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The Aim 100 2021: 100 to 91

The Aim 100 2021: 100 to 91
The Aim 100 2021: 100 to 91

100. Novacyt

At various times in its 26-year history, Aim has been called a “casino”. How fair that label seems will depend on your view of what incubator-focused markets are designed for. But for some investors, this reputation is a key attraction of the junior bourse: although there are plenty of losers, a heady combination of extreme volatility and innovation should create some huge winners.

Since the start of the pandemic, shareholders in Anglo-French clinical diagnostics group Novacyt (NCYT) have experienced all the adrenaline highs and crushing lows Las Vegas can offer. After steep declines in 2018 and 2019, the stock leapt by an eye-watering 6,523 per cent last year after it developed a polymerase chain reaction (PCR) molecular testing kit for Covid-19 just weeks after the virus was first identified.

Contracts with desperate national health authorities soon followed – concerns around pricing be damned – leading to an explosion in sales and a surge in the group’s cash profit margin from 5.5 to 64 per cent. The bottom line swung from a £5.7m loss to a £132m post-tax profit for 2020.

A new year began with broker Numis’s target price for the shares at £14, or around 100 times where they were 12 months earlier. Instead, Novacyt has since lost more than two-thirds of its market value, in large part due to the cancellation of a deal with the UK’s Department for Health and Social Care (DHSC).

This contract – which made up more than half of sales in the first quarter – has since been the subject of a bitter dispute between company and government and led to 43 per cent of the top line being scrapped from the half-year results. Worse still, Novacyt was forced to recognise £6.9m in associated manufacturing costs, write down a further £28.9m in stock and terminate supplier agreements struck in anticipation of further DHSC demand.

While the debacle will hopefully prove a one-off, the group’s investment case now hinges on the strength of the private testing market, which at this stage of the pandemic is hard to quantify.

Novacyt has also submitted 11 products for review in relation to the UK Health Security Agency’s programme on Coronavirus Test Device Approvals, but only its PROmate® Covid-19 test had been named on a temporary protocol by the initial deadline. If no other products are approved, Novacyt will take an estimated £3m hit to full-year revenues.

Announcing his departure in July, after 13 years, chief executive Graham Mullis described Novacyt as “far more than the success it has enjoyed during the last 18 months”, citing the importance of the group’s role in responding to Covid-19 and its foundations as a leader in specialist diagnostics. Time will tell. But even after accounting for the DHSC cancellation, Numis expects profits to contract in 2022. Hold. AN


99. Proton Motor Power Systems

If, as some aviation and energy analysts posit, hydrogen could become the fuel of the future, then it’s hardly surprising that Proton Motor Power Systems (PPS) has outperformed the market in recent times as western governments have introduced a range of ambitious carbon reduction targets. The designer and developer of fuel cells has easily outstripped the FTSE All-Share Index over the past five years, with its shares surging in value before peaking in the first quarter of 2021. It’s easy to get swept up in the delirium over green energy alternatives, but the broader industry is still largely reliant on subsidies.

The company, which also makes fuel cells for solar battery storage and hybrid electric vehicles from its main facility near Munich, was previously known as Future Power Systems and has been lossmaking during its time as a publicly-listed company. And it continues to burn through cash, registering a £4.4m operating cash outflow in the first half of this year, as it declared an operating loss of £3.9m on sales of £922,000. It had just £2.7m in cash remaining at the period end, but said it had secured a further €11.9m (£10m) from its main shareholders to continue operations into next year. MF


98. FRP Advisory

The government’s pandemic support has helped keep a lot of zombie companies alive, but now the schemes are being lifted we can expect a big pick up in insolvency work. This is good news for restructuring consultant FRP Advisory (FRP).

Even with the government support schemes in place, FRP managed to grow in the 12 months to April. Organic revenue was up 15 per cent to £79m and underlying cash profits jumped 22 per cent, as it took on the administration of Debenhams and Edinburgh Woollen Mill. Big mandates and funds raised from last year’s IPO allowed it to grow headcount by 30 per cent. Four acquisitions have increased its capacity to serve more clients.

Between the original lockdown in 2020 and the second quarter of 2021, company insolvencies fell 34 per cent year on year, according to the UK Insolvency Service. This means there are a lot of businesses that should have gone bankrupt last year but didn’t. 

