100. WanDisco
WanDisco (WAND) is a rare success story of 2022. The multiple record contract wins it has announced this year confirm there is a commercial case for its software. Its product enables companies to move data from the ‘edge’ – wherein data storage and processing takes place locally, close to customers – to the cloud. In the case of a manufacturing plant, this could mean tracking wear and tear on machinery and then moving this into the cloud in real time, where the data can be analysed.
In the six months to June, bookings were $27.3mn (£24.2mn), up from just $2.1mn last year. Two weeks after its results were published WanDisco announced another $25mn agreement with “a top 10 global communications company” to process internet-of-things data from the automotive sector. In its third-quarter (Q3) trading update, year-to-date bookings were $61.2mn.
WanDisco has a lot riding on this one customer, but this year looks like a breakout. Trading at five times its order book, the shares look expensive, but with more edge data being created due to the growth of 5G, we can expect more record contracts along the way. Buy. AS
99. Cerillion
Cerillion (CER) provides software for telecoms companies to help with billing, charging and customer relationship management (CRM). The company also says it is benefiting from the trickle-down impact of wider investment in 5G networks.
That claim makes sense. Telecoms have had a tricky time upgrading fibre-optic networks and 5G. Competition is high, as are the investment costs, meaning poor returns on equity. In this situation, investing in software such as Cerillion’s that could automate jobs, drive revenue and boost profits is logical. Skinny profit margins incentivise investments in productivity.
The story can be seen playing out in Cerillion’s numbers. Revenue for the six months to 31 March increased 26 per cent to £16.1mn. Existing customers made up 91 per cent of revenue, up from 71 per cent last year, as new orders dropped back. But Cerillion said its new customer pipeline is at record levels (£172mn), with a £15mn contract win subsequently announced in July. Existing customers are also asking for more support, which has helped maintain a healthy back-order book of £39.7mn.
The company is offshoring to protect margins. Recruiting in India and Bulgaria has reduced costs per head, despite wage inflation, in the UK. This contributed to the cash profit margin expanding by an impressive 7.3 percentage points to 44.9 per cent in the first half.
The unknown for investors is what consolidation in the telecoms industry will mean for Cerillion. Low margins mean further consolidation is expected in the coming years. Earlier this month, Vodafone UK announced it was in discussions to merge with Three. The combination would make it the largest mobile operator in the UK.
Three is currently a Cerillion customer, meaning the merger could potentially result in a bigger contract if the larger entity continues to use Cerillion’s software. But Vodafone may choose other CRM software. In general, consolidation is not a good thing for Cerillion as it will give the remaining telecoms companies more bargaining power when negotiating these contracts.
The market seems unconcerned with this risk. Cerillion currently trades on a 2023 price/earnings (PE) ratio of 27.2 based on consensus forecasts. Revenue growth of over 20 per cent and the cash profit margin justifies this. Hold. AS
98. Revolution Beauty
Revolution Beauty (REVB) is an IPO-flop par excellence. Since floating at 160p last summer, the beauty and personal care retailer’s share price has cratered on the back of gloomy trading updates and repeated audit delays.
These delays ultimately led to the suspension of the shares from trading, after auditor BDO “identified a number of serious concerns” and refused to sign off on the financial statements for the year ended 28 February 2022. The company breached its financing facility agreement due to the lack of filed accounts.
Management has also said it expects financial year 2023 results to be “materially below market expectations”. There are several headwinds facing the company, with weak trading impacted by post-pandemic ecommerce trends, US retailer buying strategies, and a £9mn revenue hit from Russia’s invasion of Ukraine. And the independent investigation into accounting issues looks like it will be a drawn-out process. We see limited upside potential from this point. Sell. CA
97. Naked Wines
Naked Wines’ (WINE) pandemic boom now feels like ancient history. Thirsty consumers flocked to the online wine retailer during lockdown. But the shares have collapsed amid concerns over weakening demand and the future direction of the business.
Management is cognisant that change is needed. Chief executive Nick Devlin said that “mistakes” had been made as management this month unveiled a new strategic plan which focuses on profitability. The company will cut costs and marketing investment, and it will destock. Banking covenants have been renegotiated, and David Stead has taken the helm as the new chairman.
Liberum analysts called the plans “sensible” and moved their recommendation to a hold. But the broker’s target price of just 100p pales in comparison to the pandemic high of almost 900p, which shows how far the company’s star has fallen. We think it is unlikely that a material turnaround can be delivered. Management has lowered financial year 2023 revenue guidance to £340mn-£360mn, which suggests that the top-line boom times are at an end. Sell. CA
96. Gooch & Housego
Manufacturers have had a lot to contend with in the aftermath of Covid-19, as stretched supply chains, labour market shortages and higher energy prices all contribute towards soaring cost inputs.
So much so that even companies such as Gooch & Housego (GHH) with robust order books have struggled. The company, an optical technology specialist that makes everything from fibre optics to lasers and periscopes, said in August that its order book had grown by 44 per cent year on year at the end of July to £140.6mn. However, it warned that adjusted pre-tax profit would be around £3.5mn lower than expected, at around 30 per cent of last year’s total.
