Like most computer game companies, Team17 (TM17) saw a big uplift during the pandemic. In 2020, its adjusted cash profits jumped 33 per cent to £30.1m. The release of new Xbox and PlayStation consoles, coupled with people being forced to stay at home, was a real boon, but growth has now stalled.
Last year now looks like a peak in terms of recent earnings growth. As the pandemic tailwinds have dissipated, the consensus forecast for 2021 is that cash profits will grow more modestly to £33.5m.
The company has used a chunk of the cash it generated last year (at an operating conversion rate of 108 per cent) to acquire children’s education app StoryToys for £19.3m. Last month, it released the Lego Duplo Marvel app which allows kids to learn superheroes from the Marvel Universe. This is its first partnership with the film studio and could be very lucrative if this game proves to be a success. A forward PE ratio of 32.5 is not prohibitive in a market that will keep on growing. Buy. AS
Uniphar (UPR), a Dublin-based healthcare services group, provides integrated marketing and distribution solutions to more than 200 multinational pharma and medical device manufacturers on an outsourced basis. It is split into three business segments: commercial & clinical, product access and supply chain & retail, the last of which includes a network of 373 owned, franchised and independent pharmacies in Ireland.
M&A has played an increasingly important role in Uniphar’s international growth strategy ever since the 2019 capture of Durbin, a specialist provider of pharmaceuticals to over 160 countries. Earlier this year, on the back of a deal to acquire Germany’s CoRRect Medical, it formed a strategic alliance with 415 CAPITAL Management, a med-tech venture capital firm. Expect more deals as the group scales up and deepens its global footprint.
Strategic progress is mirrored in the group’s financial performance, with cash profits up by 36 per cent to €41.1m (£35.1m) in the first half of 2021, along with a 210 basis point increase in the gross margin. Global prospects are certainly encouraging, but an ambitious forward rating suggests the market is up to speed. Hold. MR
28. Frontier Developments
The lockdown enthusiasm for gaming companies is wearing off. Now for Frontier Developments (FDEV) it is about the nitty gritty of making high-quality games and hitting deadlines.
The developer has some of its own franchises such as Planet Zoo and Planet Coaster, but it has recently decided to start Frontier Foundry, a games label for third-party publishing, that will partner with other studios. Although the Foundry games will be less profitable, because Frontier doesn’t own the IP on them, the benefit is that some of the upfront development costs will be shared, reducing risk. The group already has six titles scheduled for future release through the venture, including a new Warhammer game.
This may mean margins suffer slightly, but should give the company more cash to invest in its four current franchises: Elite Dangerous, Planet Zoo, Planet Coaster and Jurassic World Evolution. Last month, it released Jurassic World Evolution 2.
The decision to partner with other studios looks even more sensible after the slightly botched release of Elite Dangerous: Odyssey this year. In management’s words, this was the most “ambitious expansion yet” for that series and would have incurred significant development costs. However, the game was plagued with issues initially and required a series of updates.
Despite this, last year’s results were still a record for the business. Revenue was up 19 per cent to £90.7m and Frontier maintained its operating margin at 22 per cent. Cash generation was also strong, with the cash balance only falling slightly despite plugging £14m into the Foundry venture.
Changes to global gaming infrastructure could also prove a boon. Wolfire Games, an American independent developer, recently filed a lawsuit alleging that competitor Valve uses the market dominance of its PC and Mac streaming platform Steam to extract “an extraordinarily high cut” of sales.
Steam currently takes a 30 per cent cut on most games bought on its platform, which includes around 60 per cent of Frontier’s sales. Even if Valve is found not to be anti-competitive, the lawsuit adds to the increasing pressure on marketplaces to lower fees.
On its current forward multiple, Frontier's shares don’t look excessive. Tencent also owns 9 per cent of the shares. It recently agreed to buy fellow Aim traveller Sumo, and has been looking to acquire non-Chinese gaming firms since Beijing cracked down on its domestic market. Frontier’s share place has flattened after the lockdown boom, but there is still value here. Buy. AS
27. Smart Metering Systems
These are interesting times for Smart Metering Systems (SMS). On the one hand, the pledges recently made in its home city of Glasgow during COP26 are incredibly positive for its markets. Talk of trillions of dollars for green projects should create many more opportunities for the company, which installs smart electricity meters and grid-scale battery storage facilities, as well as providing asset finance for other renewables products.
However, the turbulence in gas markets demonstrates that the transition to green energy is far from easy. The company, which raised £175m from shareholders and £420m in debt in September to fund a 10-year pipeline of projects, issued a statement earlier this month noting the “considerable turbulence” in UK energy markets which have forced a number of independent energy providers out of the market. However, it assured investors of its comfort with the guidance it has already given about its forward pipeline of smart meter contracts.
Investors seem relatively sanguine. Even after the issue of almost 19.5m new shares as part of the September fundraise – about 14.6 per cent of the enlarged total – its share price is up 46 per cent since the start of the year. But its forward earnings multiple makes it pricier than both peers and its five-year average. Hold. MF
In medicine, the suffix ‘cyte’ means cell. Investors in cell engineering platform group MaxCyte (MXCT) appear to have taken that as an instruction in recent weeks: after leaping 10-fold in the 18 months to September, the shares have since dropped by a third.
Lest the market draw parallels with the Icarus-like trajectory of fellow Aim 100 member Novacyt (NCYT), recent newsflow has hardly been bleak. A deal to licence its platform to biopharma group Nkarta followed ones with cell therapy firms Celularity and Sana Biotechnology. All counterparties are quoted on the world’s deepest pool of life sciences capital, Nasdaq, which MaxCyte joined in August.
