10. YouGov
YouGov (YOU) shares had a poor summer as investors worried about the knock-on effect of tightening tech budgets. But the market recently gave it a belated a vote of confidence following release of full-year figures which defied negative expectations.
The group – a provider of marketing and opinion data – delivered sizeable increases in underlying revenue and operating profit, but the most encouraging aspect of the update was that the material benefits of its second long-term strategic growth plan (FYP2) are clearly mounting. Indeed, YouGov is close to meeting its stretching targets over the course of the plan, with respective compound annual growth rates of 17 per cent and 28 per cent for revenue and EPS since 2018. And these returns were achieved despite the negative influence of the pandemic and geopolitical disruption.
Yet there’s no getting around the fact that the shares have lost 46 per cent of their value since their high-water mark at the end of 2021. As a result, the group’s forward price/earnings (PE) ratio has halved to 18 times from a five-year average of 36. It’s difficult to gauge whether the current rating relative to competitors is justified as its commercial offering is now broader than many of its peers, but we can say with certainty that it’s no longer priced extravagantly.
It could be argued that the group’s historical PE multiple suggests that it was marked out as a proxy for the tech sector. It was logical to assume that technology companies' marketing and communication activities would have been curtailed to a degree in line with the tighter funding conditions seen since 2022. But while there is evidence to suggest that is the case, it isn’t necessarily reflected in YouGov’s trading performance.
The company continues to develop competencies across the industries it serves, while targeting overseas growth, particularly in the lucrative US market. To this end, it is in the process of acquiring the consumer panel business of GfK – the largest market research company in Germany, and one known for its consumer confidence indicators here in the UK. The proposed deal, which is being financed via an equity placing, extends the group's activities into the fast-moving consumer goods sector, a high intensity purchaser of market research services.
All in all, the forward rating nowadays doesn’t look overly demanding given an anticipated 84 per cent increase in sales through to July 2026, especially given that cash profits are forecast to grow at faster clip over the same period. Buy. MR
9. Gamma Communications
Gamma Communications (GAMA) sells software which allows companies to make calls over the internet. Many households don’t need a landline anymore, but for companies it is still useful to have a telephone number potential customers can call.
The problem for small businesses is that in 2025 BT is going to turn off the public switched telephone network (PSTN). This is good news for Gamma, which says there are currently around 3mn small businesses in the UK that still use PSTN. The company hopes to onboard around 10 per cent of them.
This should accelerate growth further. In the six months to June, year on year revenue growth was 9 per cent, and this translated into a 9 per cent increase in operating profit, keeping the operating profit margin flat at 16 per cent. Given the increase in labour costs, this stable margin shows pricing power.
With a forward price/earnings ratio of 13 and a free cash flow yield of 7 per cent, it doesn’t look like the market has priced in any of these tailwinds. Broker Numis has it as ‘a top pick’ and we agree. Buy. AS
8. Greencoat Renewables
High levels of net debt have left some analysts and investors feeling wary of Greencoat Renewables (GRP). The investment trust, which invests primarily in Irish and euro-denominated renewable energy assets, had nearly €1bn (£870mn) of debt on the books as of September. This figure is equivalent to 75 per cent of its net asset value, putting it at the top end of its peer group in leverage terms.
This is a problem for the trust, because its strategy previously relied on being able to issue equity in order to help fund its new projects. But in keeping with wider troubles for renewable trusts, its shares now trade at a discount to net asset value of around 20 per cent, as opposed to its historic premium. Stifel analysts note there is “clearly no near-term prospect of being able to issue equity” as a result.
The trust’s plus point is that many of its revenues are fixed, long-term agreements. However, the share of variable revenues are increasing, and many question marks remain over how it can fund future asset purchases. Hold. JJ
7. Keywords Studios
Keywords Studios (KWS) supports video games developers in everything from development to marketing and distribution. It’s a people business, rather than a tech one, which is why the gross margin is a modest 30 per cent or so. The advantage comes in its scale, offering global services to the biggest companies in the world.
But the post-pandemic gaming ‘recession’ has hit it hard all the same, with Hollywood strikes providing a further knock. There is also a fear AI could ultimately render some of Keywords’ main functions obsolete. The share price is down 50 per cent this year.
Yet in the six months to June, organic revenue rose 10 per cent year on year while adjusted operating profit was up 5.2 per cent. A concern is that free cash flow fell from €24mn to €3mn. Management blamed this on timing of working capital movement, but it should be monitored closely.
The forward price/earnings ratio has fallen from the high 20s down to just 12, offering a good opportunity. In the main, Keywords’ issues look more cyclical than structural. Buy. AS
6. GlobalData
Spreadsheets are a hard sell, but GlobalData (DATA) is worth paying attention to. The group, which was founded by billionaire Mike Danson, provides businesses with “gold standard” insights such as thematic research and polling results.
Its operating margin has been rising rapidly since 2018, partly as a result of its “build one, sell many” model. In other words, once a data set has been created it can be flogged to a big pool of customers. GlobalData also benefits from good visibility as 80 per cent of its sales come from subscriptions.
There are a couple of sticking points. The company has a lot of debt – net debt to adjusted Ebitda was 2.3 times at the half-year mark – and financing costs are rising rapidly. Worries about demand are also weighing on shares, which have stumbled by 15 per cent over the last six months. Ultimately, however, this cash generative data play is widening its margins and delivering strong organic growth against a tough backdrop. Buy. JS
5. Fevertree Drinks
Fevertree Drinks’ (FEVR) share price shot up by 2,222 per cent between November 2014 and September 2018, as investors poured in once the advantages of its capital-light business model came to light.
