30. Conviviality
Megamerger news like that of supermarket chain Tesco (TSCO) and wholesaler Booker (BOK) often has wider implications for the market, and the smaller companies operating within it.
This was certainly on the minds of Conviviality (CVR) shareholders when the booze supplier issued half-year results just a few days after Tesco announced its intentions. Conviviality supplies Tesco with its fine wine range, but chief executive Diana Hunter says she doesn’t expect Conviviality’s relationship with Tesco to change – should the merger go ahead – as the group has always operated “side by side” with Booker. What’s more, Conviviality prides itself on its specialism in alcohol compared with Booker’s wider grocery offering.
Conviviality, like Booker, spans retail and wholesale operations through businesses such as Matthew Clark, Bargain Booze and Wine Rack. This diverse revenue stream should help protect it against the toughening consumer environment. For now, we still think the shares are good value on just 12 times forward earnings – not to mention the attractive dividend yield of more than 4 per cent. Buy. HR
29. Benchmark
An appetite for fish has long been a trend in the Far East, but more recently it’s catching on worldwide. This so called ‘blue revolution’, alongside great pressure on the world’s oceans to provide the desired fish, has increased the need for aquaculture and, as such, fish health products are in high demand.
Benchmark (BMK) has aligned itself to benefit from this change. The group’s 2015 acquisition of global aquaculture business INVE has given it a strong commercial platform through which it can sell its novel products for increasing the efficiency of fish farming. In 2016 integration of this business, big research and development expenditure and larger finance costs widened group losses.
But the opportunities from the market, the group’s product portfolio and its new improved commercial platform means broker Numis expects adjusted cash profit to double between 2017 and 2019. Benchmark is evolving from a research and development group to a commercial company and we expect the strong share price momentum to continue. Buy. MB
28. Ithaca Energy
Long a stalwart of the junior market, Ithaca Energy (IAE) should make its final appearance in the Aim 100 this year, once its takeover by Israeli conglomerate Delek goes through. The tender offer deadline had extended to 3 May, at the time of writing, with holders of 70 per cent of outstanding shares having accepted the deal.
That £518m bid, which offered 120p a share to Ithaca shareholders, arrived in February just as the North Sea outfit was about to generate long-awaited first oil from the Stella field. Many investors will therefore have felt short-changed by the price recommended by the board, but some solace may have been provided by full-year results published in March, which revealed that gas exports to the CATS pipeline were yet to be commissioned. AN
27. Advanced Medical Solutions
The launch of the first US hernia surgical fixation product – the LiquiBand Fix8 – will be a big target for Advanced Medical Solutions (AMS) over the next few years. Although it is expected to take three years to complete the clinical trial procedure, it is exciting that the group has got the ball rolling in getting this product to market. In the meantime, AMS can enjoy the growth provided by LiquiBand Fix8 sales in Europe, where revenue rose 69 per cent to £1.1m in 2016.
Newly launched products and overseas sales are making up for relatively slow growth in the UK. Here revenue from A&E departments suffered in 2016 due to the arrival of a lower priced competitor. But AMS’s superior products means some of the business from UK hospitals is starting to come back. The outlook is good for 2017 and beyond, which is why we rate the shares a buy, despite their relatively high forward PE ratio of 28 times. MB
26. Plus500
Just when Plus500 (PLUS) was getting itself back on track after 2015’s compliance stumble, the regulator threw it a curve ball. The Financial Conduct Authority’s proposals to crack down on the amount of leverage contract for difference (CFD) providers are able to offer customers sent shares in these providers into freefall.
If enacted, the proposals would mean leverage capped at 50 times the amount traded and even lower for less-experienced clients. Plus500 offers products with a leverage limit up to 200:1. The outcome of the consultation on these plans is due to be announced this spring.
Sensibly, the CFD specialist has been gaining licences outside the UK, most recently in South Africa, New Zealand and Israel, to try to diversify its income stream. However, with a higher customer churn rate, the Israel-based group still stands to be hit worse than some of its peers by the FCA plans.
At 430p, the shares are trading at just eight times forward earnings, a deserved discount to peers IG (IGG) and CMC Markets (CMCX). Hold. EP
25. Smart Metering Systems
Shares in Smart Metering Systems (SMS) have been climbing since release of its 2016 full-year numbers in March. The group has completed a series of acquisitions that improve both its installation capacity and support capabilities, making it less reliant on subcontractors to put meters in and better able to manage them once they are in. This puts them in an enviable position, well placed to take advantage of the government’s plans to offer every home and small business a smart meter by 2020.
The group has been growing the recurring rent it receives from meters, up 13 per cent to £31.5m for its more popular gas meters, and electricity more than doubling to £2.9m. With eight new contracts for installation and ownership signed in 2016, this doesn’t look likely to stop.
