30. Victoria
In its AGM trading statement in September, the board of Victoria (VCP) said it believed “current share price levels are materially below the intrinsic value” of the company. This wasn’t a surprise, given the stock has cratered over 2022. That plunge is despite a revenue boom of 54 per cent in the company’s latest financial year to 2 April – and will have more to do with the fact that chunky finance costs dragged it to a full-year loss.
Victoria, which designs, manufactures, and distributes “innovative flooring”, has been informally buying back shares to try to turn the decline around. It has also been busy with M&A as it attempts to drive higher productivity and cut costs through synergies, with five acquisitions made in the 2022 financial year.
House broker Peel Hunt forecasts sales growth of 31 per cent for 2023, but a 200 basis point contraction in the operating margin. An uncomfortably high debt position and the poor share price performance keep us wary for now. Sell. CA
29. Alpha FX
Mitigating currency volatility has assumed an even greater importance for corporate treasury teams as the relentless march of the US dollar threatens to test even the best hedging strategy. While volatility is a problem for some, it also represents opportunity for others. Alpha FX (AFX) specialises in advising and executing hedging strategies, as well as overseeing the more routine transfer of funds between different currencies for firms operating in multiple markets. The company has grown organically over the past couple of years, using in-house marketing teams to service and acquire new business, not least in Europe.
Sticking to that strategy looks smart from an operational point of view, as leveraging large takeovers to spur rapid growth is difficult in a business that relies on close client relationships. In other words, you might acquire the staff, but not necessarily the clients who are free to move elsewhere. Share price declines have been modest this year, compared with asset managers, and the business looks robust. A better-than-expected trading update on 21 October solidifies this opinion. Buy. JH
26. Yellow Cake
Investors could easily imagine the uranium and nuclear energy sectors glowing more intently after this past year’s energy worries. Canadian giant (and current Mark Carney employer) Brookfield Renewable Partners has even partnered with miner Cameco (CA:CCO) to buy out the once-bankrupt Westinghouse Electric, which has a major nuclear power business, for almost $8bn (£6.8bn).
Yellow Cake (YCA) bet on this kind of global shift when it listed in 2018. It is effectively a uranium fund, buying more yellow cake (U3O8) when it looks cheap and using the usual buyback/share issue mechanisms to manage its discount to net asset value (NAV). Current holdings are 18.8mn pounds (lb) of uranium oxide, valued at a spot price of $52.60 per lb, as per industry pricing specialist UxC. That puts Yellow Cake’s net asset value (NAV) at £851mn, compared to its market capitalisation of £799mn. There aren’t a whole lot more moving parts than that – it is a pure play uranium and nuclear company and this industry is bright right now. Buy. AH
27. Impax Asset Management
Impax Asset Management (IPX) shares the fate of many specialist asset managers this year. Rising interest rates are starting to highlight the balance sheet risk that many technology and ESG-focused companies carry, with the performance of Impax’s investments affected accordingly. The company’s recent fourth-quarter update showed it is at least still capable of bringing in new money: inflows of £2.9bn for the year helped limited the decline in assets under management to just 4.1 per cent, to £35.7bn.
Asset manager portfolios have taken a double hit from the poor sentiment around green-focused technology (the last interaction of the UK government was mulling banning solar panels on farmland during the middle of an energy crisis, and a windfall tax is still on the cards), and early-stage battery production projects struggling to get from concept to reality. Geopolitics has also played a role, with the war in Ukraine forcing many governments to reactivate old thermal coal power plants in an effort to reduce reliance on Russian gas and keep the lights on as we approach winter.
In the investment world, the ESG backlash is not so much from the perspective of institutional or individual investors – as Impax’s inflows show – but from a general sense that accusations of greenwashing and dodgy marketing practices, which Impax is not accused of – have tarnished the sector’s reputation, overall. For context, from a slow start in 2004, where it was first mentioned in a UN-sponsored report, ESG reached a high point in 2021 when it was mentioned in a fifth of all earnings calls, and many funds branded themselves as ESG-friendly in a bid to satisfy investor appetite.
Where Impax goes from here is the next problem for management. It could follow the lead of some fund managers and diversify its offering to include shares that do not strictly fit into the old sustainability model. Take defence companies as an apposite example. What is the ESG status of a company whose products deal in death but which are used in the defence of democratic values, freedoms, and liberty? One recent example where a fund group reversed its position on holding defence shares – Swedish bank SEB – was doubtless also influenced by the fact that defence shares are outperforming the market by some distance.
But whatever the valid arguments behind Impax’s underperformance, it is also the case that sometimes the market just goes against you, which is very much the asset manager’s recent experience. Hold. JH
26. Uniphar
Uniphar (UPR) is a medicines supply chain company based in Ireland that has been quietly building market share in the highly specialist medical supply and delivery market on behalf of pharmaceutical manufacturers. The beauty of the company’s business model is that securing contracts with pharma companies, complying with statutory safety requirements and perfecting just-in-time delivery means the barriers to entry are generally higher than simply hiring a few blokes to drive white vans. It also has a growing healthcare consultancy and analytics division.
