80. dotDigital
Buying cloud communications business Comapi last November has facilitated dotDigital’s (DOTD) transition from an email marketing platform to an omnichannel group. Comapi brings conversational messaging to marketers across channels including Facebook messenger and mobile; that's particularly relevant as dotDigital looks to expand into the 'mobile first' Asian market.
Indeed, international diversification is integral to the group’s growth strategy. Within the broader Asia Pacific region, management is focusing on improving sales through partnerships and e-commerce integration; this could bear fruit in coming months.
Meanwhile, dotDigital is helping European customers to comply with the EU’s new data privacy rules – effective from May. Still, some have already lengthened their purchasing cycles ahead of GDPR – a trend to monitor once the regulation has been widely adopted.
At 89p, the shares trade on an expensive multiple of 30 times FinnCap’s forecast earnings for the year to June 2018. But EPS is expected to grow at a compound annual rate of 26 per cent between 2017 and 2019, which justifies the premium. Buy. HC
79. IG Design
In a recent trading update, bosses at IG Design (IGR) said they expect to report record revenues for the 2018 financial year. A strong first half was followed by continued good trading up to and throughout Christmas, with close to three-quarters of sales now coming from outside of the UK.
As a designer and manufacturer of gift packaging and greetings products we expected third-quarter trading to be good – it covers Christmas after all – but trading was so strong the group decided to upgrade its guidance. Full-year adjusted earnings per share are now expected to exceed current market forecasts. An increased proportion of earnings in the US means that group figures will also benefit in future years from recent changes in US tax legislation. Cash generation is also said to be strong, which will help keep overall leverage levels “significantly below” ratio thresholds by the time the group reports full-year results in June. We remain buyers. HR
78. Focusrite
Music equipment manufacturer Focusrite (TUNE) has been a star performer since we first tipped it in May 2016, with the share price almost tripling in that time. If the group’s latest trading update is anything to go by, the growth is not due to end just yet, with sales, profits and cash all climbing in the six months to February 2018. Sales of the Scarlett and Launchpad ranges were particularly strong.
However, chief executive Tim Carroll noted headwinds facing the music retail industry in the US in particular. Forty-two per cent of group revenues come from the region, and although trading there has yet to run into any trouble, Mr Carroll said he’s keeping a “close and continuous eye” on the business.
At 460p, shares in Focusrite now trade at 30 times forecast earnings. This is a demanding multiple, but heavy investment in expanding the Asian and European businesses should offset potential US softness, and we remain buyers. Buy. TD
77. Diversified Gas & Oil
Lofty buy-and-build promises are de rigeur for IPOs on the junior market, although somewhat unusual when it comes to oil and gas stocks. Between listing in February 2017 and creeping into this year’s top 100 Diversified Gas & Oil (DGOC) has proved that the business model is feasible even for energy stocks. It involves buying portfolios of low-cost, low-risk and long-life oil and gas wells in Appalachia for no more than four times’ annual cash flows; reducing overheads and margins and guaranteeing stable cash flows through hedging; and using those cash flows to grow dividends and fund new acquisitions.
As a $180m equity raise to fund two such deals recently showed, DGO has the ear of income-hungry investors, and the track record to suggest it can repeat the trick again. Indeed, management's ability to find more deals at the right price is likely to be the bigger driver of shareholder value in 2018, as natural gas prices – although hedged and profitable at their current levels – have proved volatile in recent months, and are forecast to remain below $3/mmbtu. At 85p, the shares carry a trailing dividend of 4.6 per cent. Buy. AN
76. Brooks Macdonald
Brooks Macdonald (BRK) has been a high-growth darling of the wealth management sector during the past decade, with its shares rising more than sixfold in value. That was until July last year, when its shares faltered on news of increased regulation-related operating expenses. January’s warning of pressure on revenue yields, because of increased competition and greater inflows into its lower-margin Managed Portfolio Funds, exacerbated this decline. However, we remain bullish on the wealth manager. It has arguably the most well-developed intermediary distribution network, which has helped it attract new discretionary assets at an impressive pace. During the first half it grew discretionary funds by a quarter, set against a 4.3 per cent rise in the MSCI WMA Private Investor Balanced Index during the period. At 1,845p, the shares trade at just 14 times forward earnings for this year, falling to 12 times in 2019. That’s a large discount to its historical average and one we think is unjustified given its sustained track record of pulling in funds. Buy. EP
75. Joules
Despite a challenging retail and apparel market, clothing chain Joules (JOUL) has proved itself a welcome addition to the London stock market. The company’s disciplined approach to new store openings and consistent focus on digital and wholesale channels make it a viable competitor to more established names such as Ted Baker (TED) and SuperDry (SDY).
The shares remain a top pick among analysts at Liberum and Peel Hunt, and for good reason. The group reported a stellar Christmas (sales rose by close to a fifth) and followed up with an impressive set of half-year numbers at the end of January. This is in stark contrast to many of its peers, which are struggling to win the loyalty of millennial customers and catch online rivals. Even more impressive, Joules has managed to maintain its prices – something many retailers are struggling to do in the face of competition amidst an inflationary environment. The group has achieved this by negotiating strongly with suppliers to offset adverse foreign exchange rates – admittedly only a viable tactic when volumes make it worthwhile for the manufacturer.
Critically, Joules understands its customer. That might sound like an obvious prerequisite in the world of retail, but it’s something larger chains such as Marks and Spencer (MKS) and Next (NXT) have lost sight of. A close eye on exclusive product and the core shopper is what makes this group a success, unlike, say, Debenhams (DEB) or Mothercare (MTC). Analysts at Peel Hunt go one step further, crediting the company’s level of communication with customers, both on and offline, as reason for its continued success.
Of course, this growth has been largely reflected in the share price, which has nearly doubled since the pre-referendum IPO two years ago. Squeezing forecast upgrades out of City brokers is a tall order for retail companies right now, but consistent outperformance of market expectations has allowed the stock to ride the upgrade wave.
Over time, that should hopefully make the shares’ forward valuation more reasonable but, for now, this kind of growth comes at a price. Currently trading around 24 times forward earnings, the shares trade at a premium to the general sector, but sit alongside other high-quality retailers. Seeing as the group has found the winning formula to keep customers flocking in – and remaining loyal once there – we think the shares are worth coughing up for. Buy. HR
74. Quixant
Quixant (QXT) is already a market leader in gambling machine software, but recent expansion into gaming monitors has helped it take even more business from competitors. As of the full-year results in March, the company had reached more than 10 per cent market share, shipping 52,000 gaming platforms in 2017, up by more than a quarter on the previous year. It’s now moving further into Asia with the first shipments to a new major Japanese customer earlier this year. If casinos are legalised in Japan then the gambling industry there could take off, much to the benefit of Quixant. Chief executive Jon Jayal also pointed to the broadcast industry as a target market for future expansion. The company is set to begin touring new products targeted at the industry at events this year, so we’ll be looking for an update on how this went down at the next results. The cash-generative nature of the business pushed it into a net cash position in 2017, so new product development looks well funded. Better yet, a greater proportion of its income is coming from higher-margin products. Buy. JF
73. CityFibre Infrastructure
There’s a revolution coming in the British broadband market. For too long telecoms companies have relied on the infrastructure developed and managed by BT’s (BT.A) former subsidiary, Openreach. The lack of competition has resulted in poor investment by the telecoms giant, meaning Brits have had to endure the third-slowest internet connectivity in Europe.
Not any more. CityFibre (CITY) has teamed up with Vodafone (VOD) to lead the charge against the incumbent. The two companies have entered into a partnership that will see the former provide super-fast full-fibre broadband connections to 1m homes in 12 of the UK’s smaller towns and cities. Vodafone has committed to lease the lines off CityFibre for a minimum of 10 years and has been granted a period of exclusivity, largely during the construction period. With the financial might of Vodafone behind it, CityFibre now looks to be a credible rival to Openreach.
Construction in the first of the partnership’s 12 target cities – Milton Keynes – has already begun, while planning and preparation is happening in Aberdeen and Peterborough. In the former, the group already works in partnership with Capita and the local council to provide super-fast broadband connectivity to public sector sites. The group also has a 19-year contract in Glasgow and a comprehensive full-fibre network in York.
New contracts have rolled in recently and nearly doubled CityFibre’s revenue in each of the past three years. The top line is forecast to exceed £30m when the group announces 2017 results on 24 April. But investment in the fibre network does not come cheap, which is why pre-tax profits are not forecast for at least two years (although, as of 2016, the group is generating cash profits). That’s why CityFibre tapped its investors for £200m in 2017, so at least the balance sheet is in decent shape.
But some analysts have queried why CityFibre’s fibre network is expected to cost 8 per cent less than that being developed by Openreach. Numis worries that the group is overpromising and may have to return to the market for more funds. But the group insists that its efficiency in laying new cables means it will be able to keep costs in check, while some have speculated that deep-pocketed Vodafone will provide some of the upfront capital. But with the risks of developing a major network balancing out the potential rewards, we’re happy where we are. Hold. MB
72. Majestic Wine
Majestic Wine (WINE) spent much of the last year trying to get its business back on track, and putting the 2016 profit warning “firmly in the rear-view mirror”. The share price – and certainly the forward earnings multiple – has largely reflected this recovery potential, so it’s encouraging to see that the company is back on firmer footing, especially in the wake of a good Christmas trading period.
But that doesn’t mean this year is going to be plain sailing. It’s no secret that the retail market is challenging. Although most food and drink retailers have benefited from the inflationary environment, promotional discounting is still rife in the alcohol category, so competition remains high. Majestic has done well in terms of customer recruitment – which has had a pleasing effect on sales rates across the UK and US to date – but whether these customers continue to spend remains to be seen. Seeing as the shares still carry a forward PE ratio of 21 times, we’re staying on the sidelines. Hold. HR
71. Impellam
When fears over the UK economy rose after the EU referendum, recruiter Impellam (IPEL) took a while to register the effects. After continuing to perform well in the aftermath, the group saw adjusted operating profit fall 33 per cent in the first half of 2017. The problem is overreliance on its UK operations, so the natural response is to shift focus towards its US-based and other businesses.
The extent to which the UK is struggling, and how effectively the group is reducing its exposure – or at least increasing its exposure elsewhere, proportionately – will be the key factors investors should be keeping an eye on in 2018. At the full-year results announcement in March non-UK operations accounted for 38 per cent of gross profit, up from 35 per cent the year before.
At 552p, shares in Impellam trade at seven times forecast earnings, a steep discount to peers. However, the recent results announcement hasn’t given us any cause to buy in yet. Hold. TD
For the first half of our Aim 100 analysis see below:
