40. Boohoo
Sitting at the top of the list of the most shorted shares in London, with its shares trading significantly below the IPO price, loss-making in its latest results, with guidance for a further drop in revenue, both the current situation and the prognoses are gloomy for online fashion retailer Boohoo (BOO).
Revenue was down by 10 per cent to in the latest reported period, for the half year to 31 August, with consumer demand hit by cost of living pressures, return rates rising, and international sales struggling with long delivery times. Management said that it expects “a similar rate of revenue declines to persist over the remainder of the financial year” and cut its adjusted cash profit margin forecast for the full year from 4-7 per cent to 3-5 per cent.
Deutsche Bank analyst Adam Cochrane said there is “little sign of underlying improvement on the horizon and a management team more focused on short-term profitability and cash flow than the strategic growth of the business”. We think that is a good summation. Sell. CA
39. Frontier Developments
Games developer Frontier Developments (FDEV) has suffered badly from the failure of a single game release. Elite Dangerous: Odyssey is one of its most important franchises and it flopped when released on the PC in 2021. The company decided to cancel Xbox and PlayStation development and took a £7.4mn impairment charge as a result. Operating profit fell from £19.9mn last year to just £1.5mn this year.
Other than that, it has been a strong year. Revenue jumped 26 per cent to £114mn due to strong performances from the Jurassic World and Planet Zoo releases. The board's guidance is for 20 per cent average growth a year in the medium term.
The concern for investors is the reputational damage of the Elite Dangerous release. Games are expensive to develop, so the risk of further failures is an issue. Analysts don’t seem too worried, with FactSet consensus expecting operating profit to bounce back next year and slightly exceed 2021 levels. However, Frontier is a riskier bet than some of its peers with stronger recent track records. Hold. AS
38. Mortgage Advice Bureau
The 'mini' Budget prompted plenty of worried talk about mortgages, with an inevitable knock-on effect for Mortgage Advice Bureau (MAB). Lenders removed products and reintroduced them at considerably higher rates, and many high loan-to-value deals have not come back at all. Gilt yields have since fallen materially from their peaks, but predicting where mortgage rates will go next is a fool’s errand and still dependent on the Bank of England. Whatever happens, 2023 and 2024 for the housing market will be very different from years like 2020 and 2021.
Thanks to a massive sell-off post-Budget, the company’s shares are now priced at a very cheap 8.1 times next year’s earnings, according to FactSet. But considering the wider macroeconomic conditions, the veracity of the earnings part of that forecast should be taken with a pinch of salt. Hold. ML
37. Advanced Medical Solutions
Even as the pandemic subsides, hospital capacity remains restricted in many key markets for Advanced Medical Solutions (AMS). Therefore, demand for its wound care products – such as sutures, tissue adhesives and biosurgical devices – continues to be subdued.
The company’s surgical division (responsible for 60 per cent of turnover) was nonetheless able to achieve year-on-year revenue growth of 18 per cent on a constant currency basis in the first half. This performance was, however, attributed to factors other than rebounding customer interest, such as stockpiling by distributors and inflation-linked price hikes.
Although the firm’s management is still confident in its ability to meet market expectations, analysts at Numis wrote in September that they “remain cautious due to stocking dynamics, cost pressures and an uncertain elective [surgery] recovery”.
US regulators approved the use of AMS’s LiquiBand XL, a surgical glue, in the spring, which should open up a significant new market. But in the meantime, persistent inflation and the threat of Covid’s resurgence mean that the company is still in a fragile position. Hold. JJ
36. MaxCyte
When it announced its half-year results in August, MaxCyte (MXCT) did something few of its life science peers could at the time. Namely, it significantly upgraded its guidance for 2022 – stating it expects 30 per cent growth in core revenues (instead of the 25 per cent it had previously forecast).
The cell therapy technology company then signed a licensing agreement with Vertex Pharmaceuticals in September, which will allow the Boston-based biotech to manufacture its exa-cel drug. The product is intended to treat sickle cell disease and beta-thalassemia, both blood disorders, and is expected to be submitted for FDA approval in the fourth quarter this year. There is the potential for MaxCyte to start seeing royalties as early as next year.
The company’s first-half Ebitda loss of $12mn (£10.4mn) was attributed to increased investment across the business in preparation for the commercial launch of new products. But with net cash of more than £240mn, MaxCyte remains well capitalised and poised for growth. Buy. JJ
35. Team17
In the last 18 months, Team17 (TM17) has increased the breadth of its business through several acquisitions. The portfolio now spreads from StoryToys, an educational game for children, to Hell Let Loose, a first-person World War Two shooter.
There was only one new title released in the six months to June. Revenue growth of 33 per cent to £53.2mn was mainly driven by new downloadable content packages and the near doubling of StoryToys subscribers to 250,000. The ability to monetise old games through new content releases is a good sign.