Demand for FRP’s services is now growing, following a 31 per cent rise in insolvencies in the second quarter of the year. At the recent Conservative party conference, the prime minister said he’s “not responsible for what’s in the shops”, suggesting the government now wants businesses to fight for themselves. This is bad for them but great for FRP. Buy. AS


97. Pan African Resources

Underground mining in South Africa has a long and dark history. Strikes and accidents remain common, although fewer miners die each year now. Pan African Resources (PAF) has had its share of dramas – including violent protests at one of its mines two years ago – but now looks on more stable footing. The gold miner even signed a new wage agreement with its workers this year without strife, and produced over 200,000 ounces (oz) of gold in the 12 months to June, well above recent trend. 

Alongside a more consistent operating environment, the higher gold price has handed Pan African tens of millions more dollars in cash flow. It has decided to both invest in its operations and hand cash back to shareholders.

Capital spending at its Evander operation has already brought benefits, with production up three-quarters year on year. An increase at the larger Barberton Mines site of almost a third also helped the company increase its adjusted cash profit by two-thirds to $144m (£106m). The outlook from here is for lower-cost production. Buy. AH


96. Creo Medical

Creo Medical (CREO) is engaged in surgical endoscopy, a medical technology that allows health professionals to view internal images and carry out procedures within the gastrointestinal tract and colon, in addition to several other applications, including use in obstetrics/gynaecology and urology. 

The company’s flagship CROMA technology delivers radiofrequency energy for precise localised cutting and focused high frequency microwave energy for controlled coagulation and ablation. 

Since joining Aim in 2016, it has been expanding its clinical offering partly through acquisition, but also through in-house IP development; by the end of August, it had been granted 326 patents and had another 810 pending applications. 

Revenues are on the rise, but there is always a 'blue sky' element to med-tech stocks, no matter how good the product offering. However, demand for minimally invasive procedures is increasing, and one imagines that a sizeable backlog exists because of the Covid-linked collapse in elective surgery volumes. 

It is currently operating in eighth geographies, including the US, and the value of the addressable global market is projected to rise to $43.8bn by 2027, at a CAGR of 4.1 per cent between 2019-27, according to Allied Market Research. Hold. MR


95. Avacta

At the development end of the bio-pharma spectrum, corporate prospects are largely dependent on clinical validation. Avacta (AVCT) provides a case in point. A clinical offering including cancer therapies and diagnostics based on its proprietary Affimer and preCISION platforms provides Avacta’s principal commercial opportunity, although the group has generated headlines recently through news that a pre-clinical development milestone was achieved in a therapeutics development partnership with LG Chem Life Sciences (potentially worth up to $400m). Other partnerships include a research collaboration with ModernaTX, Inc. 

Avacta's Diagnostics division is developing an in-house pipeline of Affimer-based diagnostic assays, including the AffiDX SARS-CoV-2 lateral flow rapid antigen test – big business nowadays. The first distributor for the UK and Europe, Calibre Scientific, was appointed towards the end of June, and the group is confident that “SARS-CoV-2 antigen testing will be a long-term market and will become a seasonal testing market similar to that for influenza”.

However, Avacta has pulled its AffiDX SARS-CoV-2 Lateral Flow Rapid Antigen Test while the UK Health Security Agency carries out its assessment which, if successful, would result in the test being placed on its Coronavirus Test Device register for approved products.Cash resources represent 3.5 times the net operating cash outflow for 2020, providing breathing space before the various partnerships start to generate further contingent revenues. Hold. MR


94. Idox

Software group Idox (IDOX) announced the acquisition of exeGesIS Spatial Data Management ahead of this month’s publication of full-year numbers. The group, a specialist provider of mapping software, has been expanding its capabilities to match the growth in its end-markets, in this case geospatial information services (GIS).

The deal was finalised shortly after the acquisition of another sub-sector play in the form of thinkWhere. It was predicated on management’s view that “environmental issues remain high on the global agenda”, but, above all, it underlines why standing still probably isn’t an option for Idox.

