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Aim 100: 100-91

The lowdown on the junior market's Top 100 companies. In this section: 100 to 91
April 21, 2017

100. Vernalis

A tough year for Vernalis (VER) has seen it only just cling on to its place in the Aim 100. The share price of the cough and cold drugs specialist has been battered after sales of its first ‘home grown’ drug, Tuzistra, failed to take off as expected in the US. Chief executive Ian Garland admitted that the group hadn’t managed to get its commercial operations off the ground as quickly as hoped.

But more recent signs are encouraging. In early March, even as the wider cough and cold season was slowing, Tuzistra enjoyed a 4 per cent rise in weekly prescriptions, meaning the group looks on track to reach broker Panmure Gordon’s full-year sales forecast of £15.8m. More encouraging still is the progress of the new drugs pipeline. Vernalis has two more cough and cold remedies in the late stage of clinical trials, due to announce results this year. Buy. MB

99. Pantheon Resources

When Pantheon Resources (PANR) debuted in this list a year ago, the Texan oil and gas driller was riding high. Although a repeat of 2015’s momentous share price rise (up more than 800 per cent) was never going to be easy, particularly given the further pain in the sector and the need to maintain a perfect drilling record, the last 12 months have been a lot more disappointing for investors.

In the second half of 2016, a series of operational issues caused delays to the drilling programme and indirectly hampered development at the snappily named VOBM#2H discovery well in Polk County. Flow testing in that important play is expected soon, after which the company headed by industry veteran Jay Cheatham will hope to connect the well into the planned production facility “at the earliest opportunity”. The hope is that first oil from the VOBM#1 could lead to free cash flow of $0.7m (£0.56m) a month at current prices, but we are a little nervous that a March-end cash and cash equivalents of $8.5m might fall short of the liquidity needed to see the group through to production. Sell. AN

98. SQS Software Quality Systems

Uncertain is the only way to describe the 2017 outlook for SQS (SQS). Last year, the leading independent software tester reported a slight decline in revenue from its bulky managed services division as it looks to shift away from large long-term contracts to “more agile and decentralised engagements”. Management thinks that this will help procure long-term profit hikes due to the high margins generated from this kind of consultancy work. But in the short term, a dwindling number of big contracts is creating an air of uncertainty, with broker Numis downgrading revenue expectations twice in little over six months.

There are more concerns surrounding the US business, where SQS recently made a couple of acquisitions. Although the stateside software testing market is the largest in the world, growth there is expected to be subdued following recent public policy changes. The shares, trading on 12 times forward earnings, are cheap for a tech company, but we think this is a fair reflection of the opportunities and risks. Hold. MB

97. Sinclair Pharma

Sinclair's (SPH) recent results should have been encouraging for investors. But figures including pro-forma revenue up by a half were overshadowed by news that the company will have to pay a £5m compensation fee to rival group Alliance Pharma (APH) after one of the drugs Sinclair sold to Alliance last year failed to perform as expected. Analysts aren’t too concerned that the company will be able to deal with the fee, particularly as the cash coffers still look pretty healthy – net cash was £17m at the end of 2016. Once that’s dealt with the company can get back to its expansion into the US and Brazil – two very important dermatology markets. Even better, gross margins are widening (by 240 basis points last year), so the expectation is for the company to be reporting cash profit by the end of the financial year. It’s hard to value the shares given the lack of tangible earnings, but it’s still a speculative buy for us. Buy. HR

96. Quartix Holdings

The drive to increase recurring revenue is likely to dampen the growth we’re used to from Quartix (QTX) in 2017. But that’s not necessarily a bad thing. The vehicle tracking specialist is focusing its energy on the fast-growing, fleet tracking business where customers are sticky, margins strong and repeating revenue is high. In 2016, this division grew revenue by 15 per cent after it attracted 2,336 new customers.

The global market for fleet tracking is very attractive, particularly in the US, where Quartix recently launched its commercial operations. With around 28m registered commercial vehicles stateside, Quartix has plenty of room to expand and is targeting 7m to 8m US customers over the long term. With its impressive cash flows, propensity to pay special dividends and excellent track record for growth, Quartix is a quality operator. But that quality comes with a 30 times forward earnings valuation, which is why we’re at hold. MB

95. Time Out Group

This company is much more than a magazine. The lesson, which management at media group Time Out (TMO) is always keen to teach investors, is important given severe industry stresses. The decline of print advertising is well covered, and yet Time Out managed to grow its turnover by a quarter in 2016.

How? Digital advertising sales, where the company offers a mixture of native advertising, programmatic platforms and cross-media strategies, are growing strongly – big name clients include British Airways. E-commerce revenue, in the form of ticket booking for theatrical performances, gigs and live events, is also surging. And the company’s curated markets – which host pop-up restaurants, street food vendors, and shops – are expanding globally.

