20. Highland Gold Mining
At first glance, there appears to be a hole in full-year results for Highland Gold Mining (HGM), which were released this month. Although costs and production were flat, operating profit more than tripled to $69.4m. The average realised price for gold and gold equivalent was also $1,136, more than $100 below the average gold price. So why the earnings boost? The reason is partly down to the lead concentrate Highland produces from its (say it with us) Novoshirokinskoye mine, although better free cash flow also helped, as it allowed the company to reduce its net debt ratio from 1.74 to 1.26 times cash profit. With production forecasts unchanged for 2017, the main near-term focus for investors (aside from a buoyant gold price) will be further progress on two major development projects. The first concerns expansion of the mining and processing rates at Novo from 0.7mtpa to 1.3mtpa, and construction of Kekura, a greenfield site in the far north east of Russia. However, we are less confident that costs can be held at present levels this year if the rouble continues its oil-linked rally. Hold. AN
19. Hurricane Energy
Could Hurricane Energy (HUR) save the North Sea? What role might the company play in the event of Scottish secession from the United Kingdom? Such questions would have been laughable a year ago, and to doubters of boss Dr Robert Trice’s faith in fractured basement reservoir stimulation, there’s a good chance those laughs have intensified.
But following a year of unparalleled drilling success in which Hurricane believes it has demonstrated that the Halifax and Lancaster fields are part of the same hydrocarbon accumulation, this is the sort of grand headline-grabbing attention the explorer has come to expect.
From a financial perspective, Hurricane has been entirely carried for the drilling programme and so entered 2017 with no debt, and the largest undeveloped discovery on the UK Continental Shelf on its balance sheet. With farm-out discussions moving ahead, and the company’s data room open to global oil majors, there’s a growing possibility that Hurricane might receive a bid before it sanctions its own mooted early production system. Buy. AN
18. CVS
There are two main reasons why 2017 could be an excellent year for CVS (CVSG). The first is the attractiveness of the animal health market, which is expected to grow at a rate of 5 per cent a year for the next decade as people spend more money on their pets. The second is the fact that the global veterinary practices market is ripe for consolidation, due to the increasing number of vets practices that are coming up for sale.
CVS has already bought new 13 practices in the UK and the Netherlands this year and, with its excellent cash conversion and generous banking facilities, is well placed to pick up some more. Taking the group’s projected portfolio size and the growth on offer in the market implies that group earnings could double in the next five years, according to broker N+1 Singer. True, the shares don’t come that cheap, trading on 28 times forward earnings, but we think the growth on offer justifies that. Buy. MB
17. Mulberry
Luxury retailers such as Mulberry (MUL) face a pretty tough market right now. Mulberry even more so, after years of an arguably misguided product pricing strategy that has left the stock trading at just half of its peak value. Customers are more mobile than ever, more discerning than ever, and more easily influenced by passing trends and social media.
Of course, high-end retailers are still largely dependent on their Asian customers – either at home or abroad – for a chunk of revenue. This explains why Mulberry has refocused its attention on the region, setting up Mulberry Asia, which will specifically look after operations in China, Hong Kong and Taiwan. The new company is launching four stores as well as a Chinese language mulberry.com site.
This year we expect the weakness in sterling to affect margins, as will continued investment in new designs, crafted by new creative director Johnny Coca. Foreign exchange rates are expected to add up to £1m in extra costs for Mulberry. Hold. HR
16. First Derivatives
First Derivatives (FDP) is trying to expand beyond its traditional capital markets customer base. The group sells analytics and digital marketing software, as well as technology consulting services primarily to investment banks. Central to its efforts to diversify is its Kx analytics software, which has gained the group clients across industries including pharma, utilities and telecoms. In November management announced plans to enter the retail analytics market using this technology, with a recently recruited team. This area is expected to grow by around a fifth annually and be valued at $5bn by 2020, according to market research group Marketsandmarkets.
Software sales shot up 60 per cent during the first half of the year and recurring licence revenue was up almost half to around £14m. However, the larger consulting division is also growing well, with revenue for this business up a fifth to £43m. At the time of writing, the shares are trading at an eye-watering 49 times forward earnings, having increased two-thirds in value during the past 12 months. That’s too rich for us. Hold. EP
15. Nichols
Nichols (NICL) is better known as the maker of the soft drink Vimto, and it seems that the world can’t get enough of it: sales last year were up by 14 per cent. The group’s overall performance has also been boosted by acquiring full control of frozen drinks maker Noisy in January 2016. This is an important addition because it will add to the out-of-home division where Nichols supplies and installs vending machines in locations such as Wm Morrison, Compass and Greene King.
Sales outside the UK are also strong, notably in Africa where there is good demand for high-margin concentrate drinks. It has also launched a new website that allows it to showcase its range of vending equipment, which includes soft drinks to frozen soft drinks and from Coca-Cola to milkshakes.
Trading in 2017 is likely to bring new challenges, such as the sugar tax, but Nichols is a well-run company, albeit with the shares trading on a high forward earnings ratio. Hold. JC
14. Sirius Minerals
We are still many years from knowing whether Sirius Minerals (SXX) will live up to its heady promises, but the prospective Yorkshire potash miner is already a qualified success in one department: it is leaving Aim to join the main board of the London Stock Exchange.
Arguably, this also marks something of a success for Aim. From its inception, the junior market was intended to nurture young, growing companies with often precarious or highly prospective business plans.
Following permit approvals and last year’s successful $1.2bn phase one financing, it is only right that Sirius Minerals should now be counted as the owner of a major global mining project.
The move to the main market will also provide Sirius with greater attention from an institutional shareholder base, which is no bad thing. On the other hand, those funds may be biding their time for a few more development hurdles to be cleared. That’s our view anyway. Hold at 21p. AN
13. RWS
The release of RWS’s (RWS) most recent figures showed a healthy 11-month contribution of $30.5m from acquired translation company CTi.
At the time of the deal, RWS chairman Andrew Brode said the patent translation and IP services group’s cash generation and balance sheet made it well placed to augment future organic growth with further such acquisitions. It is hardly surprising, then, that in February of this year it announced the purchase of life sciences translation company LUZ. Following the deal, the group’s life sciences division accounted for 30 per cent of overall revenue, up from a fifth previously. The deal should bolster its capabilities in patent translation and foreign filing.
A trading update released this month indicated RWS would achieve record revenue of £76m or more in the first half of 2017, thanks to strong growth in its patent translation and search businesses. The shares rose on the announcement, but at 25 times forecast earnings they’re still looking expensive. Hold. TD
12. Purplebricks
A drop in transactional volume means that times are tough for traditional estate agents. But Purplebricks (PURP) is not a traditional estate agent. It operates online, using a hybrid model whereby an elected representative guides you through the selling process, and makes themselves available at any time during the week. The big difference is that for selling your house you are charged a fixed fee, albeit payable upfront (unless you undertake to buy related services). This is significant.
Let’s take a house on the market for £400,000. Using a traditional estate agent could cost you between 0.75 per cent and 3 per cent commission, plus VAT; that’s between £3,600 and £14,000, whereas Purplebricks charges £849 including VAT outside London and £1,199 inside London.
The company floated on Aim in December 2015 and in the first year instructions more than doubled, as Purplebricks captured nearly two-thirds of all internet transactions. This needs to be put into context: pure internet-based transactions account for around 5 per cent of the whole market, and traditional high street estate agents are faced with problems because of the costs involved in running a chain of outlets across the country, whereas, Purplebricks employs local property experts who operate online. Even if they decided to establish a physical outlet, the costs would be borne by the agent and not Purplebricks.
New measures to ban agents charging tenants letting fees is also unlikely to have much effect on Purplebricks, as there will be no loss from renewal fee income because Purplebricks doesn’t charge renewal fees.
The business model has also been transported to Australia, where the initial take-up was even faster than it was in the UK. The next step is to export the business model to the US, and to finance this Purplebricks raised £50m through a share placing that was materially oversubscribed. The proceeds will be used to set up trading initially in a number of key states, with the initial rollout expected later in 2017. And there is certainly an opportunity here, with total real estate commission income in the US estimated at around £55bn a year. At 286p, the shares have more than doubled since we tipped them in April last year, and with the Australian operation gathering momentum and more growth potential coming from the US, it’s hard not to see Purplebricks growing fast. On top of this, it continues to gain market share in the UK as more people appreciate the savings that can be made when selling a property. Buy. JC
11. Dart
If value investing is indeed back in vogue, you would expect the likes of Dart (DTG) to do well. The aviation and logistics outfit, which owns tour operator Jet2holidays as well as Jet2.com, the airline that supplies the operator’s scheduled flights, has for much of the last year been rated on a fairly derisory forward earnings ratio for a company with a strong net cash balance and a robust brand.
Of course, the UK-based holiday and airline business is not without risks, not least of which is the impact of sterling’s decline against the euro, which helped to knock 90 basis points off Dart’s operating profit margin in the six months to September 2016. But volumes are certainly heading in the right direction, and losses over the winter were lower than anticipated. This month, the company said full-year figures would beat market expectations, leading Canaccord to upgrade its adjusted pre-tax profit expectation by 10 per cent to £99m. All eyes are on maintaining the current momentum into 2018. Buy. AN
For our complete run down from 50-1 see below:
And for 100-51:
