60. Franchise Brands
Franchise Brands (FRAN) has doubled in size after it acquired hydraulic hose replacement company Pirtek for £200mn in April. Funding the deal caused the shares to crash by a quarter, after the company raised £92mn at a significant discount. Trading at Pirtek has been solid, though, and management forecasts at least £29mn in full-year adjusted cash profits.
Overseen by former Domino's boss Stephen Hemsley, the company’s franchise businesses provide services from plumbing to solutions for handling fats, oil, and grease. It has brands in the UK, Europe, and North America. Commercial kitchen services business Filta is making inroads in the US market, where there is a significant growth opportunity.
The analyst consensus is for revenue to grow by 62 per cent this year and by 16 per cent in 2024. Cash profits are forecast to hit £39mn by 2025, up from £15mn last year. A valuation of 15 times consensus forward earnings is undemanding with that outlook, with a mean target price of 290p. Buy. CA
59. Focusrite
Focusrite (TUNE) shares have lost almost a third of their value in the year-to-date as the music and audio products company battles what chief executive Tim Carroll referred to in September as “extremely challenging trading conditions”.
The key content creation division, which took almost 80 per cent of total revenue in the first half of this financial year, boomed during the pandemic but has been hit by weaker demand and issues with surplus inventory.
Still, trading is materially ahead of pre-pandemic levels despite headwinds. Management expects to report full-year revenue of at least £177mn, down from £184mn in 2022, and cash profits of £38mn. Net debt fell from £13.2mn to around £1.5mn in the six months to August.
The shares trade at under 13 times forward consensus earnings, well below the five-year average of 25 times. With 28 new product launches this year and some positive signs for content creation – inventory is unwinding and Focusrite brands returned to growth in the second half of FY2023 – there is upside potential. Hold. CA
58. Pan African Resources
Mining companies usually dig up rock, crush it and then extract whatever it is they’re after. Pan African Resources (PAF) has a more varied approach. It has the dig-crush-extract approach at its Evander mine in South Africa, but also other operations that strip leftover gold from wine waste, and exploration in Sudan for investors with the very largest of risk appetites.
The most recent financial year, which ended on 30 June, saw the company produce 175,000 ounces (oz) of gold, bringing in an operating profit of $100mn (£82.2mn). That production level is quite a dip from the 2022 financial year, in which gold output was over 190,000oz. The difference stemmed from struggles with electricity supply and a slower than expected ramp-up of “continuous operations” at the Barberton Mines in South Africa. The Evander operation also saw a year-on-year drop of over 30 per cent on the year before. Pan African has set guidance for this year at 178,000-190,000oz.
Another key metric is cost. This is usually represented as all-in sustaining cost (AISC) per ounce, the ‘all-in’ including capital spending as well as operational costs. The advantage of pulling gold from tailings is that the mining cost is very low, given it is effectively just moving ore from one spot to another.
Pan African does have pricier underground assets as well, however, so AISC comes out around level with others in the industry at $1,327 an oz. Centamin (CEY) has a similar cost base, with its combined openpit and underground operation in Egypt. But Pan African could be on a path to lower costs quite quickly, as stripping out the costliest mine takes the average AISC down to $1,152 an oz.
The company can’t just magic away impact of the Sheba and Consort mines in the Barberton project, but there was improvement in the second half at the former operation in terms of output, which will help cut the cost per oz. “The shift to contractor mining at Consort and continuous operations at Fairview and Sheba took longer to bed in but look set to deliver improvements in FY24E,” said analysts at house broker Peel Hunt, which forecasts flat earnings this year and an improvement by the 2025 financial year. There are plenty of risks here but given the forward price/earnings ratio is so low (4.5 times for FY2024), it’s worth the punt. Buy. AH
57. Ashtead Technology
Outside the energy majors, share price appreciation in the sector has been a rarity in 2023. But Ashtead Technology (AT.), which rents out undersea equipment, has impressed investors with solid increases to revenue and profits so far this year, driven by both its renewables and oil and gas divisions. Significant growth in this kind of business is rare but in the first half Ashtead’s sales climbed 57 per cent and its operating profit doubled, to £15mn. Organic growth for the period was 40 per cent, and the rest came from acquisitions.
The company – not affiliated with the FTSE 100's Ashtead Group, which sold it in 2008 – has also managed to straddle both sides of the energy sector. Renewables saw more growth in the first half, but fossil fuels still provide two-thirds of sales. Our small cap expert Simon Thompson agrees with house broker Numis and has set a target price of 475p. Buy. AH
56. Impellam Group
Impellam (IPEL) keeps itself to itself. It is barely covered by analysts and most of it is owned by insiders. At heart, however, it is a recruiter facing the same problems afflicting larger, better-known rivals. Permanent placements are under pressure, which caused Impellam’s operating profit to shrink by 18.3 per cent to £8.3mn in the first half of 2023. The situation was made worse by separation costs incurred in the period relating to the sale of the group’s healthcare and regional specialist staffing portfolios.
The job market still looks volatile, meaning profits could fall further. However, this might not be a concern for long. Back in July, the company revealed that it was in discussions with staffing provider HeadFirst Global about a potential takeover. But since then, the offer deadline has been repeatedly pushed back – as was again the case last week. The latest deadline is 25 October. There is clearly a risk that the deal does not go ahead, but given the potential we say hold. JS
55. Greatland Gold
Greatland Gold (GGP) is caught in the centre of the multi-billion-dollar combination of Newcrest Mining (AU:NCM) and Newmont (US:NEM) like an umbrella in a cyclone. Newcrest owns 70 per cent of the Havieron project that Greatland discovered, which is not yet a finished mine. It is 45km from the Telfer mine, and will feed ore directly into the existing processing plant rather than being a standalone operation.
