70. Jadestone Energy
For a company selling oil and gas in 2022, Jadestone Energy (JSE) has had an unusually rough time of it. One of our picks in the space before spot prices started to rocket, its model of buying up mature assets in the Asia-Pacific region cheaply and getting them into shape has also continued to throw up challenges. The purchase of New Zealand offshore asset Maari is still in limbo three years after the transaction was announced, while the remedial work required at key producing asset Montara perhaps shows why it was able to be bought for a bargain back in 2018.
Defects in the floating, production, storage and offloading (FPSO) ship mean production has stopped at the field, located 600km off the Western Australian coast. While it is being repaired the company has started a “fundamental review of our hull and tank inspection and repair regime, which will include our maintenance approach, operating systems and organisational structure”.
Still, the company has a significant amount of cash – $162mn (£146mn) as of 30 June – and no debt. Clearly, it would have still more cash if Montara was running at full capacity. But the balance sheet provides a strong cushion ahead of a restart. Buy. AH
69. CentralNic
Everyone knows that when times get tough marketing budgets are the first things to be cut. CentralNic (CNIC) didn’t seem to get the memo, however.
The company sells domain names to get businesses online, and then helps these clients find advertising opportunities. In the six months to 30 June, revenue surged by 93 per cent to $335mn and adjusted Ebitda almost doubled to $38.6mn, fuelled by the group’s online marketing arm. Organic growth for the whole year is expected to come in ahead of expectations at 66 per cent.
There are a number of appealing qualities about CentralNic’s business. For starters, it’s extremely cash-generative –which is helping bring net debt down relatively quickly – and has plenty of recurring revenue. Its “online presence” services are sold as annual subscriptions, and only 3 per cent of customers change supplier each year. Marketing clients have rolling contracts with CentralNic, and the group gets paid every time an end user clicks on an ad. Cash conversion from this revenue stream is consistently over 100 per cent as most customers have to pre-fund their accounts.
The key thing about CentralNic, however, is that it is not reliant on third-party cookies, and it doesn’t collect personal data. As concerns about online privacy mount, and Google Chrome prepares to ban third-party cookies altogether, this is a real selling point. Buy. JS
68. Mattioli Woods
Mattioli Woods (MTW) has proved to be a resilient survivor in what was otherwise a terrible year for most of the asset and wealth management sector. It all comes down to business mix. MTW isn’t as heavily reliant on ad valorem fees for market performance as some of the larger players, which seems to have shielded the business from the worst of the market downturn. In its latest results, the split was 48/52 per cent between upfront management fees and ad valorem – some pure-play fund managers are 90 per cent reliant on market performance fees, which means the company’s revenues are less volatile by several degrees.
Mattioli is an interesting business that has many of the qualities that banks who wish to develop their wealth management capabilities are looking for in a business. By keeping its distribution network in-house, it appears able to cross-sell more of its services and keep a greater proportion of the value chain for itself. Revenues, margins and dividends are still rising. Worth keeping an eye on. Buy. JH
67. R&Q Insurance
The renaming of the old Randall & Quilter business as R&Q Insurance (RQIH) has proved the old rule that a rebrand doesn’t necessarily equate to a reinvention. The speciality non-life insurer’s results this year, most recently its interims in September, were oddly irrelevant to its perception in the market: the company has faced a turbulent time, with management having to face down a substantial shareholder rebellion at a special general meeting. That could have forced the removal of one of its board of directors in favour of bringing back founder and former executive chairman Ken Randall.
This has come during a period when non-life insurers, particularly, have struggled to keep their premiums in line with rising inflation, which is another reason for the share price pressure. There was also a failed bid by Brickall PC Insurance to acquire R&Q in May, which undermined a lot of the support for the shares. Overall, the company must stabilise itself and repair bridges with its disgruntled main shareholders before the market will grant it a fair hearing. Hold. JH
66. Devolver Digital
Devolver Digital (DEVO) is a Texas-based video games publisher. But it does not develop games itself: instead, it backs third-party developers and provides associated services, such as the marketing of their games. Unusually for a business in the sector, the company is happy to see the end of people being locked up in their homes: in-person events are the best way to find good independent developers to work with.
In 2021, when many people were still meeting on Zoom for large chunks of the year, Devolver picked some bad games. Reflecting those earlier calls, adjusted cash profit (Ebitda) in the six months to June this year dropped 46 per cent. Coupled with rising inflation, this swung it to a statutory net loss of $16.6mn, from a profit of $79.5mn last year. Prior figures were also flattered by the success of the Fall Guys game, a lockdown favourite.
This year, full-year guidance has been maintained thanks to some strong releases so far in the second half, which include a resurrection of the early-1990s hit Monkey Island. Management is expecting revenue to rise 30 per cent and adjusted cash to increase 15 per cent in 2022. There is less expensive development risk as a publisher, but also less upside potential. A modest forward consensus PE of 17.6 looks fair. Hold. AS
65. Brooks Macdonald
Brooks Macdonald (BRK) is another of the smaller specialist wealth managers that have managed to keep on an even keel during the worst of the market’s turbulence. With a strong regional distribution network based in pleasant market towns, Brooks has shown itself capable of attracting client inflows, on which it then takes fees. Its latest trading update showed quarterly net asset flows of £200mn, despite terrible market conditions.
