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Aim 100: 80-71

Aim top 100: 80-71
April 21, 2017

80. BNN Technology

Last October, Chinese lottery operator DJI Holdings dropped its name and remodelled its business as a technology platform provider. This followed on from a decision by authorities in China to suspend online lottery licences. The new incarnation BNN Technology (BNN) continued to operate land-based lotteries subsequent to the ban, but is now focusing on the mobile payments market. The ban on online lotteries has blown a hole in revenue, although the transformed platform has attracted substantive institutional support, no doubt partly predicated on expected growth rates for the smartphone market in the People’s Republic. Although year-on-year comparisons are largely meaningless, BNN delivered £2.1m in revenue in 2016 as its business mix changed. Investors will be focusing on the take-up for its services. With gross transaction volumes up from £79m in 2015 to £299m in 2016, hopes are high, but we need to see further evidence before upgrading our view. Hold. MR

79. Majestic Wine

It’s fair to say Majestic Wine (WINE) has a long way to go this year if it’s to regain the market’s trust. Last September’s profit warning, which came as a result of its acquired Naked Wines business, was quite a blow. Let’s recap: an initial mail-based marketing campaign in the US had shown encouraging returns, so the wine retailer’s bosses decided to take it national. But the wider rollout failed to generate the same results, leading the company to project that first-half costs would be higher than anticipated and full-year operating profit would be £2m below expectations. Brokers immediately revised forecasts downwards, and the share price responded accordingly.

At the time, chief financial officer James Crawford told us the experience reflected “one bad investment” and insisted investors take note that the Naked Wines business still managed to grow sales by 27 per cent during the six months to December. But the market is clearly concerned about other issues, too. Back on home turf, Majestic Retail sales grew by 5.7 per cent on a like-for-like basis during the same period, while the commercial division – essentially the trade supply operation – only managed a 1.2 per cent improvement.

All eyes are on costs. Acquisition and marketing expenses explained most of the drop at the bottom line last time around, but it’s thought further investments in the supply chain and backdoor systems are what’s needed to reignite growth for the commercial arm. Even worse, Majestic will be forced to put through price increases this year in the UK to offset rising costs and protect margins, and analysts at Peel Hunt say the “jury is still out” on how consumers will respond to more expensive booze.

There are reasons to hope, however. Management changes at Naked Wines have also helped to stabilise trading across the Atlantic, reassuring analysts. Return on investment rates have improved and sales are thought to be decent. But it’s the same story: costs are expected to hold back profitability, especially as its negotiating power with independent wine producers is intrinsically limited.

Come the prelims in June, analysts suspect there will be another bears versus bulls battle over Majestic Wines, although some brokerages are sitting firmly on the sidelines for now. We’re taking a tougher line – the shares are priced for recovery at 33 times forward earnings and that looks vulnerable if management disappoints on results day. Sell. HR

78. Xeros Technology

Three years on from Xeros Technology's (XSG) admission to Aim, the commercial potential of the group’s patented product offering is yet to come out in the wash. It supplies a range of polymer-based washing systems, utilised across multiple commercial environments, which offer benefits in terms of reduced water and energy usage. Xeros’s polymer bead machines generated significant interest in the financial press when it announced its intention to float in the early part of 2014. But that early interest has yet to translate into wider commercial acceptance of the technology.

It could be argued, however, that Xeros is still in early-stage corporate roll-out. After all, the company’s last published regulatory figures detailed the installation of 116 commercial washing machines, against 50 in the comparative period for 2015. Attention will centre on the take-up of its technologies in its results published this week for 17 months to the end of December 2016, following a change of the accounting reference date. Hold. MR

77. Safestyle

It would be wrong to think that the scope for double glazing must now be limited. Not only are there plenty of houses without it, but first generation units are now being replaced as well.

