Join our community of smart investors

The Aim 100 2018: 20 to 11

The lowdown on the junior market's top 100 companies. This section: 20 to 11
April 27, 2018

20. Purplebricks

Purplebricks (PURP) has courted controversy and ruffled more than a few feathers in its relatively short time as an Aim-traded company. Its hybrid online estate agency service has grabbed a majority share of the online estate agency market, but its detractors have questioned the number of successful completions and also the vulnerability of the business model to competition.

Yet since flotation in April 2016, the shares have risen by 135 per cent. True, they are down from a peak of 445p in February, not helped by a warning that bad weather, “some UK underlying softness” and staff training will hold back profits for the year to April 2018. However, European media group Axel Springer has invested £125m through the purchase of new shares, and Purplebricks is expanding into the US, following a successful move into Australia. The company will always attract criticism (presumably from those who chose not to buy the shares at 135p), and remains a high-risk investment, but at 317p we’re still keen on its disruptive business model. Buy. JC

 

19. Smart Metering Systems

As the UK government’s pledge to offer all businesses and households a smart meter by 2020 draws closer to the deadline, Smart Metering Systems (SMS) has been working to expand its network as fast as it sustainably can. As of the last update it was managing more than 2m metering and data assets, generating £57m in recurring revenues. However, with roughly 43m yet to be installed, there is plenty of opportunity still on the table.

The question in investors’ minds, however, should be what such opportunities will cost. The last full-year update in March 2018 revealed that the gross margin had contracted by 4 per cent to 51 per cent in 2017. The group has signalled it is looking to run out the clock on the government’s smart meter pledge, extending its £280m credit facility and raising £150m through a share issue. Consensus forecasts have adjusted EPS rising 21 per cent in 2018, but at 34 times forward earnings the shares are priced for perfection. Hold. TD

 

18. Victoria

As is standard practice for Victoria (VCP), its next set of full-year results will present a step-change in the size of the business. Following the recent acquisitions of European ceramics manufacturers Ceramiche Serra in Italy and Keraben Grupo in Spain, some 60 per cent of the flooring group’s sales will be generated outside of the UK.

This diversification also extends to what products are now sold across the group, although the good news, according to analysts, is that the now fully integrated businesses should see a “material step up” in profitability. As ever, management is on the lookout for further big deals and, hot on the heels of last year’s successful £180m fundraising, we wouldn’t be surprised if another purchase was made this calendar year. Earnings, we are told, should also be enhanced by ongoing efforts to improve logistics and find synergies with Ceramiche Serra and Keraben. In the meantime, management has indicated that results for the company’s recently closed financial year will beat expectations, so we’re sticking with our buy recommendation. JF

 

17. Secure Income REIT

Secure Income (SIR) was created by a team of highly experienced property entrepreneurs with a view to providing what it says on the tin – a secure income.

At the outset, this was achieved by setting up a portfolio of very safe investments, namely a string of hospitals run by a subsidiary of Ramsay Healthcare, one of the largest private hospital groups in the world, and leisure attractions run by Merlin Entertainments.

More recently, the portfolio has been bolstered by acquiring a number of Travelodge properties. And most recently the group tapped the demand for what many investors view as a low-risk operation by successfully launching a heavily oversubscribed share placing that raised a gross £315.5m.

Already, these funds have been put to work on two off-market deals costing £436m. And it comes as no surprise that these fit in neatly with the group’s strict investment criteria, which places much emphasis on operating in defensive sectors and preferably with long leases.

In fact, the weighted average unexpired lease term is currently over 22 years, and with no breaks. The acquisitions include Manchester Arena, the UK’s largest indoor entertainment arena, and 76 Travelodge hotels. In addition, it has acquired the former Chiswell Street Brewery, which is the largest catered event space in the City of London.

The quality of the rent roll comes from virtually the entire portfolio being linked to fixed rental uplifts and upwards-only inflation-linked (RPI) reviews. Since its flotation in 2014, the group’s net asset value has more than doubled, and the low-risk income stream and growing dividend has to be set against the paltry returns on offer on so-called safe investments. Treasury bonds with a 30-year maturity offer less than inflation, while inflation-linked bonds actually offer a negative return.

It’s also worth noting that members of the management team are also active investors in the company, and currently have one of the largest management shareholdings in the quoted real estate sector.

Net debt has been reduced significantly, and with a much-increased revenue stream, the dividend payments have risen significantly from the start. The declared payout in 2017 was more than double the previous year and was also fully covered by earnings. Despite the low-risk revenue stream and the fast expanding dividend, the shares trade at just a small premium to net asset value. At 383p, we remain buyers. JC

 

16. James Halstead

James Halstead (JHD) may be on the acquisition trail after it confirmed that it is considering making an offer for Airea (AIEA), another specialist flooring company. Airea has a market capitalisation of around £22m, and James Halstead has a cash pile of £47.5m. In accordance with takeover rules, it now has until 2 May to make a formal offer or announce its intention not to proceed. Trading remains brisk, and there is likely to be more demand for its products as a German competitor has been wound up, and James Halstead has already received a number of enquiries from its customers. The problem of rising polymer prices is also being addressed by using bulk storage for raw materials sourced from Asia where prices are actually lower than from more local European sources. James Halstead likes to point out that since flotation in 1948, the shares have risen by 300,000 per cent excluding dividends. However, a PE ratio of 22 times historic earnings doesn’t look like an attractive entry point. Hold. JC

 

15. Keywords Studios

Keywords Studios’ (KWS) sales reached €151m (£131m) in December 2017, reflecting a huge compound annual growth rate of 75 per cent since 2013. While organic growth was strong at 15.1 per cent last year, the group – which provides services to the video games industry – also benefited from 11 new acquisitions. These included two of Keywords’ largest ever purchases, both of which have laid the foundations for future growth opportunities. Quality assurance provider VMC enhances the company’s functional testing and player support services in North America, while Sperasoft has allowed it to expand into Eastern Europe and develop its engineering and arts offering. Since the year-end, three other businesses have already been bought, all of which add to the group’s audio division. More transactions may well follow, with plenty of balance-sheet firepower to fund more bolt-on deals.

