70. Alliance Pharma
Shares in healthcare group Alliance Pharma (APH) are currently languishing at eight-year lows – which should leave investors asking whether it’s a logical time to buy. The answer is not clear-cut given the multitude of headwinds facing the company and its management.
Some of these factors, such as destocking by distributors in China, are likely to be temporary setbacks. But an ongoing dispute with the Competition and Markets Authority (CMA) could continue to gnaw away at the share price for some time.
In September, Alliance announced it was appealing the regulator’s decision to seek a competition disqualification order against Peter Butterfield, chief executive since 2018 but stood down since the end of 2022. It came after the CMA handed out a £35mn fine to four pharmaceutical groups, including Alliance, saying they conspired to restrict the supply of the anti-nausea drug prochlorperazine.
From 2013 to 2017, the price the NHS paid for a pack of tablets rose from £6.49 to £51.68.
The company maintains it did not “participate in, or profit from, any market-sharing arrangement and [rejects] any involvement by the company or Butterfield”. An update on the disqualification appeal is expected by the end of the year.
In any case, it’s hard to envision a significant rebound in the company’s share price despite its ambitious near-term sales targets. Net debt crept up by £7.5mn in the six months to the end of June, taking the total figure to almost £95mn and leverage to 2.7 times. Management has promised to take this ratio below 2 by the year’s end.
It also anticipates 20 per cent growth in its kelo-cote scar treatment franchise, supported by products that were unavailable in the first half due to issues with third-party manufacturers. Broker Stifel deemed Alliance a “recovery play” following its interim results, while acknowledging it might still be difficult for the group to meet its targets.
FactSet analyst consensus currently puts Alliance’s estimated full-year sales at around £184mn. This looks like something of a tall order given that first-half turnover was £82mn. Even if business in China recovers – and the group has put its manufacturing issues behind it – significant risks remain.
That said, there’s no doubt that Alliance’s present valuation is appealing. We’re also sympathetic to the argument that shares will ultimately prosper. But they could have further to fall in the meantime. Hold. JJ
69. Benchmark Holdings
Aquaculture group Benchmark Holdings (BMK) is dependent on the global shrimp market to drive revenue growth in its advanced nutrition division. But like so many other sectors of the global economy, demand here has been hampered by the slower-than-expected recovery in China, as well as inflation in the US and Europe.
As a result, sales in the advanced nutrition business were down 18 per cent across the three months to the end of June. This performance was enough to outweigh 21 per cent year-on-year growth in Benchmark’s genetics division, which sells salmon eggs and tilapia breeding stock. Sales in the third quarter were down 6 per cent overall.
However, the group’s pre-tax losses also narrowed from £11.2mn to £4.7mn. The question of when Benchmark will find itself in the black is almost entirely down to the stabilisation of the shrimp market. Investec analysts expect things to start improving from FY2024 – and to be supported by “scale benefits in genetics, and improved internal efficiency”. We’d like more evidence of those green shoots first. Hold. JJ
68. FRP Advisory
Restructuring firm FRP Advisory (FRP) is waiting with bated breath for companies to collapse. The stage has been set for months, after all: inflation, interest rates and surging costs looked sure to wreak havoc on the corporate landscape.
So far, however, businesses have proved “remarkably resilient to the external challenges”, according to management, resulting in a “largely unfavourable market backdrop”. While the high-volume liquidations market is booming, more lucrative administrations have only just overtaken pre-pandemic levels.
FRP has done well in the circumstances, growing organic revenue by 8 per cent in FY2023 and nudging up its operating profit, but earnings forecasts are a little underwhelming. Yet with administrations on the rise, however, FRP could still surprise the market.
Regardless of what happens to the UK economy, FRP Advisory looks like a safe pair of hands and it is now trading at a particular discount relative to its 2020 IPO, both on a price/earnings basis and an EV/Ebitda basis. Buy. JS
67. Niox
There is no doubt that Niox (NIOX), formerly known as Circassia, has turned itself around. Following the final-stage failure of a cat allergy treatment in 2016, the biotech's company value slid to an all-time low in 2019. But its progress since then has been impressive. Revenue has risen in each of the last three calendar years, while its pre-tax loss has turned into a profit. Results for the first six months of this calendar year show further progress, and consensus forecasts point to growth in the years ahead.
The new name is the key to its resurrection. Whereas the old Circassa focused on respiratory disease in general, Niox focuses entirely on the asthma diagnosis and management system after which it is named. Focusing on a niche has allowed it to excel.
The real question for Niox is: does this revival story now justify a price of 28 times its forecast earnings for the end of this year? That is far from cheap, but based on the trajectory for future growth, we think so. Buy. ML
66. Idox
Government software company Idox (IDOX) is growing steadily, with good operating margins and a set of relatively safe customers. The company sells software to UK government councils to streamline the housing and planning process, as well as election management software and some healthcare planning products.
The land and property division is the fastest growing. In the six months to April, revenue was up 22 per cent and it now makes up 60 per cent of the total. The acquisition of geospatial data business Emapsite.com for £16mn will increase the land division’s size even further.
The deal will lower earnings this year. However, Investec is then expecting mid-single-digit annual revenue growth in the medium term. Even with the dilutive effect of the lower margin Emapsite, the broker thinks Idox’s adjusted cash profit (Ebitda) margin will stay close to its impressive current level of 34 per cent, thanks to some operational leverage.
