business for XL Media (XLM). The group operates via two main divisions – publishing, which directs potential customers to online businesses, and a media business that acquires online and mobile advertising, with the aim of directing it to the group’s customers. It also has a legacy business managing marketing partners, whose role is to direct online traffic to the group’s customers.
The gambling sector accounted for 70 per cent of group revenue during 2016. However, this was down from 83 per cent in 2014. Management is trying to diversify its income stream by client type and geography. In January it acquired Canada-focused credit card comparison site Greedyrates, its first significant financial services asset. Management has a track record of delivering hefty increases in annual dividend payouts. For 2017 analysts at Berenberg forecast a dividend per share of 7.2p. On the current share price, this presents a forward yield of 7 per cent. Trading at just eight times forward earnings, we stick with a buy. EP
See our analysis of the rest of Aim's numbers 100-51