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The Aim 100 2018: 90 to 81

The lowdown on the junior market's top 100 companies. This section: 90 to 81
April 20, 2018

90. Griffin Mining

Last October, analysts at Cantor Fitzgerald argued that Griffin Mining’s (GFM) zinc-gold-silver-lead project in Hebei, China, was fundamentally undervalued. Central Asia Metals (CAML) had just acquired Sasa in Macedonia, a mine with a comparable cost profile, size and scale, and had paid about double the trading multiple attached to Griffin. Apparently, the market fully accepted Cantor’s reasoning. Indeed, Griffin’s shares quickly doubled in value in the three months after the recommendation, further propelled by tightening zinc and lead markets, and confirmation at the end of 2017 that the company had paid off $45m of loans since the start of the year, and was now debt-free.

With infrastructure built, Griffin now stands poised to double production. The catalyst for this will be the award of a new mining licence over Zone II, which continues to elude the company. In December, chairman Mladen Ninkov forecast that earnings “will be even more extraordinary once this licence is in place”, although in recent results he declined to “venture an opinion when” this will happen. Dividends would alter our cautious stance towards China-based Aim companies. As it is, Griffin’s enterprise value to cash profits ratio exceeds income-generating Central Asia Metals. Sell. AN

 

89. Somero Enterprises

High-tech concrete levelling might not sound like the most fascinating specialism, but Somero Enterprises (SOM) is proving just how lucrative this industry can be. Last year’s performance took Somero ever closer to its $90m sales target for 2018. And the company now targets a net cash balance of at least $15m, with plans to distribute 50 per cent of excess cash as a special dividend.

Where could future growth lie? Europe has enjoyed excellent revenue momentum, and the equipment fleet here may be due for technological upgrades, possibly engendering new opportunities. Meanwhile, bosses have identified a serious addressable market in China and also plan to focus on wider international expansion, along with new product development.

At 395p, Somero trades on a multiple of 15 times broker FinnCap’s forecast adjusted EPS for 2018. More demanding than when we tipped the company (279p, 28 Dec 2017), but supported by compound annual revenue growth of 17 per cent from 2013 to 2017, and the attractive prospect of supplementary dividends. Buy. HC

 

88. Ideagen

Research company Gartner says the governance, risk and compliance market was worth around $4.4bn in 2016 and is growing by 13 per cent each year. A good thing, then, that ‘GRC’ represented over 90 per cent of Ideagen’s (IDEA) sales for the half year to October 2017.

The information management software provider has made various acquisitions over the past 18 months or so. In April 2018, it bought healthcare software business Medforce for $8.7m. As Ideagen’s first US acquisition, this should inspire further momentum across the pond. More transactions may follow this year, as the company seeks to grow internationally and improve earnings visibility. Recurring revenues comprised over 60 per cent of sales at last count.

At 116p, the shares trade on a multiple of 28 times FinnCap’s forecast adjusted EPS of 4.2p for the 2018 financial year. Although that's punchy, geographic expansion could sustain growth rates, while intensifying regulatory scrutiny across multiple sectors this year may drive demand for Ideagen’s products. Buy. HC

 

87. Premier Asset Management

Any fear that the US and UK equity markets may be due a more substantive correction than that suffered in February has not dented sentiment towards equity and multi-asset fund manager Premier Asset Management (PAM). In fact, by the end of March it had recorded 20 consecutive quarters of net inflows. That’s buoyed the shares, which have risen more than two-thirds on the listing price set at the end of 2016. Valuation-related concerns aside, the main threat to Premier’s inflows is the impact the Brexit negotiations may have on UK equity markets, given its domestic focus.