Brooks has been following the general trend in the sector for greater specialisation in advice, with particular emphasis on building up the private client side of the business. It recently bought Adroit Financial Planning, based in Manchester, which came with £350mn in assets under management and 650 private clients. The acquisition is a clear effort to boost distribution by bringing more of it directly in-house. The company has also finally completed a long-running IT project that should make it considerably more efficient and able to offset some of the price inflation that has affected wealth and asset managers this year, principally higher staffing costs.
Brooks certainly does not lack ambition: the company has reiterated its guidance for increasing net inflows by 8-10 per cent annually. How it will achieve this is a matter for speculation, but it seems likely that further inorganic additions to assets under management will continue.
It is a fact that adding growth is far easier at this end of the industry than it would be for a struggling behemoth such as Abrdn (ABDN), whose size means even multi-billion acquisition deals struggle to move the dial on earnings. So small and nimble, from an investment point of view, is likely to lead to better long-term gains, until the point where the label no longer applies for a company such as Brooks. In the meantime, expect more deals in areas such as pension planning, high-net-worth clients, and firms with large numbers of highly paid professionals as clients. Panmure Gordon recently upped its forecast for EPS by 7p to 145p per share for 2023, a sign that Brooks has a measurable level of resilience. Buy. JH
64. Jubilee Metals
In mining circles, it seems that targeting specialist metals is becoming a more lucrative option than going all out for volume. At least that’s the impression you get as we get to grips with the prospect of a lower-carbon future. Jubilee Metals (JLP) certainly seems to have taken a considered long-term view of where markets are headed.
In the first six months of 2022, the metals processing and recovery company increased its Zambian copper production by 14 per cent to 1,388 tonnes, thereby driving net copper earnings by 30 per cent to £4.2mn. With one eye on the energy transition, Jubilee has also approved the development of a cobalt refining circuit at its wholly-owned Sable site in the Zambian Copper Belt.
For now, however, the company’s core operations still revolve around platinum group metals (PGMs), where prospects are set fair, at least on the pricing front. Analysis from Edison suggests that PGM prices for South African producers will average $2,520 an ounce (oz) between 2022 and 2030, or 2.5 times the pre-2019 average. Financial performance, specifically relating to costs, should improve on the back of a strategy to maximise the processing of historical tailings in-house, rather than via third-party channels.
Despite short-term volatility in metals pricing and the usual execution risks in Africa, the company’s lowly rating is rather hard to justify. Buy. MR
63. Young & Co’s Brewery
Stifel analysts view Young & Co’s Brewery (YNGA) as “the pub industry gold standard: a premium ‘defensive’ but with a record of, and appetite for, growth and value creation”. We agree. While the company faces the same bitter cocktail of weak consumer confidence and surging energy and food inflation as its hospitality peers, it looks well-placed to weather a recessionary climate and invest for growth.
A key bull point to the investment case is the strong balance sheet, backed up by a largely freehold estate. Utilities have been hedged until 2024, and the sale of tenanted businesses has streamlined the strategy. Investment of £74mn in the latest financial year, which included spend on acquisitions, shows that Young’s isn’t resting on its laurels, either.
Consensus analyst forecasts are for revenue and cash profits to far exceed pre-pandemic comparators in the 12 months to March 2023. This shouldn’t be overlooked given sector travails. Buy. CA
62. Petrotal
Barging through doesn’t usually have positive connotations. And that extends to Peru-focused oil company Petrotal (PTAL), which has seen its supply constrained by low water levels in the September quarter. It is using barges to transport its oil to Brazil because the usual pipeline is out of action, and will be until next year. This has seen 2022 production guidance drop 7 per cent to 14,000 barrels of oil equivalent per day (boepd) – still a marked improvement on 2021’s average of 8,966 boepd.
Helpfully, barging was cheaper than first thought, helping to cut expected costs and expanding Petrotal’s already wide cash profit margins this year. Stifel analyst Chris Wheaton said in September the higher prices and production and cheaper barging were worthy of a one-third risked NAV uplift, to 111p – almost triple the current share price.
There are a few risks here, including a resolution of the pipeline issues and actually getting paid by Peru’s state oil company. But with this year’s free cash flow forecast to hit $158mn (£140mn) – equal to 40 per cent of Petrotal’s market cap – the shares’ risk-reward balance looks enticing. Buy. AH
61. Nichols
Vimto producer Nichols’ (NICL) top line is benefiting from the post-pandemic recovery of out-of-home sales, but just as important to the company’s prospects is the action it is taking to mitigate soaring costs further down the income statement.
As of July, the company was on track to post record annual revenue this financial year, with UK and Africa sales driving growth (Middle East and rest of the world revenue was down in the half-year to 30 June due to issues with shipping timing and container availability). The consensus analyst position, according to FactSet, is for the company to then achieve sales growth of 4 per cent for each of the following two years. Solid, but unspectacular, although Vimto’s outperformance of the wider dilutes market looks set to continue.
Changes to the UK supply chain should help drive efficiencies in Nichols’ biggest market, with more manufacturing capacity, “higher speed lines and more efficient bottling processes” the outcome. And a net cash position looks very helpful in these difficult economic times. Hold. CA
