The key reason why the FTSE Aim indices have performed so well since last year’s stock market crash is because they have a much higher weighting to fast growing sectors (technology, e-commerce, and healthcare) than the FTSE 350. These are the sectors that have proved most popular with investors. To put their outperformance into perspective, the FTSE Aim All-Share index of 728 companies has doubled in value from its March 2020 lows, and is now 21 per cent higher year-on-year. The FTSE 350 index is 11 per cent lower than its 2020 high-water mark.
The outperformance is hardly surprising given the global pandemic is accelerating the adoption of technology in our everyday levels, and brought into sharp focus the sectors and industries that are likely to enjoy the highest growth prospects in the future. The flood of liquidity into markets has also created a favourable back drop for the perceived more ‘risky’ end of the equity market.
I have a fair amount of exposure to stocks that are doing well in the new ‘normal’, although valuation metrics vary widely across sectors and in depth analysis is required to establish the quantum of the future growth embedded in current valuations especially as analysts’ research is thin on the ground. It’s a task well worth doing as the trio of technology stocks this week highlight.
Technology winner for the new normal
- 2020 cash profit 25 per cent ahead of consensus estimates.
- Global lockdowns driving more users online and accelerating adoption of digital payments.
Aim-traded Bango (BGO:180p), a provider of a state-of-the-art mobile payment platform enabling smartphone users to charge purchases made in app stores straight to their mobile phone account, has announced a major earnings beat.
Analysts at house broker finnCap and Progressive Equity Research had pencilled in annual cash profit of £3.4m and £3m, respectively, up from £0.45m in 2019. In the event, it will exceed £4m on underlying revenue up more than 70 per cent to £12.2m, the nine-fold increase highlighting strong operational gearing. This means that an increasing amount of incremental gross margin earned drops through to profits as revenue rises given a relatively fixed cost base.
It should be good for operating cashflow, albeit the doubling of Bango’s year-end net cash to £5.8m mainly reflects the receipt of £3.2m following the issue of new shares to NHN Corporation in April. The South Korean big data business also invested £6.5m in Bango’s Audiens data platform business in return for a 60 per cent stake in that operation.
As I have previously noted, global lockdowns have been driving more users online and accelerating the adoption of digital payments by merchants and consumers. In 2020, end user spend (EUS) from transactions processed on Bango’s payment platform soared 73 per cent to £1.9bn and has more than trebled in the past two years. EUS can only increase further as more merchants and resellers partner through Bango to offer valuable, third-party product bundles to their customers.
For instance, Bango expanded its partnership with US tech giant Microsoft to open-up access to Xbox subscriptions and consoles sales, having previously had a direct carrier billing arrangement, thus enabling telco partners to bundle Xbox Game Pass Ultimate and Xbox All Access in their subscription packages. Bango also tied up with BT (BT.) last autumn to use the Bango platform to deliver a range of third-party products and services, so enhancing the content ecosystem available to BT customers and offering greater flexibility in the range and way they consume content.
Moreover, the use of smart data analytics to segment Bango’s audience groups improves the return on marketing investment for app developers, hence why over 2,000 of them now use Bango’s Marketplace platform, a 10-fold increase in the past 12 months. In turn, Bango is creating a lucrative income stream by monetising customer data insights in this way.
Bango’s share price has almost doubled since I first advised buying the shares at 93p ('Bang on the money', 26 September 2016), but the possibility that the company could be making annual cash profits of £10m within two years is still not factored into the current enterprise valuation of £128m.
From a technical perspective, a chart break-out above last summer’s highs of 194p would increase the likelihood of a rally to my 225p target price. Buy.