However, multi-asset investments – which made up just over half of Premier’s total at the end of September 2017 – remain popular with both institutional and retail investors, particularly in a low interest rate environment. Analysts at Numis forecast EPS growth of around a fifth for this year and next. That’s in addition to a dividend of 10.2p a share for 2018. At 235p, that gives the shares a forecast yield of 4.3 per cent for 2018. Given the income and growth potential on offer, we reckon a forward earnings multiple of 16 is undemanding. Buy. EP

 

86. Andrews Sykes

The relatively small number of shares in free float, just 3.5m of the group’s more than 42m outstanding, means Andrews Sykes (ASY) is an often-overlooked proposition. It provides heating, air conditioning, chillers and boilers, and revenues up 17 per cent and adjusted cash profits up 24 per cent at the last count.

Most of the group’s revenues come from its hire business, although it also offers full sales and installations. Recent growth has come from higher demand across the heating and boiler hire business over the winter.

Investors should be mindful of whether climate conditions are favourable. In the six months to June 2017 – the last figures available – the air conditioning business in the UK and Europe benefited from a warmer-than-expected start to the summer. We could also see a similar pattern for the heating business in light of recent snowy conditions. With no analyst estimates it’s hard to ascribe the shares a meaningful valuation, but at 540p, the group’s price to book ratio is ahead of its history. Hold. TD

 

85. Savannah Petroleum

Investors who regularly scan Aim’s resources sector will have found Savannah Petroleum (SAVP) a confusing stock to follow. In the first half of 2016, its shares were suspended as the company mulled a possible reverse takeover. After returning to trading for a year, the shares were suspended again last June, for the same reason. Second time around, the group has emerged with a massive, and very complex, deal on its hands: the acquisition of two producing onshore oil and gas fields and a midstream business, both in Nigeria.

Now, following a $125m equity placing, Savannah has reached an agreement with Seven Energy – or more specifically Seven Energy’s senior creditors – to take on a group of cash-generative assets that the London-listed company will now use to fund its drilling campaign in the Agadem Rift Basin, south-east Niger. A potential dividend has been mooted. The transaction also comes with big director purchases and a World Bank guarantee for a key gas customer, but we think investors should wait for the dust to settle to get a clearer picture of cash flows. Hold. AN

 

84. Taptica International

In 2004, Mark Zuckerberg founded Facebook from his Harvard University bedroom. Back then, he could hardly have imagined that he would, 14 years later, lead one of the world’s most influential tech giants. Nor that the company would be sitting at the centre of a data privacy scandal – one that has led international governments to invite Mr Zuckerberg for questioning, and raised questions about the concentration of power in the digital advertising industry.

In March, allegations emerged that political data analytics company Cambridge Analytica had used millions of Facebook users’ private information from 2014 to profile US voters. Mr Zuckerberg has since faced two congressional hearings in Washington, and has noted plans to investigate thousands of apps to look for improper usage of data.

What’s this got to do with Taptica (TAP)? Potentially, nothing at all. But it seems more than coincidental that its shares have suffered as the Facebook scandal has developed. As a mobile advertising group whose technology uses big data to enable media-targeting, Taptica counts Facebook as one of the 600-plus advertisers it works with.

Within its 2017 results  – released days after the Cambridge Analytica story broke – Taptica said that the recent press coverage around Facebook did not affect its business model. Seconding that view, analysts at Berenberg said the group does not rely on Facebook for data gathering or user analytics, and that both processes were handled by Taptica internally. Still, we think it’s possible that the ongoing privacy saga could inspire new regulations to prevent a recurrence. Such hypothetical legislation could constrain demand for Taptica’s services, potentially slowing growth.  

Otherwise, Taptica has performed well. Last year’s sales of $211m brought the four-year compound annual growth rate up to an impressive 49 per cent. The company expanded its Asia Pacific presence via its acquisition of a majority stake in Japan-based Adinnovation, a useful beachhead into a key growth market. And it is moving into brand advertising, helped by the purchase of US-based Tremor Video – a business that reached profitability ahead of schedule post-acquisition. Berenberg expects Taptica to employ M&A to both “close technological gaps” and accelerate growth in key markets.