But all this expansion costs money, and the company is not expected to generate even a cash profit until 2018. That’s too rich for our blood. Hold. IS

You can listen to our podcast interview with Time Out CEO Julio Bruno free at http://acast.com/investorschronicle.

94. OPG Power Ventures

Energy supplier OPG Power Ventures (OPG) had a good first half: revenue doubled in the six months to end-September 2016, lifting cash profits by 81 per cent to £42.1m.

In its third-quarter update, generation was up 53 per cent to 3.4bn units for the first nine months of the year, while the debt repayment schedule for its Gujarat plant – which was fully commissioned in February – was extended by 10 years, resulting in a £67m reduction in principal repayments between 2017 and 2021. The company also said it has completed its coal purchases for the 2017 financial year, although consensus expectations are for a decline in prices in the remainder of this calendar year and next.

The changed debt schedule should give the company improved balance sheet flexibility, while India’s economic growth has continued apace, which is good news for electricity demand. Both are beneficial to the company’s growth prospects. Meanwhile, trading at eight times forecast full-year earnings, OPG still looks cheap. Buy. TD

93. Mortgage Advice Bureau

The UK’s vote to leave the European Union fed predictions of a slowdown in the UK housing market. For Mortgage Advice Bureau (MAB1) these worries meant a sizeable dip in its share price at the end of June, and a slow recovery. However, management at the mortgage lender is confident of the group’s ability to grow its customer numbers. This is despite the Council for Mortgage Lenders anticipating that UK mortgage lending will be relatively flat during the next two years. At the time of the mortgage lender’s full-year results in March, chief executive Peter Brodnicki told us MAB had a “market share business model”.

Last year the group came good on this, growing its share again. That meant an increase in mortgage procurement fees of more than a quarter. Growing the intermediary network is crucial to this progress. Last year average adviser numbers grew to 888 and stood at almost 1,000 post year-end. Despite these additions, Mortgage Advice Bureau still has just 4 per cent market share. Yet management is open to acquisitive growth, too. Investments last year included a 25 per cent stake in Clear Mortgage Solutions, to help establish an intermediary network in Scotland. It also entered the Australian brokerage market via a joint venture and will decide at the end of the year whether to build a more bespoke brokerage model, replicating its UK operations.

This is a highly cash-generative business. Some 128 per cent of operating profit converted into cash last year, compared with 112 per cent in 2015. With minimal capital requirements, this supports a generous dividend policy to pay out 90 per cent of post-tax profit. At 433p a share, the forecast dividend yield for the 12 months to December 2017 is 4.8 per cent. The shares trade at 19 times forward earnings – admittedly, slightly more expensive than when we tipped the shares at 17 times a year ago, which puts them 12 per cent above our buy tip (386p, 21 April 2016). They continue to offer a healthy income, and the growing market share bodes well for further cash generation. This bus is still rolling, and stick with a buy. EP

92. Andrews Sykes Group

As a business hiring out both heating and air conditioning units, you would be forgiven for thinking Andrews Sykes (ASY) has a perfectly diversified business model. It’s not quite that simple, but the group is performing well. Despite a mild winter, demand for heating and boiler hire products was up in its most recent results. This increased operating profit by more than a quarter to £6.4m for the six months ended 30 June 2016. Revenue grew to £30.3m from £28.2m in the same period in 2015.

Indications for the second half of the year are positive, too, with above-average temperatures in Europe boosting demand for air conditioning products. The group’s business in the Middle East has been positive, and its Sharjah and Abu Dhabi geographies are both ahead of last year. The board is optimistic that overall full-year numbers will also beat their comparatives. With the shares trading at four times the book value, Andrews Sykes is valued slightly above its five-year average. That prices in its prospects. Hold. TD

91. Vertu Motors

The good news for motor retailers is that new car sales are holding up post-referendum. That bad news is no one knows how long this could last. For Vertu Motors (VTU), this nervousness has resulted in a share price derating of close to 25 per cent over the past 12 months. When it reported half-year results last October, a 4 per cent drop in like-for-like new car volumes put the market on edge.

Last month, the retailer reported that total new retail vehicle volumes were up by 1.5 per cent over the five months ended January 2017, while like-for-like volumes fell by 9.3 per cent. This was partially offset by higher like-for-like gross margins, which strengthened from 7.9 per cent to 8.0 per cent.

After a record 2016, new car registrations are expected to fall by 5 per cent this year, according to industry numbers. Vertu’s shares might trade on a tempting eight times forward earnings, but that could be a value trap if results – out in May – disappoint the market. Hold. HR

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