70. Atalaya Mining
In 2018, the prospects for Atalaya Mining's (ATYM) shares rest on many factors. To name but four: the smooth execution of a planned upgrade to existing capacity at Projecto Riotinto, the outcome of a long-running legal battle, the economic viability of Projecto Touro, and management’s ability to convince protesters that this second project meets environmental standards. But without a dividend to speak of, and with a relatively high-cost profile in tow, Atalaya is very much geared to the copper price.
With the red metal at $3 per pound, the company is in a comfortable position – despite a fall in copper futures prices in the three months to March, the first such quarterly dip since 2015. Of course, mounting trade fears will always put a dent in a commodity widely viewed as a barometer of global economic growth, so too concerns that 2017 usage fell below forecasts and have pushed up stockpiles. But, however much short-term negative sentiment copper attracts, a lack of investment in major supply is pushing the market towards a crunch point, and with it the possibility of higher prices. That should be good for Atalaya. Buy. AN
69. CareTech
Funding the expansion of a care home portfolio via debt is a risky business, as many owners will attest. CareTech (CTH) took a different approach in 2017 and raised £39m to fund £25.9m-worth of property purchases. Granted, the group does have a hefty £147m of net debt on its balance sheet, but that is supported by the £329m property portfolio.
Acquisitions may have boosted revenue at CareTech, but the group is not immune to the pressures facing the wider care sector. A change in the legal requirements for nurses who work night shifts has sent staff costs up, while cash-constrained local authorities have been reluctant to foot the bill. Still, management is in the process of negotiating its second annual fee increase in as many years and the group seems to have its extra spending requirements under control. We rate the shares a buy for the dividend, which currently yields 2.8 per cent. MB
68. Benchmark
By 2030, humans are expected to consume over 150m tonnes of fish annually – a 36 per cent rise on our current dining habits. But as fishing trends are already deemed unsustainable for the survival of marine populations, aquaculture – the fishy equivalent of farming – is needed to service that demand and fill the looming gap. These carefully-reared fish are sure to require specialist medicines and feed, just as our terrestrial beasts do, and that is why Benchmark (BMK) is well placed for the future. It has 41 products in its animal health pipeline, which have the potential to aid in the business of farming a huge variety of fish.
Keeping that product range fresh doesn’t come cheap, and analysts expect new investments will lead to net debt doubling to £55m this year. So, while Benchmark clearly has the product expertise and capacity (thanks to a recent manufacturing expansion programme) to drive revenue growth, its heavy investment means it is yet to turn a profit. Hold. MB
67. Telford Homes
Telford Homes' (TEF) share price has risen over the past seven years by nearly 1,300 per cent, and it’s not just because the east London-focused apartment builder has been helped by the general recovery in the housebuilding sector in the wake of the financial crash.
Telford has helped itself by concentrating on the more affordable end of the London housing market, and notably in areas such as Stratford and Hackney that were not at the time considered to be desirable. How times change.
Some planned apartments have been sold off-plan before the first shovel has gone into the ground. The subsequent deposits have helped oil the cash-flow wheels, while a diverse stream of buyers from overseas investors, buy-to-let landlords and owner-occupiers has ensured that forward sales already secured reach forward into 2019.
More recently, Telford has increased its exposure to the small but rapidly growing institutional interest in the build-to-rent sector. This business model has all-round attractions. For the institutions, the attraction is the prospect of a decent investment return at a time when conventional low-risk investments yield very little.
The process is structured on a forward-funded basis, whereby Telford is responsible for the planning and building, which the institution pays for in instalments throughout the process. Margins are lower but not by as much as at first glance, because for Telford there are no marketing or financial costs. The model is also extremely capital light, allowing the builder to employ its resources on more conventional sales and site acquisitions.
Typical of its more recent transactions, in December Telford acquired a 3.16-acre site in Waltham Forest, with detailed planning consent for 257 open-market homes, 80 affordable and 18,830 sq ft of commercial space. However, given the increased importance of build-to-rent as a source of revenue – expected to reach half of the group’s top line in a couple of years – Telford is exploring the opportunity of securing a build-to-rent agreement for the delivery of open-market homes.
At the September 2017 half-year, total forward sales were over £580m, with a development pipeline of around £1.5bn, equivalent to 4,200 homes. Demand for apartments at the lower end of the London price range means that Telford has little problem selling its apartments around the £500,000 mark, or slightly above, with higher value apartments remaining a very small part of the business. Given that shares in Telford currently trade at a 25 per cent discount to the sector on a price to net tangible assets ratio, at 404p, we’re sticking with our buy recommendation (324.75p, 26 Jan 2017). JC
66. Mortgage Advice Bureau
Mortgage Advice Bureau (MAB1) managed to defy a sluggish wider housing market last year. While UK gross mortgage lending increasing 5 per cent to £258bn last year, according to UK Finance, the mortgage broker grew 17 per cent. That bodes well, given gross mortgage lending across the market is expected to be relatively flat this year. MAB has been steadily growing its market share – up 50 basis points to 4.6 per cent last year – by adding advisers to its network. Last year it increased its adviser numbers by 128, taking the total to 1,078.
Growing this network is important, given just over 70 per cent of UK mortgage transactions – excluding buy-to-let, where intermediaries have a higher market share, and product switches with the same lender – were via an intermediary in 2017. The shares have risen by half during the past 12 months and, at 626p, trade at 22 times forward earnings. That’s a premium to their historical average. Hold. EP
65. Gooch & Housego
Exceptionally strong demand for microelectronic components has been a big driver of growth for Gooch & Housego (GHH) in recent years. The group is a specialist in photonics, or the science (and technological application) of light, and manufactures precision optical components, alongside a growing business in modules and parts for optical and laser systems for a range of end users.
