80. Warpaint London
Warpaint London (W7L) exited its June half-year with net cash of £1.7mn, record revenues, and growing volumes across its various geographic locales. The UK-based cosmetics supplier – which owns make-up brands W7 and Technic – has been able to offset macroeconomic challenges through its targeted expansion in prime retail outlets such as Tesco and Boots.
The improved interim showing reflects further rationalisation of its product range, a process that has also bolstered margins in the face of decades-high inflationary pressures. The inflationary dynamic might even be working in Warpaint’s favour as management has clearly placed emphasis on determining the most viable price points for the group’s value orientated brands.
Based on those numbers and assuming the regular weighting of results to the second half, we might reasonably assume that sales have doubled since the pandemic slump of 2020. The group’s outperformance through an unsettled period points to a proactive, if not anticipatory, management stance. But this has not gone unnoticed, at least judging by a forward rating of over 20 times consensus earnings. Hold. MR
79. James Latham
Looking at the year ahead for timber merchant James Latham (LTHM) is akin to peering into a dense forest. The wood and panel wholesaler has conflicting narratives to consider. Housebuilders have confirmed they will be building less in response to a downturn in demand brought on by higher interest rates. That has yet to hit the near-270-year-old business, whose revenue was so strong in its results for the year to 31 March that it paid a special dividend.
Despite this show of confidence, the impact will almost certainly be felt in its next set of figures. Yet build and energy cost inflation is receding, which will likely support margins.
Its low price/earnings ratio implies the market has priced in some bad news, but the wide id-offer spread would leave investors scrambling to sell at a fair price if things take another turn for the worse. On balance, we recommend caution rather than running headlong into the woods. Hold. ML
78. Elixirr
Publicly-traded management consultancies are rare, which makes Elixirr International (ELIX) an interesting test case. It joined Aim in 2020 and presents itself as a ‘challenger’ firm, outmanoeuvring industry giants. So far, it has done just that. Since its lockdown IPO, the group has consistently reported double-digit revenue and profit growth, and is increasing its pool of partners. These lucrative fee earners, incentivised with equity stakes, are crucial for bringing in work and cementing Elixirr’s reputation.
International expansion is the next big hurdle. The consultancy wants to establish itself in North America and recently made two acquisitions there, following in the footsteps of fellow consultancy Alpha Financial Markets Consulting (AFM). The purchases make strategic sense and haven’t damaged the balance sheet – Elixirr is still debt free. However, international expansion comes with obvious risks.
Risk is something Aim investors are familiar with, though, and Elixirr’s relatively low valuation reflects its size. In fact, its forward PE multiple of 14 seems at odds with its excellent growth prospects, even when its market cap is taken into account. Buy. JS
77. Restore
Junior markets are associated with daring innovation and growth. Against this backdrop, Restore (RST) sticks out like a sore thumb. The company makes most of its money from storing documents in boxes, meaning it is more associated with paper cuts than cutting edge technology.
But Restore has other qualities. Its work is stable, recurrent and cash generative, and it has a very high market share. This isn’t immediately obvious when you look at its recent results: years of mismanagement have taken their toll and shares have fallen by 40 per cent over the past year. However, a turnaround could be imminent. The old leadership team has gone and an earlier chief executive is back in the saddle. Restore has also secured a major contract with HMRC, which has been valued at up to £140mn.
Restore’s valuation – it trades on a forward price/earnings ratio of 11, compared with a five-year average of 15.2 – is relatively attractive. However, we can’t shake the fear that, in an increasingly paperless world, a document storage company will suffer in the long run. Hold. JS
76. Vertu Motors
The car industry is in a somewhat chaotic state. It is having to deal with an increasingly uncertain regulatory future regarding the electric vehicle (EV) transition – most recently demonstrated by the UK’s pushing back of the ban on the purchase of new petrol and diesel vehicles to 2035 – along with consumer spending headwinds and a dearth of new vehicle registrations.
The evidence suggests that Vertu Motors (VTU) is navigating this challenging landscape well. The car dealer’s revenue rose by 21 per cent to over £2.4bn in its interims to 31 August, with double-digit growth across all divisions, boosted by the £182mn acquisition of premium retailer Helston Garages last December. Helston, which has let the company scale up in the south-west of England, contributed £249mn of revenue and £6mn of operating profits in the half – a solid opening showing.
While finance charges more than tripled year-on-year, this was due to higher debt from the Helston purchase and the impact of higher new car stocking loans. Balance sheet strength is backed up by a manageable gearing ratio (net debt to shareholders’ equity) of 25 per cent and an attractive freehold and long-leasehold asset base.
Trading continues to be helped by the constrained supply environment. Higher average sales prices supported the £160mn revenue increase in the core business in the latest half, with tight supply meaning that used vehicle prices are a quarter higher on average than at the start of 2021. But management noted in its latest outlook statement that this tightness is easing - new vehicle supply is improving and the company is seeing “more normalised depreciation patterns” in used vehicle prices.
EV sales currently make up a small part of Vertu Motor’s business, taking just 4.7 per cent of used vehicle volumes in the latest half. Management’s belief that demand and supply here have become aligned (given a big increase in supply and a resultant fall in prices over the last year) is unlikely to prove a steady state.
The valuation looks very undemanding. As analysts at investment bank Liberum point out, a forward price/earnings valuation of 7 times “is just too cheap for a business with an excellent growth track record and a strong balance sheet, in prime position to consolidate the market”. This makes Vertu Motors cheaper than Lookers and Pendragon (PDG), both of which have seen takeover bids this year.
Management reiterated full-year guidance and noted “strong profit generation” in September. And while sectoral challenges continue, the company is making market share progress. Buy. CA
75. Lok’n Store
Will it be trick or treat when Lok'n Store (LOK) posts its results for the year to 31 July on the day before Halloween? Based on the self-storage operator's August trading update, revenue will have increased, but expansion costs and general inflation will drive down profits.
However, if it is true that we are past the worst of inflation, the coming years will be a lot better for Lok'n Store, which continues to report increased demand for its services even as it grows its portfolio. For investors looking for an Aim alternative to the self-storage giants of Big Yellow (BYG) and Safestore (SAFE), Lok'n Store is more than worthy of consideration.
The stock is not cheap on a price/earnings basis, but we believe its growth potential justifies investment. The shares are trading at a historic low, which we feel undervalues its potential upside. Buy. ML
74. Seeing Machines
The fact that Seeing Machines (SEE) appears much higher in 2023 than last year's 87th place is as much a reflection of the decline of other Aim stocks as its own virtues.
But that isn’t to suggest that the Australian-headquartered manufacturer of driver and pilot monitoring systems hasn’t made progress – sales for the 12 months ending in June were up 49 per cent to $57.8mn (£46mn), ahead of analysts' expectations.
Its year-end cash balance of $36.8mn was boosted by the company drawing down the remaining $17.5mn from the $47.5mn secured from Canadian car parts maker Magna International through the issue of convertible loan notes last year.
Analysts at Berenberg say the company now has enough funding to see it through to profitability, with break-even expected in 2025.
However, the flatlining of its share price over the past 12 months chimes with our view that although some risk has been removed, it still seems like a bit of a punt. Hold. MF
73. Dotdigital
Dotdigital (DOTD) is a platform used by businesses to create and manage email marketing campaigns. In September, it acquired personalisation technology business Fresh Relevance for £25mn, giving it the ability to send the likes of automated personalised emails – for example, to remind a customer they have left some unpurchased items in their digital basket.
Broker Peel Hunt is positive about the cross-selling potential from this acquisition. Fresh Relevance makes £1,300 per month from each of its 350 clients on average. That compares to Dotdigital’s monthly ARPU of £1,622 and leaves room for bundling products together for a greater price. The broker increased its 2024 revenue forecast by 7 per cent when the deal was announced.
The deal was needed because organic growth has slowed. In the six months to December, revenue rose 9 per cent but rising staff costs helped push down operating profit by 16 per cent. Technology companies should expand their operating margins as they scale, not the other way around. The 7 per cent cash flow yield is appealing but some organic growth would be nice. Hold. AS
72. Andrews Sykes
Andrews Sykes' (ASY) results for the six months to 30 June were pleasing, as was the international heating and air conditioning hire company's growth over the last decade.
The outlook for the years ahead is complicated further by the mixed performance of its different regional arms. The UK and Europe recorded increased sales, but UAE revenue cratered by 40 per cent. For the company to continue growing, it needs to be able to break into more markets, and a net cash cushion will help it to do so, but its experience in the Middle East suggests this is easier said than done.
Management is "mindful of the current economic climate and the impact that volatile energy prices and inflationary cost pressures can pose". Investors should heed the caution in those words. A dividend yield of around 5 per cent is attractive enough, but the extremely low free float – FactSet data shows 90 per cent of shares are held by insiders – is another big impediment. Hold. ML
71. Victorian Plumbing
The lofty expectations investors had when Victorian Plumbing (VIC) listed were not justified. But the extent of the dramatic share price sell off that followed has gone too far the other way. True, 300p was too expensive for this bathroom retailer. Yet its current price of around 80p looks too low, considering its performance since IPO, a trading update early this month reporting revenue and profit growth for the year to 30 September, and analysts' bullish growth predictions for the years to come.
The bear point for a consumer-focused business like Victorian Plumbing is clearly the extent to which a recession might hit demand. Bathroom refurbishment costs a lot of money, and households may find themselves putting off such expenses over the next couple of years if the economy sours. The company has a cushion of cash it can use to invest in growth when economic conditions improves, but the medium-term outlook is far from ideal. All consumer businesses will suffer if a recession hits, but this company is starting from a better valuation than many. Buy. ML