Buying Newcrest will turn the world’s biggest gold miner, Newmont, into an even more dominant industry force. A report by auditor Grant Samuel valued the combined Telfer and Havieron projects at $500mn-$600mn, making Greatland’s stake worth $180mn (£150mn) using the high-end valuation, well below Greatland's own £300mn market cap. Greatland said this valuation included closure costs and other liabilities to which it is not exposed. A fair amount of work has already gone into Havieron for a project without a feasibility study or final investment decision: the decline, or mine entrance, goes down over a mile. Avoid. AH
54. Brooks Macdonald
The best wealth managers base their business models solidly on relationships with the distributors of their products and the users of their technical expertise. Brooks Macdonald (BRK) in this respect has proven itself superbly good at what it does – using its regional, county town image to reach the portfolios of the quietly well-off in pleasant towns up and down the country.
This was one of the main reasons why it enjoyed a surprisingly solid recent set of FY2023 results. Its close relationships with independent financial advisers (IFAs) ensured a steady flow of business during the year. However, it was also more circumspect about prospects for the immediate future, particularly for the first quarter of the 2024 reporting year. Consumer duty changes, which are prompting many in the sector to rein in charges, may have an impact on earnings, but it is too early to say whether this will be material. Numis forecasts EPS of 150p, with a stable dividend yield of around 4.3 per cent for 2024. Hold. JH
53. Team Internet Group
First things first: until recently, Team Internet Group (TIG) was called CentralNic. The rebrand is slightly confusing as, in its previous incarnation, Team Internet was a marketing business which management acquired in 2019. The new name reflects the company’s focus, however: marketing, rather than domain names, is now the order of the day.
Ad revenues have taken a bashing in recent months, as evidenced by fellow Aim constituents Tremor International (TRMR) and Next 15 (NFG). Team Internet has proved almost eerily resilient, however, growing online marketing sales by 18 per cent in the first half of 2023 to $304mn (£250mn). Combined with the smaller ‘online presence’ division, which trades internet domain names, this boosted adjusted Ebitda by 16 per cent to $44.6mn.
Team Internet's ability to defy advertising gravity could relate to its “privacy safe” approach: it relies on AI and contextual data, as opposed to third-party cookies, which are on the way out. It also benefits from high recurring revenues.
There’s no guarantee it won’t feel the pressure eventually, but for now Team Internet’s performance has been extremely impressive. Buy. JS
52. Mortgage Advice Bureau
Economists predict house prices will continue falling next year, so it is fair to assume it will be a difficult trading period for the Mortgage Advice Bureau (MAB1). Then again, with mortgage costs higher than they've been in decades, it is also safe to assume homebuyers need the advice this company offers more than ever.
First, consider the macro picture. Last month, Halifax said:"There is always a lag effect where rate increases are concerned, and we may now be seeing a greater impact from higher mortgage costs flowing through to house prices.
You can see this in the Mortgage Advice Bureau results for the first half of this calendar year, posted last month. The company grew its revenue, largely due to the acquisition of Fluent, and posted a drop in pre-tax profit. It noted this was "modestly ahead of the board's original expectations", but much like Halifax predicts there will be pain to come. It anticipates an adjusted pre-tax profit of not less than £22mn for the full year, which unsurprisingly would be a worse performance than in 2022 and 2021.
There are other question marks, too. The company has gone from a net cash position to a net debt position at a time when the cost of borrowing is high. Net debt is not worryingly high as a proportion of equity. Then again, this is an asset-light business in which intangible assets account for a large proportion of the balance sheet. Solvency is unlikely to be an issue, but future investment to capitalise on a housing market recovery in 2025 will be.
However, subdued as pre-tax profits will be this year, £22mn would still be a higher figure than in 2020 or 2019. And, on a timescale of three years or more, the business’ growth and share price returns look good. Investors will need to consider precisely what adjustments the company makes to arrive at its in-house figures and why, but the fact that analysts agree with its forecasts and are predicting further pre-tax profit growth for 2024 and 2025 should be encouraging.
The forward price/earnings ratio for 2024 and 2025 looks undemanding. And while a worse-than-expected downturn in the housing market would hurt the company, we remain speculatively bullish considering the potential upsides. Buy. ML
51. Horizonte Minerals
Before 2 October investors were led to believe Horizonte Minerals (HZM) was not far off completing its Araguaia nickel operation in Brazil, a $500mn (£411mn) project. Holding on through this phase is often difficult for a shareholder as setbacks and cost overruns chip away at the initially promised returns. And so it is with Horizonte, which announced at the start of the month the bill for Araguaia would be 35 per cent higher than anticipated and pushed back the start of production by six months. The shares plummeted by almost 60 per cent in response, as the company will need to raise significant cash to do this. Its powerful shareholders will likely step in if needed, but this would mean more dilution for retail holders.
The largest holders are Glencore (GLEN) and Egyptian billionaire Naguib Sawiris, through his La Mancha vehicle. La Mancha holds 23 per cent and Glencore 18 per cent. We move to hold on this play until more detail is available on Araguaia completion. AH