The plan to launch seven new titles in the second half of the year should boost revenue significantly on top of this. Broker Shore Capital currently has Team17 trading on a 2023 free cash flow yield of 9.2 per cent. At a consensus forward PE ratio of 16.5, it is better value than its peers. Buy. AS
34. Restore
At the end of September, document management services company Restore (RST) announced the largest contract in its history – a £22mn deal with the BBC over the next 10 years. The announcement was a coup for a company which has loaded itself up with debt as it pivots away from physical document storage and towards cloud storage.The jump in pre-tax profits and revenues recorded in its most recent half-year results indicate the strategy is working. And a look back over its annual results for the last five years reveal a business which has grown steadily despite a noticeable Covid blip. The BBC is not the only high-profile client on its books: a “substantial” contract with HMRC is another recent example.
In short, Restore has proven its model works and that it is a company positioned for post-Covid growth. The shares are trading at 13.9 times predicted earnings for the end of next year, and consensus forecasts point to further growth in the top and bottom line.
But there are also reasons to be circumspect. For a start, net debt is not insignificant when rising interest rates are factored into the £133mn of borrowing on its balance sheet. The company said in July that rising rates meant interest costs would be £1mn-£2mn higher than planned this year.
Aside from bank borrowings, most of Restore’s liabilities come in the form of leases. Current and non-current liabilities here amounted to £108mn at the half-year stage, and Restore will need to take on more if it wants to continue expanding its physical storage capabilities. As the company itself puts it, it is looking for “further additional lease and warehouse expansion opportunities to underpin the growth and consolidation strategy”. It does also own some assets for this purpose, but leases are often the quickest and simplest way for a business like this to scale.
It is also worth noting that, as is often the case with tech companies, over half of the assets its debt is secured against – £331mn in this instance – are intangible.
Restore looks like a business with plenty of potential for growth, but its debt position means investors should be prudent – albeit not scared away completely. A forthcoming trading update will shine further light on where the company is headed. Hold. ML
33. Ergomed
If the last few years have taught us anything, it’s that long-term financial forecasts are to be taken with a grain of salt. Continued predictions of US dollar weakness, for example, have constantly been confounded by reality. This is welcome news for drug development services provider Ergomed (ERGO), which generates some 63 per cent of its revenue in North America.
The company’s first-half results showed its order book had grown almost 25 per cent year on year to £284mn. Revenue was also up 24.8 per cent to £69.9mn and margins increased by 20 basis points. Analysts at Numis say this performance “highlights [Ergomed’s] relative defensiveness versus peers, with less exposure to early-stage biotech”.
Most small drug developers have only one or two assets, and the future of companies depends on their ability to bring them to market. Ergomed, on the other hand, is a step removed from this industry. It relies on contracts with a number of partners for various development services, meaning it’s not exposed to such concentrated risks. Buy. JJ
32. Marlowe
We often hear about the 'nanny state' and the proliferation of health & safety edicts in the modern world. But for companies such as Marlowe (MRL), a provider of business-critical services and software designed to ensure safety and regulatory compliance, the more the better.
The markets covering health & safety support, occupational health and in-house training are rather fragmented. This presents commercial opportunities, albeit at a cost, as clients would naturally be more inclined to opt for providers which can offer a range of competencies. It is the reason why the group raised £177mn from two equity placings earlier this year as it casts around for further bolt-on opportunities.
Regulatory frameworks governing UK business have not only increased in complexity but are constantly changing, too. These trends work in favour of an embedded business model and the support provided by software-as-a-service (SaaS). That helps to explain why Marlowe enjoys a recurring revenue rate of 85 per cent.
Corporate regulatory compliance isn’t tied to the health of the wider economy, so Marlowe presents a somewhat counter-cyclical opportunity. At 16 times consensus earnings, the forward rating does not appear overly demanding when set against the projected increase in sales through to 2025. Buy. MR
31. Craneware
Craneware (CRW) makes software for US hospitals that helps them manage operations and auditing. The multi-payer healthcare system means such business is a lot more complicated in the US, and Craneware's cloud-based product aims to take a lot of the hassle out of the admin. Last year, it made a big acquisition: a pharmaceutical software company called Sentry.
Although completed near the top of the market, this deal could be transformative. The business is now twice the size, with revenue up 119 per cent to $165.5mn in the year to 30 June. The major benefit is Craneware can now upsell to Sentry with only 30 per cent or so overlap between customers. This should bolster organic growth, which faltered last year as service revenues fell.
Brokers are confident about the cross-selling opportunities, with FactSet consensus expecting EPS to rise 17 per cent to $1.03 in 2024. This would give an affordable looking 2024 PE multiple of 21, especially given all its sales are in the US, where the economy is much more robust than Europe. Buy. AS
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