90. Gateley
Like many of its legal peers, Gateley (GTLY) has been struggling to entice investors since interest rates rose and recession fears mounted. The group trades on a forward price/earnings ratio of under 10, compared with a five-year average of 12.2, as worries about the resilience of listed law firms start to increase.
We may be underestimating this mid-market player, however. For starters, most of Gateley’s solicitors have remained busy this year, despite the company’s exposure to transactional work, and fees are up on an organic basis. Nor is Gateley entirely reliant on legal services. About a quarter of its turnover now comes from consulting, and this division is growing quickly: organic sales increased by 18.4 per cent in the year to 30 April 2023, and there appears to be an abundance of cross-selling opportunities.
Gateley isn’t as flashy or fast growing as some Aim constituents. However, it has a good track record, defensive characteristics, and solid prospects. Buy. JS
89. Iomart
Iomart (IOM) is a cloud computing company which is morphing into something closer to a consultancy. In the last 18 months, it has acquired Concepta, which is a holding company for an IT solutions business, and Extrinsica, a Microsoft Azure managed service provider.
This probably makes sense because it is hard to compete head-on with the hyperscalers like Amazon (US:AMZN) and Microsoft (US:MSFT). Iomart is effectively trying to become a cloud computing consultant which also has some servers to rent out. But this comes at a cost. Acquisitions have helped push down the adjusted cash profit margin by 5.6 percentage points to 31.3 per cent.
On top of this, there is little if any organic growth in the business. Last year, depreciation of £16mn exceeded its capital expenditure of £8.9mn, which suggests its server hardware is starting to fall out of date. A 6 per cent cash flow yield is healthy but partly a product of the lack of capex. Iomart needs some growth to justify its new direction. Sell. AS
88. Kitwave
Kitwave (KITW) has delivered a string of profit upgrades since its IPO in May 2021. The wholesaler, which sells and delivers confectionary, chilled and fresh food, groceries, alcohol and tobacco to around 42,000 customers – convenience stores and other retailers and operators – has consequently enjoyed a share price rise of around 75 per cent since listing despite some weakness over the last few months.
The company once again raised guidance in its latest interims to 30 April, released in July. Management put this down to “a combination of strong order volumes, sustained commodity price inflation, the determination to maintain and improve gross margins and continued operational cost control”.
While these factors can’t be relied on in perpetuity, analysts are confident that the company’s postings will continue to head in the right direction. Analyst consensus on FactSet is for revenue to rise from £503mn in 2022 to over £650mn by 2025, with cash profits growing from £29.5mn to £44.5mn over the same period. The business is primed to deliver sustainable, rather than explosive, growth in our view.
The outlook is being helped by progress with online ordering. Given that average order values are higher online, more customers using ecommerce means better returns. Online order capture rose to 44 per cent in July, up from 35 per cent in January.
Margins have also been heading north. The gross margin rose by 180 basis points in the latest half in the face of inflationary headwinds, helped by the relative growth of the foodservice division due to acquisitions.
The purchase of WestCountry last December for £28mn has expanded the company’s presence in the south west of England and looks like a sensible strategic move. It delivered £13mn of revenue in the first half of 2023 and is the 12th wholesale distributor the company has integrated since 2011.
While leverage rose on the back of the deal, a ratio of 1.9 times at the latest balance sheet date looks very manageable.
House broker Canaccord Genuity argues that Kitwave’s valuation is undemanding given “strong cash generation, robust balance sheet and considerable further consolidation opportunities available”.
With the shares trading hands at nine times forward consensus earnings, we think there is potential for a re-rating at a company which sits in an increasingly attractive position in what is a fragmented UK wholesale market. The forward dividend yield sits at over 4 per cent. Buy. CA
87. Strix
The market boiled over when Strix (KETL) warned last month of weaker demand for its kettle controls in the UK and Germany. This is a big issue, given kettle control products delivered 45 per cent of revenue in the interims to 30 June, and the company’s shares plunged by almost 40 per cent.
Filtered water systems supplier Billi helped prop things up in the first half of the year. The brand – acquired in 2022 – contributed £22mn of revenue. Management is targeting £58mn of annual revenue and a gross profit margin above 45 per cent at Billi by 2026, making this a key part of the business for the future.
Liberum analysts suggest the recent sell-off represents a buying opportunity for investors. While Strix’s new full-year adjusted profit after tax guidance of “in excess of £21mn” looks achievable, and a forward valuation of five times forward consensus earnings is undemanding given Billi’s growth potential, consumer spending headwinds remain. Hold. CA
86. Kistos
North Sea oil and gas company Kistos (KIST) was made for 2022: a European energy producer with its hands on cheap production. Its market capitalisation peaked in August last year at £550mn, and it even launched a bid for Serica Energy (SQZ), which itself tried to buy Kistos. Today Kistos’s market cap is £165mn. Lower gas prices and the UK energy profits levy have knocked investor interest in the sector.
