60. FRP Advisory
Few businesses have reason to celebrate the UK’s swelling insolvency levels. Restructuring specialist FRP Advisory (FRP) will be feeling cheerier than most, however. In July, the company noted an increase in enquiries for its services, but said “uncertainties still remain over how long troubled businesses can continue in their current form”.
As winter approaches and the economic backdrop darkens, many of these businesses now face acute difficulties, and FRP’s share price has risen by 30 per cent over the past six months in anticipation of surging restructuring or bankruptcy work.
It has been a tough couple of years since FRP listed in March 2020, as government support during the Covid-19 pandemic kept insolvencies “artificially low”. However, the group continued to grow revenue throughout and profits are soon expected to overtake pre-pandemic levels. The Insolvency Service has also noted a recent uptick in compulsory liquidations and administrations, which tend to be more lucrative for advisors than voluntary insolvencies.
With a forward PE ratio of 20, FRP's shares are trading above their five-year average of 17.4. However, a depressing abundance of growth opportunities means that pricey-looking rating might soon look like a bargain. Buy. JS
59. Savannah Energy
In recent years, Savannah Energy (SAVE) has specialised in deals that take a long time to close. Its takeover of former debtor Seven Energy, completed in 2019, has turned the company into a significant producer of oil and gas in Nigeria, but the deal took years to resolve. Happily, the timing was good and Savannah had the support of long-term contracts when prices plunged at the onset of the pandemic.
But Savannah has not seen the hefty profit increases enjoyed by others in the space, given most of its sales are tied up through those long-term contracts, with price rises linked to US inflation. Oil and condensate products are sold at spot prices, however.
Its operating profit margin is not hugely consistent, swinging between 54 per cent in the first half of 2021 and 41 per cent this year, but the Nigerian assets are otherwise reliable. Current production is around 22,000 boepd and the adjusted cash profit from the first half was $100mn (£89mn), 10 per cent ahead of last year.
Now, the company is waiting on various approvals to take on a suite of ExxonMobil (US:XOM) and Petronas assets in Chad and Cameroon, including a majority stake in an oilfield and pipelines across the two countries.
This will cost up to $700mn, and Savannah has taken on $432mn in debt and raised $65mn at the end of last year from shareholders. An effective date of January 2021 means the real cost will be as much as half the sticker price, however. The company first said it would complete the deal by mid-2022, then the end of the third quarter, and now it’s by the end of the year. It will double the company’s upstream production and add earning power through the pipeline ownership.
At the same time, the company is in the midst of refinancing its existing debt, which auditor BDO flagged as a key risk in the 2021 annual report: “The group’s ability to continue as a going concern is dependent on the support from its lenders to continue to amend the terms of the US$371mn bank loan facility.”
Savannah is still working on splitting this from a single US dollar loan to a multi-tranche facility denominated in Naira. The interim accounts, released at the end of September, said work on this refinancing was continuing.
The scope of the Chad and Cameroon deal will ramp up earnings once again. But the heavy debt load keeps us away. Sell. AH
58. Greatland Gold
One conundrum of building a mine is that the closer you get to production, the tougher the market backdrop can get. Greatland Gold (GGP), worth £1.4bn at the start of 2021 when gold traded just shy of US$2,000 an ounce, has seen its market capitalisation fall to under £400mn as it inches towards first output from the Havieron mine in Western Australia.
It’s a fairly cheap ride to production, given Greatland has exchanged a 70 per cent stake in the project for funding from Newcrest Mining (NCM), and doesn’t have to build a processing plant. It has also just raised £35mn from Andrew Forrest’s Wyloo Metals, handing it an 8.6 per cent stake in the company in return. Coupled with A$220mn (£122mn) debt, this means Greatland has done the tricky part – finding the cash.