It was this demand that drove the group’s constant-currency order book up 36.4 per cent to a record £84.7m by the end of last month.
The sales growth this is expected to generate has led management to restructure the group’s 10 manufacturing sites into three nattily titled divisions: acousto/electro optic, precision optic and fibre optic. The new structure, says management, streamlines production processes and resource allocation, and is already showing capacity and performance benefits at sites manufacturing microelectronic parts.
To add to the complexity, Gooch & Housego’s strategy also involves business diversification, placing a greater emphasis on aerospace & defence (A&D) and life sciences, and “moving up the value chain” by focusing on manufacturing systems or modules instead of individual components as a means of generating greater margins. To achieve this, the company plans to invest in research and development and go after suitable bolt-on acquisitions. Recent history shows management has good form when it comes to deal-making, with StingRay Optics, which was acquired last year, performing ahead of expectations.
More broadly, that move up the value chain has been a qualified success, with operating margin improvements in A&D offset by decreases in the life sciences business. In the year to September the adjusted margin had slipped two percentage points to 14.6 per cent, although management attributed this to foreign exchange and planned investment. In the coming year the strategy is not expected to change, as the group has yet to reach “critical mass” in its core divisions. Nevertheless a recent trading update said the A&D division now comprises around a third of the group’s total business. That statement also had the group performing in line with expectations. Consistency here may help to arrest the slide since December in the group’s highly priced shares.
That derating has left Gooch & Housego trading at 25 times forecast earnings. While slightly more attractive than peers' and the stock’s own demanding history, the fruits of the unfolding strategy are yet to flourish. Hold. TD
64. M&C Saatchi
Against a tough backdrop for the advertising industry, even giant WPP is struggling. Global brands have reduced traditional marketing expenditure and Facebook and Google have made rapid headway in the digital advertising realm. M&C Saatchi (SAA) has, by dint of skill, size or market focus, managed to work around such headwinds. Indeed, broker Numis notes that M&C has no exposure to the beleaguered segments of marketing communications such as consumer packaged goods and media buying. The benefit of this, in 2017, was strong sales growth and even stronger increases in pre-tax profit.
European sales have been especially strong. We expect this to continue, thanks to the Swedish office’s recent business wins and new projects in Paris – even if France, to quote the company, remains “challenging”.
So where next after last year’s record sales and adjusted earnings figures? Numis forecasts 7 per cent organic revenue growth for 2018, which looks conservative to us given recent customer wins across all regions, and 16 new business launches in 2017. At 390p, M&C’s blended forward PE ratio is roughly in line with the peer-group average. Buy. HC
63. Alliance Pharma
It has often been said that America is the graveyard for British companies, but does that rule apply when a company expands into the US via acquisition? Alliance Pharma (APH) will soon find out. In December, it bought headlice treatment Vamousse which was developed in America and makes 80 per cent of its revenue there. It is sold via a network of distributors which could, in the future, be used to plug some of Alliance’s other products. But for the time being, management is taking its US development slowly. As for Vamousse, the group is hoping to ramp up its global sales by improving marketing and distribution.
Funding acquisitions such as Vamousse is the group’s bedrock of core pharmaceutical products, which require very little capital expenditure and are therefore highly cash generative. A forecast free cash-flow yield of 7.1 per cent is very attractive compared with pharma peers of Alliance’s size, particularly when it is combined with its double-digit forecast earnings growth. Buy. MB
62. Draper Esprit
The fortunes of early-stage investment group Draper Esprit (GROW) depend very much on its ability to back the right horses. Thankfully for its investors, it has demonstrated impressive skill in that respect, since it was established in 2016. The venture capital group was admitted to Aim in June 2016, using the £64m of the proceeds raised to acquire an investment portfolio of technology companies from its Irish subsidiary. The gross value of the group’s portfolio increased by 44 per cent during the first half, which resulted in an adjusted net asset value per share of 324p. Its core portfolio companies include health-focused snack brand Graze.com and online review platform Trustpilot. Earlier this year it also invested £18m in France-based crypto-currency and blockchain security company Ledger. Analysts at Numis expect this to jump to 369p by the end of this year. At 450p, that would leave the shares trading at 1.2 times forecast NAV, a premium to its closest peer IP (IPO). We reckon that bakes in the group’s promising investment capabilities for now . Hold. EP
61. Camellia
Last year, the management of Camellia (CAM) said the group’s sprawling international focus would concentrate on the agriculture business. Given the most recent trading update, this looks like a good call. Agriculture is said to be trading significantly ahead of market expectations. Tea prices in India and Bangladesh have recovered and have been higher than expected in Kenya and Malawi. Along with the price of tea, Camellia’s performance also hangs on what it can charge for macadamia nuts and avocados. Coming into the full-year results (announced on 19 April), management indicated that the prices for both have been stable despite a smaller crop size for the nuts and smaller avocados.
Still, the group’s volatile cash flows mean that it’s hard to predict the outlook. Another area that could spell trouble for Camellia is its 35.6 per cent stake in BF&M, an insurance company based in Bermuda. Net income in this business fell by 73 per cent to $5.2m in the nine months to September 2017 due to the hurricanes that hit the Caribbean last year. Sell. JF
For the first half of our Aim 100 analysis see below:
