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Aim 100: 70-61

Aim 100: 70 to 61
April 21, 2017

70. Telford Homes

Introducing an east London-focused housebuilder, and a very successful one at that. Over the past seven years, Telford Homes' (TEF) share price has risen by 250 per cent. Demand for apartments in particular remains robust, coming from owner occupiers, buy-to-rent and overseas buyers. More recently, Telford has adopted a capital-light business model that effectively derisks new construction by using a forward-funded process. In this way, Telford will build apartments for an institutional investor or housing association and the cost will be forward funded and paid for by the client. This means that Telford doesn’t have to use its own capital, so there is no risk if end demand for the apartments under construction suddenly evaporated.

This ‘build-to-rent’ model could account for around half the group’s business in the next few years. So far, four deals have been secured. The latest deal is through its joint venture with the Notting Hill Housing Group called Chobham Farm, and contracts have been exchanged for the first phase of open market homes in Stratford to be sold to Folio London, a subsidiary of the Notting Hill Housing Group. Telford will receive a net cash sum of £53.7m, and further phases will be launched at a later date. All in all, Telford is now developing 483 build-to-rent homes.

Gross margins on such business are lower, but not by much. For whereas gross margins on private sales average around 24 per cent, this is before deducting finance and marketing costs, which brings the figure down to around 16 per cent, compared with a virtually risk-free 12-13 per cent on build-to-rent. Despite the increased stamp duty on second homes and the uncertainty generated by the UK’s decision to leave the EU, demand for apartments close to London, but not commanding inner London prices, remains strong. A typical example is the off-plan launch of the City North Development in Finsbury Park, where 72 homes were sold in just three weekends, and with a combined value of £43m.

And there is more to come, with the forward order book standing at over £700m and the development pipeline double that. Telford has very little reliance on the Help-to-Buy scheme because purchases using this must be completed within six months of application, whereas Telford is selling apartments before they have even been built, and securing a decent deposit as well. Buy. JC

69. M&C Saatchi

M&C Saatchi's (SAA) structuring and growth plans have been performing well, increasing revenue in all of its geographies, according to its latest set of results. The most notable of these was its US business, where revenue was up 97 per cent following acquisitions in New York.

The advertising group’s investment has had a deleterious effect on its returns, however, pushing last year’s profit before tax down 46 per cent to £6.8m and earnings per share from 9.1 to 0.2p. However, on an adjusted basis it’s a much more appealing picture, with adjusted cash profits up 45 per cent to £8.26m in 2016. The restructuring is now complete, which will decrease costs for the group going forward. Given the success of its international expansion so far, we expect to see further growth in the coming years. At 15 times forecast earnings, we still think it has room to grow. Buy. TD

68. Blue Prism

Robots, rise. Every day brings a new estimate of the number of jobs that could be lost as a result of automation and artificial intelligence. It could be as many as 15m in the UK, according to one recent Bank of England projection.

One company that embodies this trend is Blue Prism (PRSM), which has built virtual ‘robots’ – it’s software, really – that automates routine back-office functions. Such tasks could be transferring data from one system to another, or quality assurance. Big name clients for Blue Prism include Accenture, Fidelity and npower.

The ‘blue sky’ Blue Prism story has gained many adherents: the current share price is a multiple of the float price. A fascinating prospect, but not in our view an investment prospect, as yet. Despite a growing top line, high costs mean losses are expected to escalate in the year to October. Hold. IS

67. Yougov

After the failure of most pollsters to predict many of the political shocks of the last few years, one might be forgiven for thinking polling businesses would be struggling. In truth, data products, not polling, is increasingly the focus for Yougov (YOU), and it looks to be paying off.

The group grew both revenue and profit at its latest half-year results, with the data products and services business growing 23 per cent at constant currencies. This is consistent with the group’s strategy of focusing on the subscription-based, higher-margin data products business. Over the year it grew to 43 per cent of revenue, from 38 per cent in 2016. This doesn’t look set to slow down, as once the products are mature they can be sold to multiple clients with no additional input cost.

Yougov is displaying impressive growth, but trading at 26 times forecast earnings, it looks like the performance is already priced in. We stay at hold. TD

66. Brooks Macdonald

Brooks Macdonald (BRK) is one of the more experienced discretionary wealth managers, having cottoned on to the benefits of charging clients a regular fee for the day-to-day running of their portfolios. Discretionary funds under management grew to over £9bn during the six months to December, £332m of which was new business. This helped push revenue up almost a fifth during the period.