Investec notes that Idox’s EV/Ebitda ratio is around the sector average, but suggests its above-average margins mean it is undervalued. However, this figure leaves out non-trivial amount of depreciation and amortisation. At a forward price/earnings ratio of 22 it comes across as a little more expensive. Hold. AS
65. Accesso Technology
Accesso Technology (ACSO) is trying to digitise the events industry. Two-thirds of its revenue comes from ticketing and distribution while the rest is from ‘guest experience’. Using Accesso’s services, a customer could purchase their ticket and acquire drinks on an app without having to talk to a single person, should they so wish.
Events business volumes understandably surged once lockdown restrictions eased but now Accesso is fighting some difficult comparators. In the six months to June, group revenue increased just 4.5 per cent to $66.6mn (£54.5mn). And administrative costs increased by 14 per cent meaning the company made an operating loss of $0.8mn, having made a profit of $3.2mn last year.
Part of these increased costs are related to acquisitions – including Paradocs Mountain Software, which specialises in ski resorts. Broker Peel Hunt says Accesso usually has lower revenues in the first half of the year, but it has left itself a bit more catching up to do this year. That is a common concern for companies at the moment. On top of this, a forward price/earnings ratio of over 20 is expensive, given there is no margin expansion in sight. Hold. AS
64. Avacta
When cancer patients receive standard chemotherapy treatments through an IV, their entire bodies are exposed to the drugs – not just their tumour cells. While modern chemotherapies are often effective in shrinking cancers, they may also produce a host of unpleasant side effects that can be difficult for doctors to manage. Avacta (AVCT) thinks it has found a solution with its Precision platform.
The technology releases chemotherapy only within the “tumour microenvironment”, limiting the toxicity and boosting the safety profile of these medicines. Avacta’s AVA6000 – a form of the drug doxorubicin modified using Precision technology – is currently in early clinical trials. Earlier this year, the company reported that patients dosed with approximately 2.25 times a standard dose of doxorubicin were able to tolerate it in its altered form.
Several years on from its advent, AVA6000 is still only in the first phase of the three-stage clinical trial process – meaning it has a long road ahead of it yet. Non-specialist investors would ordinarily be wise to wait for further progress before backing the company. However, Avacta’s management is keen to emphasise that its drug is more than just a single promising treatment.
“It’s very easy to get focused on AVA6000 and forget the fact that this is a platform,” the company’s chief executive, Alastair Smith, told analysts in a September. "The fact that AVA6000 is generating such good clinical data [...] serves to validate the mechanism of Precision in humans. We’re not just developing an individual asset.”
Investors excited by this prospect should keep a close eye on the company’s cash runway. At the end of June, the group had £26mn available – which analysts at Stifel say is “sufficient to fund operations for the next 12 months”. This is going to be a particularly crucial time for Avacta, with final phase I trial data due to be released in the fourth quarter of this year, followed by preparations for a planned phase II trial.
The group’s adjusted interim Ebitda loss widened to £7.9mn in the six months to the end of June – up from £5.4mn the prior year – primarily as a result of higher R&D costs. Profitability is not, therefore, in easy reach. But we’d argue that Avacta’s technology is exciting and potentially important – and further positive data could make it look like a decent buyout target. A cautious buy for those with a healthy risk appetite. JJ
63. Tatton Asset Management
Small and profitable niches are what have set Tatton Asset Management (TAM) apart from its peers; the company has maintained positive asset flows during the worst troughs for the rest of the asset management sector. Tatton has successfully encouraged droves of smaller independent financial advisers (IFAs) to hand over management of their clients’ investments. Some advisers simply do not have the time or capacity to personally design and manage a portfolio for every single client, so Tatton’s “off-the-peg” approach is a desirable solution, particularly as its charges are attractive compared with industry norms. For Tatton, this translates into a base of stable recurring fees, with incremental growth coming from adding more IFA accounts to its platform services.
The model has proved to be enormously successful for Tatton. The only proviso is that larger asset managers have long since developed their own model portfolio offerings and competition may start to heat up soon. Buy. JH
62. MaxCyte
Contract development and manufacturing organisations (CDMOs) like MaxCyte (MXCT) have struggled in today’s tricky biotech funding environment. Newfound restraint on the part of sector investors has forced drug developers to focus on their close-to-market products, reducing the overall demand for CDMO services.
And so it was that MaxCyte issued a profit warning earlier this month after sales fell 25 per cent to $8mn (£6.5mn) in the third quarter due to reduced customer activity. Management subsequently slashed its sales expectations for FY23 by 24 per cent. In other words, things aren’t looking bright – at least not in the immediate future.
However, the company is assisting Vertex Pharmaceuticals (US:VRTX) with the development of a promising gene-edited therapy for rare blood disorders, which could be approved before the end of the year. If all goes to plan, this could offer MaxCyte a share price boost at an otherwise gloomy time.
We think the potential of this treatment is nonetheless overshadowed by the biotech funding drought, and would wait for conditions to improve before investing in a CDMO. Hold. JJ
61. Mattioli Woods
Mattioli Woods (MTW) very much fits in the “small but beautiful” niche when it comes to asset and wealth managers, with the bonus that it enjoys very high levels of recurring revenue – over 90 per cent at the last results – and a sticky client base. The company thrives by integrating new clients from acquired businesses and then finding cost savings.
Its latest deal has seen it buy another small adviser, Opus, for £700,000, bringing around £53mn assets under advice with it. This exemplifies its approach: the Mattioli Woods way is small-scale deals with a web of personal relationships that ensure a long-term client base. The company can then cultivate and manage client money over money years and earn the management fees that insulate it somewhat, from the ups and downs of the market. While lacking the sheer scale of the largest asset and even wealth managers, in MTW’s world, stability has a quality all of its own. Buy. JH