So Safestyle (SFE) has been kept busy and, crucially, it has continued to grab a bigger share of the UK market, up from 9.5 per cent in 2015 to 10.2 per cent last year. Order intake for the coming year is up 4 per cent, and price increases have offset the increased cost of imported materials as a result of sterling’s weakness.

There are big changes in place for the coming year, not least an expansion of its existing factory, including a glass toughening furnace and a high-speed cutting table. This means that frames and double-glazed units will be built on a single site, which will greatly enhance efficiency. New branches are being opened, and for shareholders, there’s a decent dividend, too. Buy. JC

76. Gemfields

Mining stocks were some of the best performers in 2016, and entered this year with heightened cash generation, better balance sheets and lower costs. That was the picture for industrial commodities groups, at least. Gemfields (GEM), which operates the largest emerald mine in the world at Kagem in Zambia, initially appeared to track that rebound, but was rocked by the decision taken by Narendra Modi’s government in November to ban the circulation and use of 500 and 1,000 rupee notes. While the coloured gemstones miner doesn’t deal directly in the Indian currency, many of its customers do and were instantly hampered by liquidity issues.

That forced the delay of an emerald auction initially scheduled for December, and which ultimately proved to be a disappointment when it took $22.3m in February at an average price of $64 per carat. The cancellation of another high-quality emerald auction scheduled for the current financial year also means that 2017 will be a poor comparison against last year’s strong set of results, which included a pre-tax profit of $41.8m.

Of course, there is always the hope that a less than sparkling recent outing for the emeralds business – including “variable” recoveries from Kagem’s mining plan – could be reversed by pent-up demand from a less hamstrung Indian customer base. Investors can also place some faith in rough ruby and corundum production from Montepuez in Mozambique, which accounted for the bulk of revenue in the six months to December. Following an upgrade to the mine’s processing plant in December, Montepuez is now targeting a throughput rate of 150 tonnes per hour, an increase of around 50 per cent. Unit operating costs have already fallen precipitously to just $2.21 per carat, which together with rock handling unit costs of $4.59 per tonne match up favourably with an average sales price of $28 per carat.

Given the enormous occasional prizes on offer, it can be tempting to value gemstone miners on similar lines to their precious metals peers. Within that group, Gemfields remains the alluring differentiator with its premium coloured stone offering, and is better placed in a marketplace which has shown an increasingly uncertain appetite for rough diamonds. But with the timing of a return to ‘normal’ conditions in the demonetised Indian market as yet uncertain, we remain neutral. Hold. AN

75. Central Asia Metals

What makes a good mining stock? Some would argue that the whole point is leveraged exposure to commodity price rises. Others want to see reliable cash returns. Central Asia Metals (CAML) certainly falls into the latter camp, and is an awkward fit in the former. This is largely because the group is such a low-cost copper producer that price increases in its key output are less magnified than they are at other miners.

Last week, the Kazakhstan-based company revealed to the market that its C1 cash costs had fallen to just 43¢, paving the way for a full-year dividend equivalent to an unparalleled 31 per cent of revenue. Unfortunately, the cash-printing characteristics of Central Asia’s Kounrad mine render most other opportunities forgettable.

Take Copper Bay, the group’s 75 per cent-owned tailings project in Chile: January’s defined feasibility study arrived at a meagre $34.1m net present value, based on an $88.5m capital layout and assuming a $3 per pound copper price. Its development would only dilute Central Asia’s current value; still, the 7 per cent yield looks very secure. Buy. AN

74. Midwich

Specialist audiovisual, IT and document solutions business Midwich (MIDW) released a promising set of results last month as it reached the end of its first full year as a public company. The group increased revenue 18 per cent and profit before tax 41 per cent in 2016, marking a good year since it listed on Aim last May. Since then, it has acquired a majority stake in Earpro SA, an audio, video and lighting specialist with operations in Spain and Portugal.