Management software is now employed across an endless range of industries in both the public and private sectors. It ranges from transport network organisation to records management, and from sexual health to electoral services. If anything, the range of digital applications continues to expand, although logic dictates that competition is becoming ever keener, hence Idox’s willingness to broaden its capabilities through M&A channels.

Engineering information management is viewed as one of the fastest-growing markets, while compliance issues are another important driver of growth. Increased regulatory complexity is an important structural driver of trading volumes, and it wouldn’t be fanciful to suggest that current global supply chain issues will act as a key catalyst for growth going forward.   

Local authority markets have been a particularly good source of order activity, with half-year sales up by a third in the six months to April. Some parts of the group business saw a slowdown linked to the pandemic, but order intake at the half-year mark continued to grow, with total contract value increasing by 10 per cent over the same period in the prior year.

Revenues from the ‘health and elections’ division continued to increase, while consolidation of the group’s software business units has helped simplify company legal structures, with positive long-term implications for margins. Given the breadth of the service offering, there is an inherent risk of duplication across the various business groups, so moves to streamline operations are to be expected – perhaps in perpetuity.

Institutional owners account for around 78 per cent of the issued share capital, with insider ownership standing at an encouraging 12.4 per cent.

As you might expect given its reliance on intellectual property, the group’s intangible assets account for 131 per cent of total equity, which theoretically exposes the group to associated risks, but that’s probably par for the course in the information age. Hold. MR


93. Gooch & Housego

With its niche offering – supplying specialist photonics products to customers across the aerospace, defence, industrial, telecoms and life sciences sectors – Gooch & Housego (GHH) benefits from a high-tech moat, and high barriers to entry.

The question that existing and prospective shareholders need to ask is whether a forward earnings multiple of 29 is appropriate for a company prone to economic cycles, and whose sales and net income have gone sideways over the last four years? Bluntly, a 50 per cent premium to a FactSet-compiled peer group average looks an ill fit given the return on equity last hit double digits in 2015.

Recent trading has been encouraging, however, as strong industrial laser demand has helped to prop up the order book. We’ve flip-flopped on this stock in recent years, as trade wars and choppy selling conditions have been offset by the long-term potential for photonics technology (the physical science of light waves) and big promises around the rollout of 5G. On balance, however, a premium rating lacks obvious catalysts. Hold. AN


92. Knights

Knights’ (KGH) plan is to become the biggest law firm outside of London through an aggressive acquisition strategy. Since it listed in 2018, it has made 14 acquisitions with four of those in the last year. It now has offices in most major cities outside London. It’s just a shame that the dawn of hybrid working has made geographic diversity somewhat obsolete.

Full-year revenue for 2021 was up 39 per cent year on year to £103m, or 10 per cent on an organic basis. The firm prides itself on cash collection and managed to increase the conversion rate to 96 per cent, an increase of 16 percentage points from the year before. This is well ahead of the industry average.

The concern is that owning lots of office space around the country could leave you more vulnerable to the changes we have witnessed over the past 20 months or so. The advent of homeworking and hybrid arrangements means that wealthy London law firms can more easily poach the best regional talent, which could translate into wage inflation for its lawyers. A FactSet 2022 consensus PE ratio of 18 times forecast earnings puts it at the upper end of expectations for law firms and its M&A story might be reaching the end of the line. Hold. AS  


91. Jadestone Energy

Jadestone Energy (JSE) has built up a portfolio of offshore oil and gas fields in the Asia Pacific region, and despite some production issues and the continued uncertainty over its Maari acquisition, the group is set to hit big earnings numbers. Peel Hunt expects cash profits to almost triple to $256m in 2022. 

Although this year’s production was hit by unplanned maintenance, the recent tie-back of the Montara H6 well into the company’s infrastructure in the field in between Australia and Indonesia – thereby adding 3,000 barrels of oil a day to output – is a big win.

The Maari uncertainty concerns when and if the New Zealand government will allow Jadestone to buy the project, given it has now been two years since the acquisition was announced. Jadestone looks like a strong performer for the next year, but carries plenty of downside risk due to its unhedged oil sales. With this in mind, we think it is a good short-term buy given increasing tightness in oil and gas markets. AH

See also: 

Aim 100: 100-91

Aim 100: 90-81

Aim 100: 80-71

Aim 100: 70-61

Aim 100: 60-51