Gooch & Housego’s shares took a dive as a result and have fallen by 57 per cent so far this year, making them a particularly poor performer. More pain could come if it decides the carrying value of its intangible assets has taken a hit. However, we think that this is a quality company experiencing some short-term pain, meaning its sell-off provides the opportunity for patient investors to make longer-term gains. Buy. MF
95. Inspecs
Since we last discussed eyewear and lens design house and manufacturer Inspecs (SPEC) in August, the shares have fallen precipitously. While revenues have boomed, production capacity is increasing, and a first dividend has been paid out, the market’s attitude towards the company has been negatively impacted by both the significant delay to the filing of the 2021 annual accounts due to inventory accounting issues at American subsidiary Tura, and by cash profit headwinds and the impact of currency movements.
Inspecs’ latest results, for the half-year to 30 June, underline this mixed picture. Revenue was up by over 10 per cent to $138mn (£124mn) as the company enjoyed higher volumes and the positive impact from the integration of German eyewear supplier Eschenbach. The gross margin rose by 630 basis points to 50.5 per cent. But underlying cash profits were hit by the relocation of production for lens maker Norville (acquired in 2020) and the company’s reported results in Europe, which suffered due to a weak euro against the dollar (Inspecs reports in the latter currency).
The company has had its share of institutional backers. Crux Asset Management fund manager Richard Penny told Investors’ Chronicle earlier this year that Inspecs was well placed to make future acquisitions and benefit from manufacturing and distribution synergies. He also pointed to the success of Ray-Ban owner EssilorLuxottica (FR:EL), whose size dwarfs Inspecs’ own, as something it could “replicate”.
This is at the very bullish end of things. But we still think that wider trends look to be in the company’s favour and should benefit it over the long term. Demand for its products is helped by the ageing populations across its markets. The sector enjoys good pricing power, which leads to high margins. And the eyewear market is relatively fragmented, meaning that there are good acquisition opportunities, if Inspecs can get these right.
Peel Hunt analysts said in August that they expect ramped up production to “be used both for internal requirements (improving gross margin) and for external sales” and reiterated their buy recommendation, albeit with a reduced target price of 395p. The share price slump since then means it has a long way to travel to hit that mark. But the valuation looks cheap, with the shares trading at just eight times consensus forward earnings forecasts, according to FactSet, significantly below the five-year average of 24 times. We are sticking with our last recommendation for now, keeping an expectant eye out for improvement in share price performance. Hold. CA
94. Eurasia Mining
When we ran the rule over the top 100 companies on the junior boards last November, platinum specialist Eurasia Mining (EUA) was in a whole different league, ranking in the middle of the pack by market capitalisation. Since then, its exposure to Russia (both through an exploration asset and partnership with state mining body Rosgeo) has seen investors back away, sending the share price down significantly – almost 80 per cent this year.
Even the potential addition of hydrogen projects has failed to excite the market. Eurasia has a history of big announcements, but not enough follow-through for the hydrogen gambit – which currently amounts to a line in its half-year results – to be convincing. Those interim figures, released at the end of September, also reported platinum production of around 6,000 ounces, up 47 per cent year on year. This is now in Russia for refining, although the company said it was operating within the parameters of UK and EU sanctions on Russia. Sell. AH
93. Hotel Chocolat
The market was blindsided by premium chocolatier Hotel Chocolat’s (HOTC) July update, which said that it would “materially reduce” international investment due to challenging macro conditions, a development that leaves it with narrower horizons.
In September, Hotel Chocolat put the final nail in the coffin of US direct-to-consumer sales with the closure of its website. In Japan, it may have to take a full impairment charge on £23mn of loans made to join venture Hotel Chocolat KK, in which it has a 20 per cent stake, and it has a further £6mn on the line in loan guarantees. These international travails are expected to drive a statutory loss for the year to 26 June when full-year results are published in the weeks ahead.
But top-line performance has been robust in the key UK market, with sales soaring against pre-pandemic levels. Management thinks it has a “significantly larger addressable market size than previously estimated” due to new hot chocolate and alcohol ranges, online business growth, and real estate profitability. Hold. CA
92. LBG Media
If you are over 35, you’re not likely to be familiar with LadBible. However, the digital youth publisher – now LBG Media (LBG) – is attracting ever larger audiences.
The group started life sharing videos on Facebook, but now publishes a variety of digital content across different platforms. Around half of its sales are 'direct' and involve making branded content for clients, who have included the British Army, PlayStation and Tampax. The other half is generated indirectly through revenue sharing arrangements with social media platforms, where advertising appears alongside LBG content. More clicks equals more money.
One of LBG’s key strengths is its popularity. Its global audience grew by 62mn people to 315mn in the first half of 2022, while content views rose by 38 per cent to a mind-boggling 35.8bn. This fuelled sales growth of 8 per cent.
However, LBG’s outgoings are also expanding rapidly, and heavy investment in staff meant the group fell to a loss in the six months to 30 June. Cost concerns are compounded by fears that demand for advertising will dry up as recession bites, and that young audiences will lose interest in the content itself. Sell. JS
91. James Latham
There are reasons for investors to take a look at shares in timber and panel manufacturer James Latham (LTHM). Currently priced at just five times the company's current earnings, and at a premium to net asset value per share of 38 per cent, they look cheap for what is still a quality business. After all, pre-tax profits for the year to 31 March 2022 more than tripled while revenue jumped over 50 per cent.
However, one big question mark for the business remains the impact of the war in Ukraine. The company said in its annual report that one of its “notable challenges” included obtaining alternative supplies to replace products that previously were sourced from Russia. Cost pressures were already significant, as the 36.2 per cent hike in the cost price of its products last year emphasises. Then there is sterling weakness – which has been a problem for the company in the past – to factor in. Hold. ML