The listing raised gross proceeds of $202m, sparking inclusion in the Russell 2000 index. So why the jitters? One place to start is the group’s $33m revenue projection for 2021. Although up on initial guidance, hopes of near-term profitability may have ebbed. At a certain point, as every Aim company discovers, cash generation needs to match sky-high valuations. Hold. AN
25. Tremor International
Tremor International (TRMR) is enjoying a resurgence in the global digital advertising industry. Shares in the Israel-based video advertising group have more than tripled in the past year, while it swung from a $31.5m loss in 2020 to a $36.4m profit in the first half of the year. In the wake of strong demand, Tremor raised full-year guidance for 2021 as early as March.
Under the group’s new strategy, Tremor focuses on video, data, and ‘connected TV’, which allows adverts to reach TV audiences on second-screen devices such as smartphones and tablets. The group is confident that programmatic advertising – where companies use algorithms to automatically bid for specific advertising slots on websites – is also an important source of growth.
The mechanics of digital marketing can be mind boggling and extremely fast moving. How much Tremor is able to spend on product innovation will be crucial, therefore, as more companies – including advertising giants such as WPP – battle to combine tech with creativity. Hold. JS
24. Blue Prism
In July, the technology consultancy Gartner ranked Blue Prism (PRSM) as the third-best company in the burgeoning field of robotic process automation for its “ability to execute”. Although this was above no less a tech luminary than Microsoft (MSFT), it was behind both UiPath and Automation Anywhere, two key rivals which have together gobbled up market share in the software niche.
Critics have variously cited the Aim firm’s smaller relative gains as a reflection of its sub-par R&D spend and weak execution. Years of losses have compounded enfeebled market sentiment.
All of this could soon be rendered moot, after management backed a £1.1bn takeover offer from US private equity firm Vista Equity Partners, at a price that values the shares just a scratch above the terms of a £100m equity raise in January 2019. While we have argued shareholders should accept, this isn’t yet a done deal: four weeks after the Vista news broke, just 22.3 per cent of investors had signed irrevocable undertakings to back the offer. AN
Victoria (VCP) revealed in a recent trading update that underlying pre-tax profits were trailing ahead of market expectations for the 2022 fiscal year. The flooring manufacturer and distributor now expects high levels of demand to persist “next year and beyond”.
The group also revealed that S&P followed Fitch in upgrading the rating on Victoria’s 2026 and 2028 bonds. While this is positive, the amount of debt the group holds remains a pressing concern. At the last reporting date net debt was double total equity and over three times Ebitda. With a potential interest rate rise around the corner, the situation could look increasingly deleterious.
The sales pipeline, meanwhile, looks robust. The group has benefited from the pandemic trends of home working and a very active housing market. The Italian ceramic business’ output is sold out until next year’s second quarter and the soft-flooring business is outperforming the market.
Consensus analyst estimates from FactSet suggest EPS of 37p for 2022 and 45p for 2023. The debt issue and an expensive 12-month forward PE ratio against peers tempers our view for now. Sell. CA
22. Next Fifteen
Digital marketing business Next Fifteen (NFC) has positioned itself to profit from the need for businesses to connect with customers on computers and phones. Marketing used to be about billboards and TV ads, but now it is about locating customers online and speaking to them directly.
The customer delivery business is an exciting opportunity. It uses data analytics to anticipate the future needs of customers and in the first half of the year almost doubled operating profit. As it is the highest margin portion of the group, this fast growth meant overall operating margin improved by 4.8 percentage points to 21.1 per cent in the six months to July.
Plans to accelerate investment and hire additional talent is expected to have an impact on margins in the second half, with Numis forecasting the full-year operating margin to drop to 19.8 per cent. But consensus forecasts are for EPS to hit 40.7p and 55p in 2022 and 2023, respectively, which translates to an affordable price for a business with momentum. Buy. AS
21. James Halstead
Sometimes it takes an event as big as a global pandemic to remind us of the benefits of traditional business methods. ‘Lean’ manufacturing principles developed in Japan and popularised globally in the late 1980s discouraged holding inventory as it tied up capital and weakened profitability. However, the supply chain disruptions kicked off by Covid-19, which companies are continuing to grapple with, proved just how valuable holding stock can be.
James Halstead (JHD), a 107-year-old, family-run flooring manufacturer, said it had been committed “for many years” to have stock in its warehouse to smooth production pressures and to be able to supply larger projects off the shelf, rather than needing to manufacture to order. “It is a key differentiator of our business and it can have its challenges but in this year it was a key strength,” chief executive Mark Halstead noted in last month’s annual report.
The company reported a 17 per cent increase in pre-tax profit to £51.3m as revenue grew 12 per cent to £266.4m in the year to 30 June, beating brokers’ forecasts. It said this amounted to winning market share from competitors, particularly from import-reliant UK rivals facing sourcing difficulties. Holding stock at higher levels also supported growth in its Pacific and European businesses, while in Europe a lack of wood laminate flooring led to customers switching to its luxury vinyl tiles. Shortages also increased demand for products typically used for commercial premises in a booming UK home improvement market.
Like its competitors, James Halstead has still faced supply challenges, most notably over the supply of basic polymers as petrochemical plants in the US were knocked out by Hurricane Ida. Self-isolating procedures also caused manufacturing disruption in the UK and logistical struggles have meant that “even where we have orders and stock it is difficult to move goods internationally”, Mr Halstead said.
Still, the strong trading and a reasonably upbeat outlook have helped push the stock higher this year. The shares have also outperformed the FTSE All-Share Index for four of the past five years and are not overly expensive when compared either with peers or their five-year average. Cost pressures are unlikely to ease in the short erm, though, limiting the potential for outperformance and the company’s shares are already close to broker Panmure Gordon’s 575p target price. Hold. MF