This acquisitive strategy looks set to continue, as last month managing director Stephen Fenby told Investors Chronicle the group continued to look for suitable opportunities, namely those that offer new products, capabilities or geographies to add to the company’s portfolio. Recent acquisitions and organic growth also bode well.

The company trades on 17 times forward earnings, which looks fair value for its prospects. This is one to watch. Hold. TD

73. San Leon Energy

Investors in San Leon Energy (SLE) may be sitting in limbo, but it is not necessarily a painful one. In December, the oil and gas development group confirmed press reports that it had received a preliminary 80p a share offer from Chinese investor Geron Energy, in a deal that would value the company at £360m. Consequently, the entire investment case hinges on whether a firm offer will materialise.

As it is obliged to do, San Leon advised caution that the talks will lead anywhere – adding that there were “significant uncertainties as to whether or not the matter will proceed”. The company has not yet commented on an Irish Times report of a bid from a second Chinese suitor, although that hasn’t stopped majority shareholder Toscafund Asset Management picking up any spare stock in the market. If all comes to naught, San Leon can focus its attention on OML 18, the Nigerian onshore field in which it acquired a stake last year. Hold. AN

72. Quixant

The market for casino machines is growing and Quixant (QXT) – which makes the internal hardware and software of these devices – looks ideally placed to benefit. The group’s main customer, Ainsworth, has recently been acquired by market leader, Novomatic, sparking speculation that this global giant of the casino machine world may soon turn to Quixant for its tech needs. Plus, Brazil is expected to legalise gambling in 2017, which would open up a whole new market for the company.

Recent acquisitions, on top of double-digit organic growth sent group revenues up by more than 100 per cent in 2016. Profit growth is also impressive and broker finnCap expects double-digit pre-tax profit growth to continue in 2017. Plus, the highly cash-generative nature of the business model means Quixant has now paid off all its debt. We therefore expect more acquisitions to come this year. We recently upgraded the shares to a buy, despite a relatively steep forward earnings valuation of 26 times. Buy. MB

71. Amerisur Resources

Amerisur Resources (AMER) may tout its first mover advantage in the Putumayo region of Colombia, but the principle doesn’t necessarily apply in every field of business. As demonstrated by the devastating flood that hit the province earlier this month, deficiencies in the remote region’s infrastructure have left serious challenges to setting up a productive concern. In fact, investors will certainly have wondered over the last two years when the oil and gas exploration group will start to live up to its low-cost, hyper-expansionary promises.

Those worries were partly answered last October, when Amerisur completed the long-awaited construction of the OBA pipeline connecting the Platanillo field with Ecuador, thereby setting the stage for a transport rate increase to 5,000 barrels a day this quarter. The pipeline has not only brought operating costs down to a mooted $15 a barrel, but should provide the platform from which the company can plough ahead with its drilling programme. A glance at the other side of the Rio San Miguel, under which the OBA passes, explains why the company has been so keen on the area; it is the home to the Oriente Basin, source of the majority of Ecuador’s half a million barrels of daily oil production. On the Colombian side of the river, Amerisur’s best estimate of net attributable resources stands at 1.1bn barrels. The figure could be as high as 4.3bn, mind.

The next leg of Amerisur’s bid to increase production to 20,000 barrels a day by 2019 received a boost in March, after a successful step-out well in the Northern part of the Platanillo field revealed net oil-saturated pay in various sands. The news bodes well for further two infill wells expected this year, both of which have been given a capital expenditure estimate of $4m apiece. As well as building the reserve base, the group is confident that cash generation from increasing sales can be used to convert reserves into production, although broadening the production base to three fields in the next two years may require financing.

All options are currently on the table, but the group will hope that it can complete its 10-well drilling schedule by the end of 2018 without additional funding. With the scale of the group’s prospects coming into sharper relief, we remain buyers. AN

See our analysis of the rest of Aim's numbers 100-51

Aim 100: 100-91

Aim 100: 90-81

Aim 100: 70-61

Aim 100: 60-51