But investors are largely buying into what Greatland will be able to find beyond Havieron, given the limited exposure to this project after the Newcrest farm-down. The positive is that further exploration will certainly be covered by Havieron cash flows, and the negative is that another big discovery might be the only trigger for a major uptick in the share price. Avoid. AH
57. Pan African Resources
In the context of the dollar debasement we’ve witnessed both prior to and following the pandemic, it can be difficult to fathom why the gold price has slipped over the past six months. But with few other safe havens in evidence, the dollar’s inverse correlation to the gold price and US bond prices now hold sway. Indeed, at the time of writing the gold price was testing a $1,680 an oz technical support level.
All this is grist to the mill for Pan African Resources (PAF), a gold miner whose buy case was detailed by Investors’ Chronicle in November 2019 when the gold spot price was $1,473 an oz. At that point, the gold producer was weighed down quite heavily with borrowings, but the subsequent run for the gold bulls enabled it to reduce net debt as a proportion of total equity to just 4 per cent by the end of June 2022.
There was further operational progress through the year, with record gold production of 205,688 ounces, outstripping revised production guidance of 200,000 ounces. Pan African also managed to keep a lid on all-in sustaining costs, which, at $1,284 an oz, were only 1.8 per cent up on the prior year. Management plans to trim costs in the current year, although its ability to do so is bound up with the USD/ZAR rate. The softening gold price is set against a lowly forward rating of four times adjusted earnings. Buy. MR
56. FW Thorpe
Aim’s secondary market may be far more liquid than it once was, but investors keen to take a stake in FW Thorpe (TFW) may struggle due to the high level of insider and institutional ownership. The fact that the shares are tightly held reflects a stable, steadily growing business with net cash on the balance sheet and “substantial order books”.
Indeed, the supplier of professional lighting systems has seen increased order backlogs due to sourcing problems linked to electrical components and microchips. Supply chains remain strained despite the gradual return to business as usual. The delays and associated cost increases have weighed on financial performance, yet FY2022 revenues of £144mn and EPS of 17.2p trumped the prior year equivalents by 22 per cent and 26 per cent, respectively. Statutory figures are also well in advance of pre-pandemic comparators.
The net cash position has been maintained despite a string of acquisitions, including the purchase of an 80 per cent stake in SchahlLED Lighting in Germany, finalised last month.
Including the special interim payout of 2.27p a share, the implied dividend yield stands at 2.24 per cent. Next to a PE ratio of 22, that hardly screams value – even if you could get your hands on the shares. Hold. MR
55. Central Asia Metals
Compared with its Aim 100 copper peer Atalaya (number 72 on this list), Central Asia Metals (CAML) is a lot less preoccupied with mining costs. It has excelled as a low-cost producer due to its rather unique Kounrad asset in Kazakhstan, where a processing plant actually extracts copper from waste dumps from a shuttered mine. Power costs are a consideration, but these have so far remained in check, helped by a weak local currency in Kazakhstan and a five-year power deal at the company’s other operation, Sasa, in North Macedonia.
The prices of copper and other base metals have come down significantly this year, hit by a mix of weaker demand in China and less bullish bets in commodity futures markets. CAML’s resilient offering is shown in its performance against the spot market – its share price is down 14 per cent in the year to date, compared with a fall of 21 per cent for the copper price. A newly debt-free balance sheet should allow the group to take advantage of discount acquisition opportunities. Buy. AH
54. Alliance Pharma
Management at healthcare and prescription medicine marketing firm Alliance Pharma (APH) has some reassuring to do after a rocky year for the company’s investors. Problems largely stem from an ongoing tussle with the Competition and Markets Authority, which is seeking to disqualify Alliance’s chief executive, Peter Butterfield, from serving as a company director.
Butterfield is one of seven directors from a number of pharmaceutical companies accused of conspiring to fix the NHS price for a common anti-nausea drug. Controversy aside, Alliance’s pre-tax profit was flat at the time of its interim results in September, in part because China’s Covid lockdowns had prevented key products from entering the country.