| Simon Thompson's 2017 Bargain shares portfolio performance | |||||
| Company name | TIDM | Opening offer price on 03.02.17 (p) | Bid price on 18.01.21 (p) or exit price (see notes) | Dividends | Total return (%) |
| BATM Advanced Communications (see note seven) | BVC | 19.25 | 98.6 | 0 | 449.9 |
| Kape Technologies (formerly Crossrider) | KAPE | 47.9 | 197 | 3.55 | 318.7 |
| Chariot Oil & Gas (see note one) | CHAR | 8.29 | 8.20 | 0 | 213.0 |
| Avingtrans | AVG | 200 | 258 | 11 | 34.5 |
| Cenkos Securities (see note two) | CNKS | 88.425 | 106 | 9.5 | 30.6 |
| Manchester & London Investment Trust (see note three) | MNL | 291.65 | 377 | 3.0 | 28.4 |
| H&T | HAT | 289.75 | 261 | 32.4 | 1.3 |
| Management Consulting Group (see note five) | MMC | 6.183 | 6 | 0 | -3.0 |
| Bowleven (see note four) | BLVN | 28.9 | 5.5 | 15 | -6.1 |
| Tiso Blackstar Group (see note six) | TBG | 55 | 20.4 | 0.54 | -61.8 |
| Average | 100.5 | ||||
| FTSE All-Share Total Return | 6485 | 7321 | 12.9 | ||
| FTSE AIM All-Share Total Return | 977 | 1335 | 36.6 | ||
| Notes: | |||||
| 1. Simon Thompson advised selling two-thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Simon subsequently advised participating in the one-for-8 open offer at 13p a share ('On the earnings beat', 5 Mar 2018) and buying back the shares sold at 4p ('Chariot's North African adventure', 17 April 2019). Total return reflects these transactions. | |||||
| 2. Simon Thompson advised selling the Cenkos Securities holding at 106p on 3 April 2017 and the 106p price quoted in the above table is the exit price on the holding ('A profitable earnings beat', 3 Apr 2017). Please note that Simon has since included the shares in his 2020 Bargain Shares Portfolio and rates the shares a buy ('Ben Graham recovery plays', 5 October 2020). | |||||
| 3. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017), and selling the remaining half at 377p ('Bargain shares second chance', 17 August 2017). The 377p price quoted in the table is the final exit price. | |||||
| 4. Simon Thompson advised banking profits on half your holdings in Bowleven at 33.75p (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019 and the balance of the holding was sold at 5.5p ('Taking stock and profits', 9 December 2019). | |||||
| 5. Simon Thompson advised to sell Management Consulting's shares at 6p in February 2018 (‘How the 2017 Bargain share portfolio fared’, 2 February 2018). The price quoted in the table is the 6p exit price. | |||||
| 6. Tiso Blackstar transferred its UK listing to the Johanesburg Stock Exchange. The shares were then delisted on 23 November 2020 when shareholders received an exit cash payment of R415 per share on cancellation of their shares. | |||||
| 7. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018) and subsequently bought back the shares at 43.5p ('BATM armed for a re-rating', 11 July 2019). | |||||
| Source: London Stock Exchange share prices. | |||||
BATM firing on all cylinders
- Covid-19 antigen test delivered to European private and government customers.
- New technology rapidly diagnoses infections using DNA or RNA.
BATM Advanced Communications (BVC:100p), a provider of medical laboratory systems, diagnostic kits, cyber security and network solutions, has made three important announcements.
Firstly, its COVID-19 tests have been proved effective in accurately detecting all variants of the virus, including the latest mutations. BATM’s antigen test has 4+1 gene discovery capability, including the S-protein, compared with a market standard of one to three gene discovery. This enables it to provide more accurate results, reducing the risk of false positives and false negatives. It is being delivered to several private and government customers in Europe and other geographies.
Secondly, associate company Ador Diagnostics has developed a new innovative technology that can provide sample-to-answer diagnostics of bacterial, viral or fungal infections using DNA or RNA sampling in 15-20 minutes compared with 60-90 minutes for polymerase chain reaction (PCR). Ador’s NATlab molecular diagnostic bench-top analyser can analyse several pathogens (currently up to 400) at the same time, thus detecting all the possible pathogens associated with diseases such as meningitis, sepsis and respiratory diseases.
By accurately detecting the right strain of a disease, the correct treatment can be started immediately – something that is not possible with PCR methods. Several universities and hospitals in the UK, Europe, Israel and the USA are co-operating with Ador and in-hospital trials will commence in the first half. Demand is likely to be strong given that the speed and accuracy of identifying an infection is vital in providing the correct treatment and containing potential disease outbreaks.
Thirdly, BATM is selling its non-core NG Soft software subsidiary for US$33m (£24.5m) to unlock value for shareholders. The group will use the proceeds to accelerate growth in its core bio-medical, cyber security and network function virtualisation technology business, the latter is playing a critical role in the range of 5G services telecom operators can offer.
The 444 per cent gain on BATM shares since I included them in my 2017 Bargain Shares portfolio has helped drive up the portfolio total return to 100 per cent. A 2020 cash profit multiple of 37 times to enterprise valuation is worth paying at this stage of its earnings upgrade cycle as this is a US$1bn (170p a share target) company in the making. Buy.
Finally, I highlighted the strong potential of a third technology company, Kromek (KMK), at the end of last week ('Covid-19 airborne threat detection profit opportunity', 14 January 2021).
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].
Promotion: Subject to stock availability, both books can be purchased for the promotional price of £25 with free postage and packaging.
They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.
Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.