Increasing distribution is a core aim for management during 2017. It already has an established network of intermediary companies, standing at more than 1,000, which introduce pass-through work to the wealth manager. Last year management agreed its first international strategic partnership with UAE-based financial adviser Abacus. The plan is to establish partnerships with advisers in countries that have a regulatory regime that is following a similar path to the Financial Conduct Authority.

The shares are trading at 18 times forward earnings, in line with the wealth management sector average. Given the quality of income on offer, we stick with our buy tip. EP

65. Next Fifteen Communications

Buy tip Next Fifteen Communications (NFC) is in a heavy investment stage. Bolt-on acquisitions are an important part of its strategy to develop a range of digital marketing services. During the 12 months to January the UK-based group acquired four domestic companies. Among these were Twotogether, a marketing agency focused on the technology sector, and marketing research agency HPI.

However, expanding into the US is even more important for management. Specialising in data-driven marketing including analytics, the group has won contracts with major US technology companies such as Google and Facebook.

The strongest revenue growth also came from across the pond. During the 12 months to the end of January the US grew revenue organically by 13 per cent. What’s more, Next Fifteen has also benefited from the strength of the US dollar, with revenue up around a quarter after taking this into account. The shares are trading at 15 times forward earnings for the 12 months to January 2018, which isn’t expensive against the sector. Buy. EP

64. Renew

Shares in engineering services business Renew (RNWH) haven’t moved hugely since our buy tip earlier this year (440p, 23 February 2017), but we still see potential for growth.

This is a company that is living up to its promises. In 2012, the company set targets to exceed £500m in revenue and reach an operating profit margin of at least 4.5 per cent by 2017. It has already beaten this target and margin growth remains on track.

Its most recent trading statement, released in April, indicated trading was ahead year on year. The October acquisition of specialist mechanical, electrical and power services company Giffen means the balance sheet should show net debt at the half-year stage, before returning to a net cash position at the end of September.

The company’s shares are currently trading at 14 times forward earnings, in line with its historic average. Given Renew’s strong order book, and the acquisition of Giffen broadening its offering, we still think it offers value. Buy. TD

63. Idox

Acquisition-fuelled expansion, which has been an important part of the strategy at Idox (IDOX) in the last few years, is set to continue in 2017. At the end of January the public sector software provider completed the acquisition of 6PM, which presents a significant opportunity for expansion in the healthcare market. The acquisition brings with it contracts to deliver efficiency improvements to the NHS.

The company’s transport management division, Cloud Amber, was also recently awarded a public sector contract and has been selected to join the government’s low emission freight and logistics trial.

One downside to the company’s strategy to diversify into different sectors is that the percentage of recurring revenue has taken a slight knock. But still, at 82 per cent of the top line, there’s plenty of reason for confidence, confirmed by a recent trading update. We rate the shares a buy based on the potential for growth and strong share price momentum. MB

62. Camellia

Sporting an unlikely business portfolio that includes producing tea, macadamia nuts, private banking, financial and engineering services, the big news is that Camellia (CAM) has decided to dump its Duncan Lawrie Private Bank.

The sale of its loan book and asset management side reflects a desire to reduce the group’s risk profile and the decision was also prompted by the low interest rate environment which made it tough to maintain margins. Most of the loan book has been sold to Arbuthnot Latham for £42.7m, which equates to 95 per cent of the outstanding loan book.

On the agricultural side, higher prices and strong tea production helped to offset the effects of drought, which affected macadamia nut production. As always, the weather remains an all-important factor, but assuming that conditions remain benign then the second half could see an improvement on the £4.9m pre-tax profit delivered in the six months to June 2016. Still, the shares are too highly rated to recommend an entry point. Hold. JC

61. Numis

Times are tough for brokerages. Corporate retainer fees are in decline, while corporate finance and capital raising revenue remains at the mercy of market sentiment. Up until its latest financial year, broker Numis (NUM) had been withstanding these pressures.

However, what management calls a “paucity of primary equity issuance” in the UK market during the six months to the end of March, means total income for the period is expected to be lower than in 2016. However, management did say it has a number of corporate transactions due to complete in April.

In an effort to mitigate the effect of unpredictable markets, management has been positioning the business more towards corporate consultancy and advisory work. This part of the business has been steadily adding clients – 16 during the 12 months to September, taking the total number of clients it acts for to almost 200. The shares are changing hands at 11 times forward earnings and with a typical yield of around 5 per cent, we stick with a buy. EP

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

Aim 100: 100-91

Aim 100: 90-81

Aim 100: 80-71

Aim 100: 60-51