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The Aim 100 2021: 70 to 61

The Aim 100 2021: 79 to 61
The Aim 100 2021: 70 to 61

70. Renalytix

Renalytix (RENX) is the kind of company London’s junior market was designed for. Its core product, a kidney disease diagnostic platform called KidneyIntelX, puts it at the bleeding edge of AI-led healthcare, data analytics and cloud-based digital medicine. A slew of peer-reviewed citations, breakthrough designation from the US Food and Drug Administration (FDA) and testing contracts with leading hospitals have led to a sixfold rerating in the shares since their 2018 spin-out from EKF Diagnostics (EKF).

Investors can expect more catalysts, including FDA approval, reimbursement, new partnerships and testing data. What’s missing, naturally, are reasonable projections for cash generation.

This is typical of high-promise blue-sky stocks, but adds both risk and demands on marketing efforts at a time when cash is being swallowed by operating and research costs, as last month’s full-year results again highlighted. Renalytix’s value is therefore whatever a large (likely US-based) healthcare group is prepared to pay for it. The consensus analyst view is a $1.2bn price tag. Hold. AN


69. Nichols

Global soft drinks producer Nichols (NICL) is on the road to recovery after struggling with out-of-home product sales during lockdowns. Risks remain, however: driver shortages are a concern and the impact of “inflationary pressures affecting logistics, labour, plastics and costs associated with increasing environmental legislation” is likely to drag on the bottom line.

Nichols’ key product is fruit-flavoured drink Vimto. This enjoys strong brand equity and further market penetration is expected. Middle East sales – Vimto is notably popular during Ramadan – have held up despite the 50 per cent sweetened beverage tax in Saudi Arabia and the UAE. Diluted Vimto squash growth has, encouragingly, outperformed the market.

Growth prospects look promising. Nichols now controls sales of the Slush Puppie frozen drink brand in the UK and Europe, and Berenberg thinks that further expansion in the Africa market is a “large opportunity”. The stock is not cheap – Singer Capital Markets forecast an FY23 EV/Ebitda of 14 times, which is above the sector average – but with no debt, notable brand equity and growth potential this is not overly concerning. Hold. CA


68. Tinybuild

Many video games are based on popular movie franchises such as Avengers or Star Wars. This is great for sales because they come with a huge number of fans. The issue for the designer of the games is that both these franchise rights are owned by Disney (US:DIS), meaning it, rather than the game designer, gets a large chunk of the profits. For game producers, the key to unlocking great profit margins is to own the intellectual property of the game.

tinyBuild (TBLD) may not make games that everyone has heard of but it does own the IP of 78 per cent of its games, a significant increase from the 50 per cent it owned in 2017. The shift away from making third-party content to own-IP games was cemented by the success of its Hello Neighbor title, a stealth horror game. Since its launch, it has grown into its own successful franchise, including books and merchandise. This year, tinyBuild launched the Secret Neighbor platform to continue the franchise’s growth.

The benefit of owning your own IP can be seen in its profitability. Its cash profits (Ebitda) grew 18 per cent in the first half of this year compared with 2020 and its margin expanded six percentage points to 42 per cent. 

The company is growing organically, and at the end of 2020 it had 23 games in its pipeline. It launched four of them in the first half of 2021 and signed an additional 10 games, which currently leaves it with 29 games under development. At the same time, it is also looking at M&A opportunities. In August it acquired Animal for up to $10.2m and in September it bought Bad Pixel, the studio behind open-world survival game Deadside, for a maximum consideration of $17.1m. 

Bringing the Deadside IP in-house builds on its strategy of growing out its franchises and given that Bad Pixel generated $3m of cash profits in 2020, the deal looks pretty cheap. tinyBuild had known the Bad Pixel team for the past two years so investors can also be confident of the due diligence done on the deal. Buy. AS 


67. Hotel Chocolat

The pandemic-driven closure of Hotel Chocolat’s (HOTC) high-street stores for half of the group’s last financial year justifiably struck fear into the hearts of investors, but the premium chocolatier’s transition to a “global digital-led brand” seems to be paying off.

Online sales, which now make up most of the group’s revenue, offset the impact of store closures and drove a return to profitability. Customers have enthusiastically embraced at-home products such as the Velvetiser hot chocolate machine, and a coffee machine range will be released this winter to supplement this drinks offering.

A dividend was last paid in 2019, after management decided to divert recent spare cash generation into future growth. This is paying dividends of its own: production capacity rose 66 per cent last year, following £19m of capital investments. With further firepower from July’s oversubscribed £40m equity placing and stores now open, analysts expect sales to grow by an average of 18 per cent a year until June 2024. We think a robust trading period lies ahead. Buy. CA


66. FW Thorpe

Lighting company FW Thorpe (TFW) is enjoying something of a bright spell. Earlier this month, it reported a 4 per cent increase in revenue for the year ending 30 June of £117.9m against strong comparatives. Higher gross margins meant its adjusted profit before tax increased by about 17 per cent to £19.2m and its order book is at record levels.

Things aren’t all plain sailing, though. It is currently facing “severe shortages and rising costs” for the most basic components, leading to declines in service levels and lengthening delivery dates. It’s also fishing from “a reduced pool of labour” in the UK following Brexit as it attempts to ramp up production. All of its group companies are targeting growth this year, though, and it recently bought Spanish lighting group Electrozemper to strengthen its European footprint. It’s trading at about 31 times last year’s earnings, which is almost double the industry average, though, and given the potential disruption we recommend hold for now. MF.


65. Young & Co

Pub chain Young & Co’s (YNGA) last trading update came in July, shortly after that month’s removal of Covid-19 restrictions. By now, the narrative is well-worn: government restrictions shuttered their doors and turned off pub and accommodation revenues. Management reported in the update that trading was ahead of expectations, helped by pent-up consumer demand and capex investments.

The situation now looks more precarious. Spiralling cost and supply chain headwinds have hit the hospitality sector hard. Inflation is rising and labour shortages are particularly acute in the London market where Young’s has numerous venues. Cash preservation and well-targeted investments during the pandemic period mean the group looks robust enough to push through this, but the market situation remains volatile.

Young’s focus on a premium hospitality offering could drive long-term growth, given the general premiumisation trend amongst consumers. Panmure Gordon has recently raised its fiscal year 2022 EPS forecast by 6 per cent to 52.9p. The broker predicts profit before tax of £39m for 2022 and £49m for 2023. Set this optimism against current economic headwinds. Hold. CA


64. Midwich

When Midwich (MIDW) presented its 2019 results in March 2020, managing director Stephen Fenby posited that the distributor “may see an uptake in demand for video and audio conferencing” from its trade customers as an indirect consequence of the pandemic, then in its infancy.

That was a prescient call. After growing its top line last year, Midwich more than tripled its adjusted pre-tax profits in the first six months of 2021, as sales of core products such as displays and projection smashed pre-pandemic figures.

Analysts at broker Berenberg now expect gross margins to expand over the coming year, which feels like a big ask given huge dislocation in global supply chains. As of September, a hoped-for boom in sales to corporate clients was also yet to materialise, amid continued deferrals to return-to-office plans.

This is a well-run company with a reassuringly large management stake, but those two flies in the ointment mean the shares look a little toppy on 25 times forward earnings, near a five-year high. Hold. AN


63. Naked Wines 

The closure of restaurants and bars during the pandemic drove consumers to seek their tipple of choice from the internet. This benefited online wine retailer Naked Wines (WINE), which connects its customers to independent winemakers via a monthly subscription model and saw a 53 per cent increase in subscribers in the 12 months to 29 March.

It is unclear just how well the online wine trend will hold up as a form of economic normality returns, but the signs are encouraging for ecommerce vendors. IWSR, which analyses alcohol trends, expects online sales to almost double from 2020 levels to 7 per cent of the alcohol retail market by 2024.

However, Naked investors will be looking for concrete progress after the £10.7m FY2021 pre-tax loss. Interim results this month will signal any bottom-line improvement, although Investec forecasts an underlying loss of £5m for this financial year and has adjusted future profit expectations downwards. We aren’t yet convinced of the path to profitability. Sell. CA


62. Serica Energy

There have to be some winners from the cripplingly-high gas price. One is North Sea producer Serica Energy (SQZ), which is responsible for 5 per cent of the UK’s gas production. It will see its December quarter cash flow climb to firehose levels thanks to the current situation. 

Serica’s timing has been flawless too, with a new well coming on stream in August and another expected by the end of the year. Output was down in the first half, however, partly because of the pipeline maintenance that affected supply overall in the middle of the year. There has been a reversal in the second half, though, with full-year guidance at 23,000-25,000 barrels of oil equivalent per day (boepd) compared with first-half production of 18,900boepd. This will climb to between 27,000 and 33,600boepd next year. 

Beyond the short-term earnings influx, Serica’s prospects are still good. There are risks to its bottom line from a potential decline in demand because of the energy transition – gas is slightly insulated compared with oil – but recent forecasts from the International Energy Agency (IEA) indicate a friendly macroeconomic environment for the company. 

The IEA said in mid-October the world was moving towards a “volatile period” in which the reduction in oil and gas exploration and project development exacerbates an energy market in which investment in (and supply of) transition technologies is not yet high enough, creating upward pressure on oil and gas prices. The organisation also increased its total oil demand estimate for 2022 to 99.6m bpd, ahead of pre-Covid-19 demand. 

Within all these forecasts there will be volatility in oil and gas prices. As the maxim goes, the cure for high prices is high prices, and the gas price highs have already brought on gas-to-oil swapping. 

But Serica has a strong balance sheet, to the point it could stand to make more use of its cash reserves (£92m as at the end of June). Dividends have already been increased so perhaps this is a time for acquisitions, or putting more cash into cutting project emissions, given methane leakage and flaring are far more harmful than releasing CO2 into the atmosphere through burning gas. A shift to receiving 100 per cent of cash flow from the key Bruce, Keith and Rhum assets from 60 per cent this year will make this a more pressing concern next year – but a good one to have. Buy. AH


61. Amryt Pharma 

Amryt Pharma (AMYT) is a relatively low-key UK-based pharmaceutical company that focuses its research on rare and hard-to-treat diseases in order to develop so-called orphan drugs. Orphan indications are intended for relatively small patient populations but attract higher reference prices from healthcare providers, as well as expedited approval if statistical clinical significance can be proved. 

Revenues are not insignificant; in a recent trading update, it forecast revenues for the full year of $220m-$225m. Its main product is Mycapssa, which won approval from the FDA in June last year, is an oral formulation and a first-line therapy for patients with the hormonal disease acromegaly (where the body produces too much growth hormone). It is also presenting data for Oleogel-S10 in Epidermolysis Bullosa (rare inherited skin disorders) for potential FDA approval, with the agency setting a review date for the end of November. Like many other UK biotech companies, Amryt has chosen to pursue a listing on Nasdaq in order to gain easier access to funding. The suite of orphan drugs looks interesting, though gaining sales momentum is as difficult as regulatory approval. It could be one to watch. Hold. JH

See also:

Aim 100: 100-91

Aim 100: 90-81

Aim 100: 80-71

Aim 100: 70-61

Aim 100: 60-51