The company has been active in the third quarter in the acquisitions market. The most notable of these was in the US where it acquired Inspired Health, based in Boston, in what represents an attempt at both geographic and business diversification. The US healthcare market is the world’s largest in geography and value and Inspired offers healthcare intelligence and market research services. Uniphar is turning into an interesting and diversified business, and the Irish healthcare sector has a history of punching above its weight. Buy. JH
25. Big Technologies
Big Technologies (BIG) makes tags that track people. Currently almost all its revenue comes from the criminal justice system. However, it is now trying to branch into the care system, the idea being the tags can also be used to indicate if an elderly person has had a fall.
In the first half of 2022, revenue rose 27 per cent to £22.9mn. The gross margin was stable at an impressive 71.4 per cent and the adjusted cash profit (Ebitda) margin was over 60 per cent. With net cash of £56.9mn the balance sheet is also strong. But top-line growth and healthy margins combine to produce an expensive looking forward PE ratio of around 40.
The business rationale makes sense: tracking people outside of prison is cheaper than keeping them incarcerated. Meanwhile, demographics will support the new elderly care business. However, the technology itself doesn’t stand out, and at this price you want to see substantial economic moats around the business. Sell. AS
24 James Halstead
When compared with some of the other manufacturers of building products, James Halstead (JHD) has many things going for it.
Firstly, the manufacturer of floor coverings isn’t as exposed to a weakening domestic market as its peers – less than 40 per cent of its revenue is earned in the UK. And although some of its imports will become more expensive given the recent decline in value of sterling against the dollar, the fact that about half of the money it is owed is in US dollars means it expects the change in currency rates to “have some positives”. A less fervent demand for building products has also eased raw material availability.
Slowing demand cuts both ways, however, and after building inventory to make sure supplies were uninterrupted, the company said production suspensions may be needed to bring stock levels back in line. Expect some disruption to earnings, at least in the short term. Hold. MF
23. iEnergizer
iEnergizer (IBPO) has been around since the turn of the millennium. And the Guernsey-registered integrated software business is very much a 21st century enterprise.
The group’s business model has developed in response to the spread of digitalisation in the corporate sphere, a process which gained impetus throughout the pandemic. Companies are deriving significant cost benefits from the outsourcing and decentralisation of business processes, and the tech-solutions provided by IEnergizer extend across a range of customer service functions. It’s a global business, therefore not immune to macroeconomic effects, but management recently noted that the surge in inflation has “driven multinationals to focus not only on cost reduction but also revenue retention”.
In June, it announced that it was undertaking a strategic review of its options, including the possible sale of the company to interested parties. The formal sales process has subsequently been terminated after IEnergizer announced strengthening trading and margin expansion in its first-quarter figures for the three months to the end of June. Still, it's quite conceivable that this could trigger further interest on the M&A front.
A glance at asset/equity returns suggests that IEnergizer has been efficiently utilising its assets to generate profits, yet an inherently high proportion of intangible assets on the balance sheet leaves it vulnerable to goodwill impairments. As we say: a very 21st century enterprise. Hold. MR
22. Next Fifteen Communications
Experience tells us that marketing specialists are vulnerable when economic conditions deteriorate. Next Fifteen Communications (NFC) is still going from strength to strength, however, with all four of its divisions reporting double-digit organic revenue growth in the six months to 31 July.
Its ‘transformation’ arm, which helps customers redesign their business models, is performing particularly well, following the acquisition of growth incubator Mach49. (The new addition has secured a lucrative contract which – while upping the group’s earnout liability – has turbocharged revenue growth.)
In May, management made an offer for advertising group M&C Saatchi, and a deal was struck. After Next Fifteen’s shares tumbled, however, M&C withdrew its support. M&C shareholders reconvened to vote on the deal on 31 October, and rejected the takeover bid. Shares in Next Fifteen rose by 12 per cent after the offer was rejected.
This group’s performance so far is too good to miss, and investors can enjoy more clarity now the M&C Saatchi deal is behind them. Buy. JS
21. Pantheon Resources
A giant onshore oil deposit in the US seems like a winner right now. The 100 per cent owner of this kind of project would be worthy of a grandiose name – enter Pantheon Resources (PANR). It holds a significant parcel of land in Alaska with resources of more than 2bn barrels of oil, as per management estimates.
But the company is not getting perfect results from its well tests, and the lack of a farm-in partner which would fund operations in return for a stake in the project means Pantheon is on the hook for development spending itself. It is now investigating whether fracking techniques will be able to extract oil from the Alkaid-2 well because of low permeability in the deposit. “Given the poor quality reservoir, Pantheon plans to develop using expensive, horizontal, multi-frac stage wells (as used for unconventional shale),” said Peel Hunt analysts.
We stay on the sidelines for this one – there could be a leap in the share price if Alkaid-2 works perfectly, but the lack of a partner and previous difficulties are enough for us to skip the bet. Hold. AH
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