In the first half, Kistos saw its adjusted cash profit fall by 74 per cent, to €68.6mn (£58mn), following on from a super-sized 2022. Despite the weaker bottom line, production overall doubled in the first half thanks to acquisitions. These have also put the company into a net debt position, but with an EV/Ebitda ratio of 0.7 times, that can be overlooked. Risks ahead include more exploration work that could prove a bust, like the Benriach well in the UK North Sea. Buy, if a North Sea punt appeals. AH
85. R&Q Insurance
R&Q Insurance (RQI) has long been in a turnaround phase as the company attempts to move away from being solely a legacy book run-off business – typically the company bought unwanted insurance books and ran off the cash at a decent profit. These days it seems to have turned more seller than buyer; the capital strain of constantly buying up old insurance books has meant a change of direction towards a fee-based model. The immediate problem is that this change has caused a fall in profits into 2023 before the fee model, in this case a stake in Gibson Re, starts to deliver consistent revenues. The path has not been smooth and is strewn with controversy, not least the sizeable pay cheque that chief executive William Spiegel banked for 2022, despite worsening results.
The company is also considering a sale of its fast-growing program management division. Last month it said it was in advanced talks with private equity business Onex Corporation over a deal. That could unlock value but would leave only the legacy insurance business and its attendant turnaround plans. Hold. JH
84. DX Group
For a company that handles freight, DX (DX.) has had a surprisingly high-octane couple of years. The courier was suspended from Aim for much of 2022 after an accounting fiasco, which resulted in a clash with its biggest shareholder and a boardroom shake-up. Shortly after returning to the market, DX was then hit by a corporate espionage claim from a rival delivery group, which it eventually settled without any admission of liability.
After all the upheaval, however, it looks to have found its feet again. The delivery group increased its revenue by 10 per cent to £471mn in FY2023, and boosted adjusted operating profits by 26 per cent to £31.4mn. Both the freight and the express divisions appear to be thriving.
But time may well have run out for investors looking to buy in. In September, the company was approached by US private equity outfit HIG Capital about a potential £293mn takeover bid. Following a deadline extension, HIG now has until 6 November to announce a firm intention to make an offer. Buy. JS
83. Tracsis
Transport technology business Tracsis (TRCS) is benefiting from US infrastructure boosterism. Its rail technology and services division, the highest-margin part of the business, “delivered strong growth in North America” in the year to 31 July, according to its latest trading update. Tracsis’ acquisition of US-based RailComm last year increasingly looks like a smart piece of business in the context of a £1tn bipartisan infrastructure bill which aims to transform the rail system.
The UK remains the key geography, however, given domestic sales contributed 70 per cent of the top line in the latest results. Recurring revenues have been locked in – multi-year software contracts are delivering growth despite a backdrop of strikes and uncertainty about the government’s ‘Great British Railways’ project. The consultancy division is tapping into increasing demand for specialist services while event and data revenues are performing strongly after the pandemic.
A valuation of 20 times consensus forward earnings isn’t cheap. But the US growth opportunity, resilient revenue streams, and a diversified client base are big plus points. Buy. CA
82. Fintel
The number of regulatory changes that financial intermediaries have to conform to has kept even the best-resourced compliance departments busy beyond capacity in recent years. This has created a niche advisory industry that caters to intermediaries ranging from the humblest high street independent financial advisor (IFA) to the largest global asset managers. Fintel (FNTL) uses a software-as-a-service (SaaS) business model to generate partnership revenue by offering a suite of compliance, technical and market information services.
The acquisition of Defaqto in 2019 has also helped turbocharge revenue growth, but it is important to remember that the state of the end market also has a major impact on demand. That was the main takeaway from recent half-year results, which saw reported revenue decline by 2 per cent to £31.7mn. Sales tend to be weighted to the second half, but a relatively sedate year looks likely amid a general slowdown for service providers. Hold. JH
81. Tremor International
Tremor International (TRMR) is an Israeli tech company that enables advertisers to reach more people and helps publishers optimise their digital ad space. In late 2021, the group was riding high in the top quartile of the Aim 100, but it has since slipped down the rankings.
This is largely a result of its exposure to economic cycles. In its latest results, the company complained that “macroeconomic uncertainty is impacting major advertisers' and agencies' budgets and willingness to spend” which is obstructing its own “accelerated revenue growth”.
The group fell into an operating loss in the first half of 2023, and slashed its full-year adjusted Ebitda forecast from $140mn-145mn to $85mn-90mn.
Even when the economic backdrop brightens, however, challenges will remain. Tremor’s focus on big deals with major advertisers means sales cycles are getting longer and more complicated, and its own selling and marketing expenses are ratcheting up. A cautious hold. JS