At 308p, the shares trade on just 11 times Berenberg’s forecast EPS. Taptica’s use of machine learning technology and geographic expansion are encouraging, but the market is currently too uncertain for our liking. Hold. HC

 

83. Horizon Discovery

News that Darrin Disley will step down as chief executive officer of gene editing and gene modulation technology group Horizon Discovery (HZD) hasn’t done the share price any favours of late. After 11 years Mr Disley has decided it’s time to pursue “other business opportunities”, leaving Richard Vellacott, chief financial officer, to move into the hot seat on a temporary basis.

Since then, the group told analysts that branding has been refreshed to encompass the broader tools and services it now offers its customers. It also provided further detail over trading in FY2017 with 20 per cent sales growth in products, 7 per cent growth in services and slight growth in company-owned group Dharmacon – all of which trade at high margins. The commercial team headcount has also risen dramatically, which should help the company better serve its clients, particularly as products become more specialised. Results are due in early May, but we remain in the neutral zone until then. Hold. HR

 

82. Staffline

This year started off poorly for recruiter Staffline (STAF) as it failed to hit its target of breaking the £1bn sales mark. The shares fell on the announcement in spite of the 9 per cent growth in sales and 28 per cent growth in pre-tax profit the group had managed to achieve. Since then, the group has announced the acquisition of blue-collar recruiter Endeavour Group, which will bolster its food and agriculture business in the east of England.

The question for investors this year will be whether this is enough. We tipped Staffline back in May 2017 on the basis of its strong performance since Brexit, despite being in a sector that would ostensibly be among the hardest hit. The shares have struggled since then, although the group’s outsourced recruitment ‘Onsite’ network has continued to grow. The Onsites are part of an overarching strategy to improve margins and organic growth in the recruitment division. These have been successful in the past few years (with the exception of 2017, where a rise in the minimum wage hurt margins). 

Staffline’s shares now trade at eight times forecast earnings. That's cheap for the sector, but we want to see gross margin improvements before buying back in. Hold at 992p. TD

 

81. Renew

Engineering services has long been the driving force behind improvements at Renew (RNWH). The group has seen its sales and order book grow consistently in the division in recent years, boosted further by efforts to increase the quality of earnings. As a result, adjusted operating profit was up more than 16 per cent at the last update. The group’s latest trading update, released in April, continued this theme, with management expecting to report an increased forward order book at the half year. Growth in engineering services came predominantly from the infrastructure and environmental sectors.

The group reports its results for the six months to March 2018 in May, and investors will be hoping for news that will push the shares up to where they were at the start of the year. The share price fell 19 per cent at the end of January as the group released its pre-annual meeting trading statement, which warned that some public sector customers were paying more slowly than usual, and announced the retirement of chairman Roy Harrison. The share price continued to fall until management announced the disposal of Forefront in early February.

The sale of that business marked the group’s willingness to cut its losses. It had originally intended Forefront to exit its lossmaking low-pressure small-diameter gas pipe replacement activities, but when by the fifth month of the year the remaining business had shown no signs of improving financial performance, management sold it for a minimal price and took a £9m write-down on its balance sheet.

Looking ahead, the question to answer will be how far the group’s engineering division can grow. It carries a good mix of work across energy, environmental, specialist building and infrastructure projects. This diversification may come in useful in coming years as investment in water infrastructure – in which the group does a lot of work – will likely wind down as the AMP cycle reaches its end and water companies prepare to submit their business plans for the next period. Investors should look for further increases in the order book, whether the group looks likely to slip from its year-end net cash target and whether any progress is being made on margins.

At 383p, shares in Renew now trade at 11 times forecast earnings, well below where they have been trading in recent times. With the disposal of Forefront the group is well positioned to improve its margins and deliver further growth. Buy. TD

 

For the first half of our Aim 100 analysis see below: 

Aim 100 100-91

Aim 100 90-81

Aim 100 80-71

Aim 100 70-61

Aim 100 60-51