The company said it is on track to meet market expectations for its full-year financial performance, and it raised its interim dividend to 0.592p from 0.563p in the first half of 2021. Management anticipates that several large orders in the final quarter of this year will give its full-year figures a boost – but the shares (and market faith) still have a lot of lost momentum to recover. Hold. JJ
53. Johnson Service Group
Since 2019, the average cost of running a washing machine in the UK has roughly doubled to £12 a month. This gives a sense of the challenge facing Johnson Service Group (JSG), a Cheshire-based company that rents out and launders linen for restaurants and hotels.
Covid-19 hammered hospitality, and Johnson Service suffered as a result, with demand plunging to just 3 per cent of normal levels in the space of two weeks. However, customers are flocking back and analysts now forecast sales of £380mn in 2022, eclipsing a record set in 2019. Better trading has been fuelled by the core hotel, restaurant and catering (Horeca) division, but the group’s smaller workwear arm also achieved modest sales growth.
Strong demand has been undercut by cost fears, however, meaning profitability lags the pre-pandemic benchmark. In the first half of 2022, the group’s adjusted operating profit margin stood at just 7 per cent, compared with 14 per cent three years earlier.
Energy costs are a particular problem. These stood at 9.3 per cent of revenue in the first half of 2022, compared with 6.5 per cent in 2019. Given that Johnson Service has fixed 67 per cent of its anticipated gas requirement through to September 2023, things could be worse. But wages are also climbing and “competition for new employees” remains a challenge. Staff costs now represent about 48 per cent of total revenue, compared with 43 per cent in 2019.
All told, that explains why the group is braced for some “short-term” margin pressure particularly in respect of energy costs.
There are plenty of reasons for investors to be cheerful, however. Management has reinstated a progressive dividend policy after payouts were suspended when lockdown was first announced. Up to £27.5mn-worth of shares are being bought back, too, even as investments in new rental stock continue to make the most of the bounce-back in demand.
Chief executive Peter Egan said trading momentum since June has “remained encouraging”, with volumes in Horeca up to 92 per cent of pre-Covid levels this summer. “Based on our assumption that volumes follow the normal seasonal pattern over the coming months and are not impacted by a reduction in discretionary spending, or a further material deterioration in the energy markets, as a result of ongoing economic factors, we expect the full-year outturn to be in line with current market expectations,” he said.
That list of assumptions is a little too long for our liking, however. Hold. JS
52. Kistos
It’s hard to argue with an income statement like the one gas producer Kistos (KIST) filed for the first half of 2022. Production: double last year. Sales: €285mn (£248mn), up from €33.7mn in the first half of 2021.
As consumers on the other end of those increases, it’s hard to look at those figures without wincing. But for Kistos, it is a sign of good timing and dealmaking. The company came into being through buying the Q10-A asset in the Dutch North Sea and has since taken a 20 per cent stake in various producing wells in the Greater Laggan Area in the North Sea from TotalEnergies (FR:TTE) for $125mn (£110mn).
Executive chair Andrew Austin still wants more. He even had a go at taking out larger North Sea producer Serica Energy (SQZ) in the summer. For us, the company’s share price drop-off since August makes it one to add to the portfolio. Gas prices are down this month but we are not sold on the crisis being fixed just because of a warmer October in Europe. Buy. AH
51. Volex
Volex (VLX) is a business whose fortunes have been much improved in recent years.
Its management brought it back “from the brink of extinction” in 2015, according to chairman Nat Rothschild, and last year grew pre-tax profit by 23 per cent to $36.2mn (£32mn). Revenue rose by 19 per cent on an organic basis, or 39 per cent once the four acquisitions it made were factored in.
Those deals are a core part of its strategy – to use the cash it generates to fund investments. The company also doubled capex to $15mn to support automation projects in higher-volume factories. In February, it substantially increased borrowing to $300mn as it pushes forward with a new plan to double revenue to $1.2bn by 2027. Investors don’t yet seem to have bought in – Volex shares are down by around a quarter this year. Rothschild said on an earnings call that he thought they were “incredibly undervalued”. They trade at almost 10 times forecast earnings, which isn’t exactly bargain basement territory given their five-year average of just over 12 times. Hold. MF