Since then, pandemic-era disruption temporarily weighed on volumes, and issues with glass costs have also hurt. But the premium mixers specialist has continued to make inroads into the US market, the likely channel for long-term growth.
The value of Fevertree’s intangible assets is nearly double that of property, plant and equipment within its non-current assets and was an astonishing five times greater at the half-year mark in 2022. Meanwhile ingredient costs have been on the fly and Fevertree has suffered disproportionately from rising energy costs as glass production is an energy-intensive process – a problem when 80 per cent of your sales rely on glass bottles.
The company cut its full-year revenue guidance in September and its consensus price/earnings forecast is certainly in downtrend, so a forward rating of more than 30 times overstates its growth prospects. Hold. MR
4. CVS Group
Shares in veterinary services group CVS Group (CVSG) plummeted last month after the Competition and Markets Authority (CMA) announced an investigation into the pet healthcare sector. While they rebounded somewhat in the weeks to follow, it’s clear that investors are nervous.
The reality is that we won’t know if or how the competition regulator intends to intervene in the veterinary industry until early next year. But CVS has withstood CMA scrutiny before, when it bought Quality Pet Care in 2021, albeit with some concessions. And Liberum research indicates it is private equity-owned vet prices are well in excess of those owned by listed peers. The business itself is in good financial standing – and managed to grow pre-tax profit by an impressive 50 per cent across the year to the end of June.
CVS is currently trading on 15.5 times projected earnings for FY24, which we think looks like good value. The regulatory panic that has hit the shares may actually constitute an opportunity for new investors. Buy. JJ
3. Hutchmed (China)
Hong Kong-based Hutchmed (HCM) is expanding its horizons beyond mainland China, where it makes the majority of its sales. Only a few weeks ago, it announced that its partner Takeda had submitted a regulatory application for its cancer drug fruquintinib in Japan. If approved, the treatment would become available to patients in the country for the first time.
Hutchmed is also working to commercialise a “second wave” of trial-stage oncology assets in its home market. It recently enrolled patients in a phase II study of tazemetostat, a potential treatment for blood cancers, and presented positive results from a phase III trial of lung cancer drug savolitinib.
Even without any plans for global expansion, we think Hutchmed makes a compelling investment prospect. Cancer is becoming a more prevalent disease in China due in large part to its ageing population. Some investors will be hesitant because the company has yet to turn a profit, but we think growth looks increasingly certain. Buy. JJ
2. Jet2
Philip Meeson’s decision to step down from Jet2 (JET2) in July marked the end of an era.
Although Meeson didn’t set up the company from scratch, the former RAF pilot has transformed it from a small cargo operator shipping flowers and post into the UK’s third-biggest passenger airline. He bought the business in 1983, and floated it in 1988, but only moved into the low-cost passenger airline market in 2002.
Although this is a competitive field where margins are usually wafer thin, he has carved out a niche that has been vacated by others, selling package holidays in the sun to families.
In its financial year to the end of March, 65 per cent of passengers who flew with the airline were on one of its holidays, compared with 52 per cent a year earlier.
Four-fifths of revenue now come from package holidays, and although Jet2 doesn’t break down the margin performance from each division, it earns a fatter margin from holiday provision than from flights. The group’s overall operating margin was 7.8 per cent last year, still some way below competitor Ryanair (IE:RYA) but a much stronger performance than EasyJet (EZJ) and Wizz Air (WIZZ) – both of which were stuck in lossmaking mode.
The post-pandemic bounceback in holiday appetite has helped, with the company citing “robust consumer demand” and a change in destination mix for its ability to push up average holiday prices by 10 per cent.
The key question for investors is how long this will last, particularly as the company has been buying lots more aircraft. It flew 120 aircraft over the summer, yet has firm orders in place for another 98 planes, worth £12.4bn at list prices (albeit it has secured "significant" discounts on these). It also has options to buy another 48.
Things certainly seem to be holding up for now. Last month, Jet2 said late summer bookings had been strong and described winter bookings as “encouraging”, with load factors marginally ahead of last year despite capacity increasing by a fifth. And even after incurring £13mn of extra costs during the Rhodes wildfires and the UK’s air traffic control fiasco, the company said pre-tax profit (excluding forex revaluations) for the current year would be ahead of analysts’ forecasts at between £480mn-£520mn.
Jet2’s shares still only trade at 6.5 times FactSet’s consensus analyst forecast, which seems cheap given its recent performance. Buy. MF
1. Burford Capital
Litigation funder Burford Capital (BUR) is on a winning streak. In September, it announced another court win in the case concerning the nationalisation of Argentine oil producer YPF, which could result in billions of dollars’ worth of damages. As always, however, there is a big question mark over how much money Burford will actually receive, and when it will arrive.
The group is certainly making tangible progress, though. In the first half of 2023, its cash receipts – a key metric in such an unpredictable sector – grew by 148 per cent to $247mn (£203mn), as court backlogs continued to clear. “Realised gains”, which refer to the total proceeds generated when a court case concludes minus the deployed cost, are also on the rise.
Litigation funding remains an inherently volatile industry, however, and the nature of lawsuits, together with the complexity of Burford’s accounts, make it difficult for investors to ever understand what is going on behind the scenes. Hold. JS