It makes for a compelling growth case. The complication is the price. The shares are still trading at 29 times forecast earnings, which looks about right. Hold. TD
24. Scapa
Let’s face it, some businesses, some sectors, capture the imagination, while others struggle to generate column inches due to the prosaic nature of their commercial offering. For investors this shouldn’t matter one jot. Unless you’re in the process of bleeding out, it’s unlikely that you would show much interest in Scapa’s (SCPA) range of adhesive-based products for the healthcare market – bandages, for want a better word.
But the group has delivered a steady 6 per cent annualised growth rate in revenue since 2012 and its product offering in both the healthcare and industrial sectors tends towards the niche, specialist or value-added end of the market. This has enabled the group to move up the value chain and build margins, a process given added impetus by last year’s deal to acquire US-based EuroMed, a hydro-colloid (ie, opaque or transparent) wound dressings specialist. The acquisition enhances its ability to secure long-term supply contracts from within the healthcare sector.
The IC also lauds Scapa for its tendency to under promise and over deliver. But it has still guided for improved margins and strengthening cash flows for the March year-end. Hold ahead of April’s prelims. MR
23. Emis
Cuts in NHS spending created a tough marketplace for EMIS’s (EMIS) secondary and specialist care divisions in 2016. But as those sections only make up a quarter of total revenue, we think recent share sell-offs are overdone. The larger primary care and pharmacy divisions are attracting a rising number of NHS trusts, GP surgeries and chemists, which helped EMIS report excellent overall revenue and profit growth last year.
Going forward, management has plans to realign its secondary and specialist divisions to help boost business in these markets. Over the next two years the group is also due to spend £7m on improving its patient.info website, the UK’s largest independent online health service.
Meanwhile, we think EMIS is ideally placed to benefit from the problems in the NHS. The prolonged life of the UK’s beloved free health service is going to rely on improved cost efficiencies and EMIS is the only company in the UK able to provide IT solutions to the whole system. Buy. MB
22. Solgold
Investors scour Aim for companies like Solgold (SOLG). A year ago, after several years languishing among the junior market’s resources minnows, the miner’s shares were less than one-twelfth of their current 43p trading price. While past projects have focused on Australia and the Solomon Islands, the story is now all about Cascabel, a tier-one copper and gold project in Ecuador majority-owned by Solgold.
Resource validation is not an issue: Newcrest International (Aus:NCM) and Guyana Goldfields (Can:GUY) both own stakes, and BHP Billiton (BLT) even made an earn-in investment proposal in October. Drilling has also revealed some of the richest copper-gold ore bodies ever discovered, at intervals of over a kilometre, although no full resource estimate has yet been provided. That will be one of the focuses over the next two years, as Solgold drills a further 95km of intervals, extends its knowledge of the metallurgy, and thinks about a mining plan. This might be the most exciting commodities project on Aim, but until an estimate can be squared against the company’s valuation, we remain neutral. Hold. AN
21. Sound Energy
Sound Energy (SOU) joined Aim as Sound Oil in 2005, and relisted a year later after deciding that Asia, rather than west Africa, offered greater opportunity. After a decade of largely fruitless activity, Sound is back making waves around the Meridian line, via its focus on gasfields in Italy and Morocco, two countries that are almost entirely reliant on other nations for their hydrocarbon supplies. At present, Sound produces a small amount of gas from its Casa Tiberi and Rapagnano assets in Italy, although this generated just £321,000 in cash after operating expenses in 2016.
As is invariably the case with Aim’s natural resources companies, the investment case is built around the potential of exploration assets, and in that regard Sound has moved up several gears in the last year. Most important is exploration at the Tendrara licences in Morocco, which to date has resulted in the discovery of commercial volumes of gas and decent flow rates at the TE-6 and TE-7 wells and extension of the Triassic reservoir on which Tendrara sits. In the second half of 2017, Sound will apply for the Tendrara concession, and start determining volumes and prospects.
To fund drilling at Tendrara, Sound has struck a strategic partnership with Schlumberger, in a bid to “technically de-risk the asset”, with the US oilfield services giant on the hook for most of the first three wells’ drilling costs. Schlumberger has also partnered with Sound for the second strategic play: the fully-permitted Badile well in North West Italy, which sits just 45km from the giant Malossa gas condensate field. The third “high upside exploration” prospect is the Sidi Moktar licence area in central Morocco, which has so far revealed positive gas indications, just 10km from the Meskala gas processing plant.
Commercialising the Moroccan assets is not guaranteed, but the signs from the government are encouraging so far. Not only is Sound promised a 10-year tax holiday, but the 35 per cent net government take thereafter – including corporation tax and a 5 per cent royalty on production over 10.6bn cubic feet – is ranked among the top quartile of fiscal terms globally. But as one IC reader recently pointed out, a commercial discovery does not necessarily mean commercial success. Equally, we think there are enough obstacles before Tendrara becomes a cash cow to take a pass on the shares, however encouraging the geological findings have been to date. Hold. AN
For our complete run down from 50-1 see below:
And for 100-51:
