90. Seeing Machines
Seeing Machines (SEE) is behind an artificial intelligence-driven system that monitors drivers and pilots for signs of fatigue, boredom, distraction or other potentially dangerous situations. The company, headquartered in Canberra, Australia, remains heavily lossmaking. Its full-year accounts for the year ending June 2020 show pre-tax losses of A$45.5m (£24.8m) on revenue of A$40m, but a recent trading update said it expects an 18 per cent increase in sales to A$47.3m until June 2021.
The company makes its money through royalty payments in installed vehicles and through aftermarket sales. It expects royalties to rise “sharply” in the next two to three years given that systems have now been installed in more than 100,000 vehicles. It also recently opened a European sales office after winning contracts in the UK with operators such as coach company National Express (NEX) and Trams of London. Its share price has gained 29 per cent this year to 9.6p, valuing the business at about £372m. Broker Cenkos Securities has a Buy recommendation on the stock, but even under its forecast of an 80 per cent uplift in revenue over the next two years it won’t quite break even. Hold. MF
89. EKF Diagnostics
Nominally, EKF Diagnostics (EKF) sells into the in-vitro diagnostic (IVD) marketplace, but the pandemic has generated other opportunities. Beyond the core businesses, the company has seen brisk demand for Covid-19 sample collection devices and associated kits, so much so that management recently upgraded trading expectations for FY2021. The upbeat assessment came after interim pre-tax profits improved by 83 per cent at £11.4m.
Glamorgan-based EKF certainly isn’t standing still from a clinical perspective, having recently appointed a new chief scientific officer, while finalising a $10m (plus performance-based payments) scrip acquisition of Advanced Diagnostic Laboratory (ADL Health), a US Covid-19 testing firm.
Sales in the diabetes segment, which account for around a quarter of the group total, have grown through the year to date, while the top line for its contract manufacturing product lines expanded by 171 per cent over the same period. The shares have risen in value by 185 per cent since we first highlighted the investment case in 2011, but with the global in-vitro diagnostics market expanding at 4.4 per cent annually, the growth narrative remains in place. Buy. MR
88. IQE
IQE (IQE), which supplies chip wafers used in handset devices and telecom infrastructure, is “nearing a big, positive value inflection”. So say analysts at Numis, which alongside broker Peel Hunt has been calling a rebound in the Cardiff-based group’s shares for a while.
History explains such belief: despite possessing lower gross margins than semiconductor peers, IQE saw demand explode in 2017 and again in 2020 following big orders from key client Apple. In the periods inbetween and since those years, sales have been hit by a trade war, a Huawei ban, hard-to-read demand cycles, an inventory overbuild and chip size reductions. Despite this, IQE’s valuation has stayed elevated.
That might seem uncharitable with the shares on less than two times next year’s expected sales, especially if rising capital expenditure budgets prove a lead indicator of bigger orders. But analysts and investors have struggled to accurately forecast the company’s earnings since the start of 2018, shortly before IQE made the number 13 slot in our annual Aim round-up. Hold. AN
87. Brooks Macdonald
It is often said that imitation is the sincerest form of flattery and asset manager and financial services provider Brooks Macdonald (BRK) can justly claim that similar-sized managers are starting to take the high-end advisory trail that Brooks had long since blazed. Arguably, the company deserves more attention from investors in the aftermath of the clear success of its reorganisation and acquisition strategy led by former chief executive Caroline Connellan, now running wealth management at Abrdn.
When market conditions are right, then most wealth and asset managers benefit from some form of operational gearing. The problem with pure-play fund managers is that this effect tends to be dissipated by the increased bonus awards that star managers trouser at the end of a good year. By contrast, advisory is a more stable business in terms of fees and Brooks benefits from significant levels of operational gearing. The company has been building on this by adding advisers, rather than fund managers, to its operating business – as it did with the purchase of Cornelian Assets Managers and Lloyds’ Channel Island Funds.
The asset management industry more generally should be the beneficiary of some robust trends. Saving rates soared to over 16.9 per cent of household income during the pandemic, making many people active savers for the first time. While that ratio is unlikely to continue as spending returns closer to historic trends, the realisation that savers need to be more active to generate the returns needed in a low-interest rate environment is behind many of the inflows from retail investors that fund managers have experienced. While new start-ups such as Nutmeg, Monzo or Revolut have hoovered up millennials, the real money still lies with the “assetocracy” of near-to-pension-age professionals who did well out of the housing boom and still value a bespoke service from their wealth advisers. This is why managers, such as Brooks, that maintain an active bank of financial advisers, along with a wide net of intermediaries, look well-placed to benefit. It is also noticeable that similar-sized companies such as Rathbones (RAT) have been buying their way into the high-end advisory market over the past 18 months.
On pure valuation terms, Brooks is notably undemanding on a forward PE of 13 times broker Panmure Gordon’s forecasts for 2022. That places it firmly between the troubled asset managers (ie the ones leaking funds) and the gold-standard likes of Schroders. With dividends forecast to rise consistently through to 2024, the combination of income and capital growth looks enticing. Buy. JH
86. AFC Energy
The appetite for all things hydrogen as a breakthrough fuel has certainly powered AFC Energy’s (AFC) share price over the past couple of years. Despite a complete lack of sales in its three most recent financial years, during which time it has racked up more than £11m of cumulative losses, it has frequently outperformed the FTSE All-Share Index and maintains an enduring ability to sell its story to investors, most recently tapping engineering giant ABB and Dubai-based Dutco Group during a £36m fundraising round in April.
AFC makes alkaline fuel cells that can convert hydrogen into power and has been working alongside ABB on an electric vehicle charging product as well as Spanish construction giant Acciona on a trial to replace onsite diesel generators with hydrogen cells.
Broker Zeus Capital has a target price of 188p on shares that currently trade at less than a third of this level. Its investment case is based on the potential of its S-series batteries, which use membranes rather than a fluid handling system for higher grades of hydrogen, allowing it to offer lighter and cleaner cells. These aren’t due to begin commercial production until the end of next year, though, and costs will ramp up until then as the company more than doubles staff numbers this year. As such, short-term momentum looks fairly weak. Hold. MF
85. Alpha Financial
Alpha Financial (AFM) offers consulting services to asset managers, so its success is strongly linked to how much people want their wealth tied up in the stock market. The past few years of low interest rates and inflating asset values have therefore been pretty handy for its prospects.
Its revenue doubled in the five years to March 2021 and operating cash conversion above 100 per cent means its free cash flow yield is around 5 per cent. As well as an impressive historical record, planned expansion into insurance and ESG translates to a clear strategy.
Alpha expects assets managed by the industry to increase 30 per cent by 2025. Whether its core market can grow by a similar amount is hard to say, although an interest-rate-sparked stock market correction wouldn’t necessarily hit demand for the consultancy’s services. On balance, a forward price/earnings multiple of 21 looks like a fair price. Hold. AS
84. Numis Corporation
Numis (NUM) has carved out a niche in the investment market, aiming to deliver returns for investors with long time frames. Its research-driven approach focuses on specialist or differentiated mandates, although it does not offer credit to its clients or carry out much proprietary trading on its own account. That leaves a much simpler business model focused on traditional market-making activities – running the books on IPOs and advising on mergers and acquisitions.
In a sign that markets continue to froth, the company recently reported in a trading update that revenues for its investment banking arm will be at least £150m for the year. Paradoxically, that makes forecasting overall performance a best-guess scenario as no-one really knows whether that will continue next year. However, over a decade Numis has outperformed the FTSE All-Share significantly with a total return of 400 per cent, compared with 90 per cent, suggesting that the wait with Numis is worth it. Buy. JH
83. Jubilee Metals Group
Mining metals cheaply has proved popular with investors over the past 12 months. Jubilee Metals Group (JLP) has more than got its timing right: in that time it has grown from a minnow to a mid-sized miner through a canny set of acquisitions to add to its holdings in South Africa. This has turned it into a platinum group metal and chrome producer with copper and cobalt expansion plans.
Its strategy is similar to fellow Aim 100 constituent Central Asia Metals (CAML), although it has largely bought dumps of pre-processed tailings, while CAML’s Kazakhstan operation focuses on mine waste, which was dug out and left rather than put through a plant.
The point is it works. Shareholders barely flinched when Jubilee raised £30m to increase its stakes in several copper projects in Zambia in September, showing the appetite for growth. This will see total production capacity hit 25,000 tonnes a year of copper by the midpoint of the decade, the company said, adding a metal that has good long-term demand growth prospects. Buy. AH
82. Inspecs Group
Inspecs' (SPEC) share price has more than doubled over the past 12 months, helped by improved trading conditions and acquisitions. Revenue and underlying Ebitda have soared at the Bath-based designer and manufacturer of eyeglass frames and lenses, which listed on Aim last year after a period when Covid-19 restrictions closed distribution depots and shuttered client shops.
Performance has been robust despite continuing restrictions in some group markets and growth prospects look promising. The integration of German eyewear supplier Eschenbach, which is trading ahead of expectations, helped drive group revenue up 653 per cent to $126m in the latest (interim) results. The resumption of international travel will help sunglasses sales. International market penetration has improved and operating capacity has been expanded. A new UK facility for Norville lenses – acquired last year – will raise production limits and drive sales volume further.
Peel Hunt forecast adjusted earnings per share (EPS) of 16.8¢ for FY2021 and 20.4¢ for FY2022, up from last year’s 5.6¢. Growth expectations are displayed in the broker’s prediction of FY2021 underlying Ebitda of $25m and $30m for next year, after 2020’s $4.5m. Buy. CA
81. AB Dynamics
Wiltshire-based AB Dynamics (ABDP) has been testing and measuring vehicles for almost 40 years, but its methods have become increasingly sophisticated.
The company began life by putting new models through their paces on the track – driving them under various conditions to make sure they were up to scratch. As vehicles have evolved, though, so have the company’s methods – it can carry out laboratory-based and high-end simulator tests and has increasingly moved into driverless and autonomous vehicle technology.
It has managed to do all of this while continuing to generate a profit. The pandemic has affected this – adjusted profit before tax for the first six months of this year fell 57 per cent year-on-year to £3.5m as revenue was more than a fifth lower at £27.3m, with fewer higher-margin track tests undertaken. Its cash generation remained strong, though, and it continues to innovate. It launched ABD Solutions, which retrofits off-road machinery such as mining, defence, agriculture and materials-handling vehicles so they can operate autonomously.
It also paid €17m (£14.4m) for Singapore-based Vadotech Group in March, boosting its presence in Asia Pacific – specifically in the Chinese market, where it has a 60,000 sq ft testing facility in Beijing.
The company is highly rated by investors. It trades at a price of 47 times forecast earnings, which is around double the valuation of its peers. Its biggest institutional holder is Castlefield Investment Partners, which holds a stake of more than 13 per cent through its CFP SDL UK Buffettology (GB00BF0LDZ31) fund.
AB Dynamics has a “very strong” customer base, including most of the top 20 vehicle manufacturers, the main testing laboratories and government clients, said David Gorman, a partner at Castlefield Investment Partners. “The contracts that they have are extremely good. It’s quite niche but it dominates its niche,” he says.
It also enjoys a “reasonable marriage” between revenue-generating, day-to-day testing work and the more technologically advanced work, which may not be as lucrative currently but offers significant growth opportunities.
For instance, the new ABD Solutions business addresses a potential market worth £4.8bn that’s growing at a rate of 25 per cent a year, broker Peel Hunt said in a note last month. Its valuation does seem quite racy, but given that it continues to generate cash to fund its development – it had £33m of net cash as of 30 June – it’s unlikely to run out of road. Buy. MF
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