60. Alliance Pharma
Alliance Pharma (APH) has a simple strategy: acquire the rights to consumer healthcare and prescription medicine products with untapped potential and expand their geographical reach and brand awareness. By repeating the process, the Chippenham-headquartered group aims to take out costs, find synergies with its marketing and sales channels and continually refresh its portfolio.
Although it counts an 80-plus stable of brands, four consumer products account for more than half of the top line. These include scar treatment Kelo-cote, sales of which rose 54 per cent to £21.9m in the six months to June, and Amberen, a menopause supplement acquired for $110m in 2020.
The model has also delivered for long-term shareholders: on a total return basis, the stock has returned more than 300 per cent over the past decade, a threefold outperformance of the FTSE All-Share. Management’s next test is to ensure Amberen sales pay off the deal. The track record should inspire confidence, although a forward price-to-sales ratio of three looks about fair given growing product concentration. Hold. AN
59. Urban Logistics Reit
Urban Logistics Reit’s (SHED) stated investment policy reveals pledges to acquire smaller, or so-called “mid-box” distribution centres, at good prices, using conservative leverage and with the option to turn flexible tenancies into long-term leases signed by high-quality tenants.
The cherry on top is a “focus on locations where there is strong tenant demand against limited supply of appropriate properties”. It’s a noble aim, but the limited supply of quality assets cuts both ways. Fortunately, recent form suggests the landlord knows how to strike deals; since raising £108m in July, the trust has bought six off-market logistics units at a blended net initial yield of 5.4 per cent.
The kicker is good momentum in valuations. By March 2022, analysts expect book value to hit 175.4p a share, which would equate to a five-year average annual headline growth rate of 8.3 per cent. The logistics market has further to run, even if a tight market could constrain growth. Buy. AN
Specialising in the nuts and bolts of digital payments meant Boku (BOKU) had a good lockdown as users settled down to binge-watch streaming serials and boxsets. At the last interim results, the company, which listed in 2017, added 20.8m new users, with a consequent 20 per cent rise in revenues for the company’s payments division. It has also been on the acquisition trail, buying up Fortumo Holdings, which adds a boost to the forthcoming full-year results. Boku paid for Fortumo, in part, by using a revolving credit facility and a four-year term loan from Citibank totalling $20m. The $10m credit facility has now been paid off. The company seems to be entering a period of rapid sales growth and should stay well in the black this year, despite planning higher capital spending on its mobile payment network. The shares have responded accordingly and have nearly doubled in value in a year. Hold. JH
57. Watkin Jones
Watkin Jones (WJG) can trace its roots back to 1791, but its current business model is very of-the-moment: the property group sources and then forward-sells build-to-rent (BTR) and student accommodation developments to pension funds and institutional investors.
In theory, this is a mutually beneficial exchange. Buyers of the schemes are free from the costs and complications that come with planning approvals, project delivery and management, while Watkin Jones is relieved of the working capital burden and funding risks.
It has been a success in practice, too. Despite a less-than-benign operating environment, post-tax profits of £40.3m are forecast for the 12 months to September 2021, in line with 2019. That would translate into a 20 per cent return on equity, equal to the five-year average.
Investment partner appetite looks assured, although the order book growth rate depends on the pace of planning permissions. Chief executive Richard Simpson has petitioned the housing secretary to prioritise BTR as the “only way” to address the UK’s rental market imbalance; either way, a forward PE multiple of 13 is undemanding. Buy. AN
56. Advanced Medical Solutions
The peculiarities of the virus outbreak, or rather the actions taken to retard its spread, have resulted in differing outcomes across the broader medical sector. So, while firms engaged in viral testing technologies have certainly benefited, others dependent on elective procedure volumes have struggled.
Advanced Medical Solutions (AMS) saw demand for its surgical and advanced wound-care products tail off significantly as the pandemic took hold, exacerbated by intensified competition for specialist theatre staff. By the end of 2020, group sales had marched back by 15 per cent, although even that figure was slightly above the company’s initial projections for the year.
And despite the fall-away in volumes, management took the opportunity to plough more capital into R&D projects, while £22m was set aside for the acquisition of Raleigh Adhesive Coatings. Sales of its new LiquiBand Rapid surgical glue were constricted because of restricted access to surgeons, but the group’s wound-care division stands to benefit from a substantial procedural backlog. And the US pre-market approval process for the LiquiBandFix8 product has moved ahead, with FDA filing for the device on track for next year.
The catalysts behind the investment case remain in place. Complex injuries brought about by trauma, burns, diabetes and other chronic wounds pose a challenge to healthcare authorities as they are often difficult and slow to heal and are therefore expensive to treat. So, clinical advances in these treatments find a ready market.
Indeed, research published by business consultancy Delveinsight gives a compound annual growth rate (CAGR) of 20.5 per cent for the global advanced wound-care market over the next five years, reaching a value of $16.97bn by 2026. It is not difficult, therefore, to understand why management is prioritising product innovation. As things stand, take out cash, and the group’s intangible assets account for two-thirds of shareholder equity.
Despite disruption to normal trading patterns, the group’s finances held firm. By the June half-year, the net increase in cash was double that of the comparative period in 2020. Receivables had increased by £1.5m as sales gathered momentum, while inventories were winding down as elective surgery volumes continued to recover.
Management will be looking closely at clinical developments over the northern winter. The Royal College of Surgeons has called for the creation of “surgical hubs” across the country to reduce the elective surgery backlog. But even if infection rates for Covid-19 are kept in check, there is a possibility that seasonal influenza pressures will intensify. In 2018 all elective surgery was suspended for a month, when a spike in influenza cases led to NHS bed shortages.
Whatever happens over the next few months, the group is sufficiently insulated from a financial perspective and well-placed to profit from long-term structural drivers. Buy. MR
55. Renew Holdings
Contracting can often be a miserable business, with competitive bidding processes leading to many in the sector pricing work at levels that prove unsustainable. Renew Holdings (RWI), however, focuses on specialist market niches where an ability to deliver work on time and to budget matter. These include rail networks, utilities, nuclear and highways work.
The company made an operating margin of 6 per cent in the six months to 31 March and said in September that it expects to generate a full-year profit of at least £50m, which would be ahead of analyst consensus estimates of £45.8m.
The outlook for infrastructure contractors currently seems pretty rosy, with chancellor Rishi Sunak’s autumn Budget last week finding £1.7bn for infrastructure investments from the first round of the government’s Levelling Up Fund, £7.6bn for nationwide road upgrade and maintenance work and £5.7bn for transport projects in eight city regions, including tram improvements in Greater Manchester, South Yorkshire and the West Midlands.
Renew has managed to maintain decent profitability despite fairly static revenues over the past five years. Although it can expect to win more work in a growing market, its share price is already up 37 per cent since the start of the year and margins in the sector are never likely to be stellar. Hold. MF
54. Greatland Gold
Imagine you own the rights to a hefty gold deposit. Good for you! But mines are expensive, even if you have a few million ounces of gold to borrow against and enough investor interest to raise money on the markets. Processing plants alone can run into the hundreds of millions of dollars, if you want scale.
Greatland Gold (GGL), which found the Havieron gold deposit in Western Australia in 2018, has found a solution to this problem: make sure your land is near a mine that has almost run out of gold. Greatland has turned this one asset into one of the largest market valuations on Aim. More specifically, it has provided Newcrest Mining (Aus:NCM) with a new source of ore for its Telfer plant, 45km away.
This arrangement means Newcrest has paid for exploration and development at the site and now owns 70 per cent of the asset, with the right to buy another 5 per cent of the project at market price in the 12 months from December. Greatland’s $73m (£53m) share of the mine development should be paid off three years after production is reached. That said, we would rather buy a gold company with greater long-term control of its asset base. Hold. AH
53. Eurasia Mining
Eurasia Mining (EUA) is not inclined to hide its light under a bushel, although you wonder when confidence gives way to wishful thinking. Most recently, the company said a deal from this year was successful in “positioning Eurasia among the majors”. This came after it teased buyout interest from “a wide range of parties” from mid-2020 before exiting a formal sales process in May without a sale.
The ‘major positioning’ deal was a $500,000 agreement with Russian state-owned company Rosgeo, covering nine platinum group metal (PGM) and battery metal licences in Russia. Shareholders certainly responded to this deal positively, even doubling the share price on the back of a minor update in August, although it has dropped back since then.
The hyperbole extends to other operations: in its September interim results announcement, the company trumpeted a “ninefold” increase in revenue from its West Kytlim mine in the Urals, a ‘soft rock’ operation mining alluvial PGM and gold deposits. This huge increase was to £425,965. The company is still in the stripping phase at the operation, which is effectively the preliminary stage before real mining starts, but it once again shows the habit of just giving investors a shiny headline. Avoid. AH
52. Warehouse Reit
As ecommerce hoovers up an ever-greater proportion of retail spending – a long-running trend that has accelerated since the pandemic – the investment case for logistics assets has only grown. In turn, the sector’s perceived risks have fallen, institutional capital has piled in and yields have compressed. Despite this, logistics landlord Warehouse Reit (WHR) has posted a handsome average total return of 15 per cent a year since it floated in 2017.
Such a strong track record helps explain the shares’ premium to book value. That’s in line with the sector, although the trust has a greater focus on multi-let sites and shorter average lease lengths than some better-known peers. This could soon prove a key differentiator: estate agent Knight Frank recently highlighted the “particularly acute” lack of available big boxes and noted supply had dropped to just eight months of current take-up levels.
A smaller, more active approach looks the smart place to be, particularly with RBC forecasting NAV to reach 161p a share by March 2023. Buy. AN
Restore (RST) decided it was better off alone when it rejected Marlowe’s 530p-a-share offer in July. Both businesses provide services to offices so the deal made sense from a cross-selling perspective, but clearly wasn’t juicy enough for the Restore management team.
Self-restoration is instead the focus. Although Covid hit services such as office relocation, a recent trading update suggests Restore is bouncing back, with cash profits expected to climb 18 per cent above pre-pandemic levels. Part of this is due to the £2.6m synergies it expects from EDM, an IT recycling and commercial relocation business it acquired for £61m in April.
IT recycling is part of the business Peel Hunt analysts are most excited about. The division grew 64 per cent in the first half and now comprises 11.6 per cent of the top line. Companies are investing heavily in IT as they emerge from the pandemic and need recycling services for their old machines.
But while hybrid working drives one offering, it might lower demand for relocation services and box storage. A 2022 PE of 18.2 looks quite expensive with the future of the office so uncertain. Management probably should have accepted the Marlowe offer. Hold. AS