50. Cerillion
Cerillion’s (CER) CRM software manages payments for telecoms companies, be they network providers or network carriers.
The sector is enduring a difficult time as inflation increases capital spending requirements for providers while also squeezing related businesses. Spirent Communications (SPT) relies on companies to increase capital expenditure and has had to issue a string of profit warnings this year as its customers cut back investment.
Yet Cerillion is benefitting from this dynamic because its productivity enhancing software is cost saving. In the six months to March, annualised revenue increased 27 per cent. Its impressive and improving adjusted cash profit (Ebitda) margin of 49 per cent means it is turning a lot of this into profits. A good software company is thought to be one where these two numbers combined are in excess of 40. At Cerillion, the combined score is currently over 75.
Since the half year, it has signed a “major” new contract with an existing customer and announced that adjusted profit will be meaningfully ahead of market forecasts. At a forward price/earnings ratio of 25, Cerillion is on the expensive side, but this kind of momentum is rare at the moment. Buy. AS
49. Central Asia Metals
After over a decade on Aim, many investors will be familiar with Central Asia Metals’ (CAML) approach – keep production ticking along at its two operations, make improvements here and there, and pay a dividend. A trading update this month duly reiterated copper, zinc and lead production guidance for the year. More importantly, last month saw the company only drop the dividend by 11 per cent despite a 50 per cent fall in free cash flow for the first half.
So the bona fides remain. But there is some angst from both management and investors as the share price has continued to slide this year. Year to date, it is down 38 per cent, a more dramatic slide than the price of the metals it sells from the Kounrad operation in Kazakhstan and the Sasa mine in North Macedonia. One way to rev up interest is an acquisition, but given the high cost of debt and weak share price, paying for a new mine will be tough. Exploration projects in Kazakhstan will likely be the way instead. This means a long road ahead, but CAML certainly has the fortitude for it. Buy. AH
48. Nichols
Nichols’ (NICL) strategic review of its out-of-home division, which is the more capital intensive side of the business and contributes around a quarter of total revenue, looks set to deliver notable gains. Management says “material benefits” will arise from 2024, while broker Peel Hunt forecasts that the Vimto producer’s return on capital employed will rise from around 23 per cent this year to hit 26 per cent in 2025.
The opportunity in Africa is another key supporter of future growth prospects. The region is the company’s second biggest after the UK, and revenue there grew by more than a quarter in the latest half. There is the potential for significant growth given demographic and economic trends.
The shares trade hands at 15 times consensus forward earnings, a nice discount to the 5-year average of 22 times. The international growth potential and a net cash position support the bull case, but growth in the UK has been more modest and cost pressures are still hitting margins. Hold. CA
47. SigmaRoc
SigmaRoc’s (SRC) decision to raise £30mn to invest in acquisitions and growth projects back in February this year displayed the confidence not only of its managers in identifying suitable opportunities, but also of shareholders in its ability to deliver.The 54p a share placing price was at a premium to the previous day’s closing price of 53p.
The pan-European aggregates company pledged to spend £39mn on 10 acquisitions. A further £8mn was earmarked for “organic growth and carbon footprint reduction” projects, with the funding gap between the planned spend and the money raised being plugged by disposals.
Combined, the plans are expected to generate an extra £42mn of revenue and £10mn of cash profit.
“That programme has now effectively closed. We’ve executed on pretty much everything we announced,” chief executive Max Vermorken said this summer. Most of the acquisitions were bolt-ons secured “at very attractive multiples”, averaging around 3.9 times cash profit. Disposals were sold at a multiple of almost 13 times, he added.
The new projects include its first carbon capture unit at a cement kiln in Sweden and a partnership with a start-up to develop a range of “ultra-low carbon” concrete products.
Operational performance has already been aided by some of these developments. Vermorken said results for the six months to 30 June were “well ahead of what we ourselves expected but certainly what the market, in terms of consensus, had out there”.
Weakness across Europe’s residential market (responsible for 20 per cent of group sales) meant like-for-like volumes were down 4 per cent in the nine months to September, but price increases contributed to a 7 per cent increase in like-for-like revenue. Although the company warned that conditions are likely to remain challenging in a few of its end markets, declining inflation should ease interest rates’ upwards path, which will help the outlook for construction. The company is targeting areas “underpinned by long term growth dynamics”, such as infrastructure investment and green energy.
Cash generation has also remained "positive" and will support efforts to reduce debt by the year end, the company argues.
Net debt dropped by £11mn to £183mn, or 1.7 times cash profits, at the half-year stage. The sustainability of these cash flows is one reason why house broker Liberum thinks that SigmaRoc’s shares are undervalued. Based on next year’s forecasts, the shares offer a free cash flow yield of 16 per cent and trade off a “miserly valuation of just over six times earnings, the broker said. Given its improved growth prospects following its recent deal spree, we would agree. Buy. MF
46. MP Evans
Crude palm oil prices soared in 2022 because of Russia’s invasion of Ukraine and the knock-on impact on vegetable oil supplies. MP Evans (MPE) reaped the benefits, but now must deal with an environment of moderating prices. A 27 per cent year-on-year price fall in the Indonesia-focused producer’s latest half drove a revenue contraction of a fifth. And the analyst consensus is that the top line won’t increase again until 2025.
However, the acquisition of new planted land supports growth prospects. The signing of a $60mn (£49mn) deal in September to pick up 8,350 planted hectares in East Kalimantan came after the purchase earlier this year of an additional 2,000 hectares close to the Simpang Kiri estate, where a new mill remains a possibility.
The environmental issues with palm oil can’t be ignored, but an increase in sustainable production and the company’s first climate-related financial disclosures report demonstrates progress on that front. The shares are valued at just eight times consensus forward earnings. Hold. CA
45. AB Dynamics
AB Dynamics (ABDP) managed to navigate the second half of its financial year successfully.
The company, which performs track and simulator testing of vehicles, said a “large, high margin” contract had been delivered by its laboratory testing and simulation arm earlier than expected. As a result, sales are expected to top £100mn for the first time and its adjusted operating profit will come in “at the top end” of analysts' forecasts, which range from £14.7mn to £15.9mn. Its cash pile also increased by £3mn to £32mn, even after making an upfront payment of £16mn for the Ansible Motion business bought last year.
Although the company’s shares rose by 4 per cent on these results, this only took their year-to-date gain to 6 per cent. They trade at 34 times broker Shore Capital’s forecast earnings, in line with their five-year average. This isn't cheap but AB Dynamics is a quality company and once the AB Solutions arm that makes driving robots breaks even, there’s scope for margin expansion. Buy. MF
44. Gresham House
Fund management group Gresham House (GHE) is likely making its valedictory appearance in the Aim 100. The company is in the later stages of a takeover after an agreed cash bid in July from Searchlight, a private fund management company with $11.6bn (£9.6bn) of assets under management. Searchlight had been remarkably persistent in its bid for Gresham, having tabled four bids in total before reaching a final agreed cash offer of £469mn, or roughly 15 times the company’s enterprise value at the end of last year. Based on broker Canaccord Genuity’s forecasts, the offer represented a PE ratio of 18 times forward earnings.
Gresham’s performance over the past couple of years, and part of its attraction to potential buyers, was based on its specialisation in renewable technology – battery energy storage, wind and solar – as well as owning large bits of forestry in Ireland as part of a sustainable management programme. With the Searchlight deal now approved by shareholders, there’s little to do but await final approvals. Hold. JH
43. PetroTal
When a company talks about liquidity, it usually means cash at hand or shares available on the market. For PetroTal (PTAL) shareholders, the top liquidity concern is water levels on the Amazon river. Yet recent images of houseboats turning into normal houses don’t seem to have rattled them and PetroTal shares are still above water year to date.
The company operates oilfields in Peru that should be feeding into a pipeline. But PetroTal has to send its oil on barges to Brazil, hence the focus on river levels. Production in the third quarter averaged 10,909 barrels of oil per day (bopd), and guidance for the year is 14,000-14,500 bopd, below the true capacity of the field. Outside production troubles, the company offers a lot to investors. Sales for 2023 will likely be down 5 per cent on last year, at $311mn (£256mn), as per Peel Hunt. Yet cash flow is still strong, and this, according to the broker, translates to a dividend yield of 13 per cent for the full year. Buy. AH
42. Boku
It has been a story of recovery for mobile payments technology developer Boku (BOKU), with its recent interim results showcasing the potential for operational gearing to turbocharge the group’s performance. Revenues grew by 32 per cent at constant currencies to $38.2mn (£31.5mn). The root of Boku’s success is the rapid development of local payment methods (LPM) – simply put, more of us are using digital wallets to perform ever more transactions. The result is that the company’s LPMs tripled in value during the half, with a wide spread of customers across gaming, retail, and financial transactions.
If the company lives up to its goal of doubling revenue over the “medium term”, that could equate to annual revenue growth rates of 15 per cent for the next five years. Broker Peel Hunt has subsequently upped its forecasts for adjusted cash profits by 3 per cent for 2024 to $29.5mn. Boku seems to have grasped its opportunity for growth and the immediate future looks promising. Buy. JH
41. Midwich
Investors are nervous about Midwich (MIDW) because it distributes audiovisual equipment such as speakers, projectors, and scanners. Demand for these products is fairly cyclical, and the group reported delayed spending by corporate and education clients in the first half of 2023, after a bumper lockdown period.
Midwich serves a diverse range of markets and geographies, however, and the slowdown was more than offset by demand for higher-margin live event and entertainment products, as concert venues and theatres roared back to life. Similarly, a slight dip in revenue in the UK and Ireland was offset by “exceptional” growth in southern Europe and the Middle East.
As such, Midwich’s adjusted profit before tax increased by 13.4 per cent to £21.8mn in the first half of 2023, and analysts at Investec expect it to reach £49.4mn by the end of the year, which would represent an annual increase of 9 per cent.
Midwich’s broad reach is one of its key strengths – particularly as the rest of the market is very fragmented. Its margins are also expanding after a pandemic slump because it is focusing on “technical” product categories which require greater pre- and post-sales support. Its gross margin reached 16.3 per cent in the six months to June, up from 14.9 per cent the previous year, while its adjusted operating margin rose from 3.6 per cent to 4.3 per cent.
The market isn’t convinced yet. Shares in Midwich have fallen by 8 per cent over the past 12 months, and the distributor trades on a forward price/earnings ratio of just 10.3. This is far lower than its five-year average of 17.7, and makes it considerably cheaper than larger companies like Diploma (DPLM) and Bunzl (BNZL) (Investec estimates that shares currently trade at a 40 per cent discount to listed distributor peers).
As a small, low-margin Aim stock, Midwich is obviously a riskier option than a high-quality large cap. It is also important to note that it has a sizable amount of debt: leverage was 1.5 times at the half-year mark, despite a recent £20mn equity raise. Meanwhile, management flagged that market conditions remain “challenging” and it is possible that demand will weaken further and Midwich will be caught out by aged stock – as happened in the first half of 2022.
Nevertheless, we remain convinced that Midwich’s valuation is attractive given its resilience so far, and that shares will recover as economic conditions and confidence improve. Buy. JS