At 1,770p, Keywords’ shares trade on an eye-watering 43 times Numis’s forecast EPS for 2018. But the gaming market looks set to keep growing, with an increasing trend towards developers and publishers buying in technical capabilities. We think Keywords looks well-positioned against this backdrop. Buy. HC

 

14. Blue Prism

Artificial intelligence, robotics and other types of automation could contribute up to $15 trillion (£10 trillion) to global GDP by the year 2030, according to PwC. Such phenomena are already disrupting industries from manufacturing and retail to financial services. For companies, automation brings advantages including greater efficiency and quality control – not to mention the possibility of machines out-competing humans on a cost basis. The latter point has naturally raised concerns about job losses and employment, with McKinsey estimating that between 400m and 800m individuals could be “displaced” by automation by 2030.

In any case, many investors have bought into the promise of automation via Blue Prism (PRSM), which specialises in robotic process automation (RPA). The group’s share price has shot up by over 1,000 per cent since its IPO in March 2016. And as results for the year to October 2017 showed, demand for the company’s software robots, which automate back-office functions in organisations around the world, is only increasing. New software deals rocketed to 609, against just 189 a year earlier, while revenue surged 155 per cent to £24.5m.

Despite this momentum, Blue Prism’s losses widened during the period due to investment in its global expansion. On recent evidence, the company can count on equity markets to fund those plans. To coincide with January’s preliminary numbers, the group announced a £40m share placing to help drive sales and marketing activities. Investors happily obliged, and the fundraising closed within just one hour. Simultaneously, a secondary placing raised £30m for selling shareholders including chief executive Alastair Bathgate.

To its credit, the group has already made progress on one of the objectives outlined in its results: to address global demand for RPA software through expansion into new markets. In March, Blue Prism set up shop in Paris, its fifth new office in less than a year. The market here is potentially huge: according to analysts at HfS research, robotic software and services spending in France is expected to reach $75m this year, and almost $500m across Europe.

For Blue Prism, the challenge will be to prevent shareholders losing faith. Such a scenario could arise if profitability remains a twinkle in the company’s eye, rather than a real possibility – although accelerating sales may be enough to maintain interest. At the time of the last results, Investec forecast revenues of £70.2m for the October 2020 year-end, reflecting a compound annual growth rate of 42 per cent from FY2017. During that period, positive earnings aren’t expected. While we await more news on international growth, and cash burn, hold. HC

 

13. IQE

Advanced semiconductor group IQE (IQE) has trundled along for the best part of a decade without investors taking much notice. Now it is rumoured to be supplying Apple with the facial recognition technology used in the iPhone X, that has changed. The company went from being one of the biggest Aim risers to one of the UK’s most shorted stocks in a matter of months as investors weigh up whether supplying the world’s biggest company with components is a good or bad thing.

On the positive side, the group’s photonics business (where it makes the specialist components that can detect movement) is storming and is expected to contribute the majority of the forecast 7 per cent growth in profits in 2018. But less attractive is the fate that has previously befallen companies that are too reliant on Apple. The photonics market is still in its infancy and the associated risks are too high for a company trading on 35 times forward earnings. Hold. MB

 

12. First Derivatives

More than three-quarters of First Derivatives’ (FDP) sales come from its ‘FinTech’ (financial technology) business, while the rest largely stem from MarTech (marketing technology). These have both enjoyed strong growth, and FinTech should stand to benefit from an intensifying regulatory environment; FD says it is working increasingly with clients to help them meet statutes including Mifid II and GDPR.

The data analytics group has also been busy expanding its flagship ‘Kx’ software into new markets. Indeed, reflecting Kx’s adaptability, FD announced a deal with a FTSE 100 gaming company in February. At the time, it said it would continue to target customers across gaming, retail, airlines and e-commerce to address customer yield, churn and pricing analysis. Watch this space.

At 3,760p, FD trades on a huge 51 times N+1 Singer’s forecast adjusted EPS for FY2019. But we think further progress in new markets, along with general sales and earnings momentum should keep the shares on an upwards trajectory. Buy. HC

 

11. Clinigen

We recently reiterated our buy advice on speciality pharma group Clinigen (CLIN), and by taking stock of the shares’ Aim track record it could be easy to understand why. Since joining Aim in 2012, revenues and adjusted cash profits have more than tripled, while the share price has risen 450 per cent.

A recent blip over at the clinical trials division in first-half results isn’t anything to get too worried about in our view. The segment only accounts for 10 per cent of gross profits, and the much higher-margin commercial medicines division continues to perform strongly. That division accounted for just shy of half of first-half adjusted gross profits following strong demand for all five core medicines.

Crucially, the group’s growth profile has been enhanced by the £144m acquisition of Quantum Pharma last November, and chief executive Shaun Chilton has been swift to overhaul the clinical trials division to deal with its issues. At 929p, we remain buyers. MB

 

For our completed run-down from 100-1, see below:

Aim 100 100-91

Aim 100 90-81

Aim 100 80-71

Aim 100 70-61

Aim 100 60-51

Aim 100: 50-41

Aim 100: 40-31

Aim 100 30-21

Aim 100: 20-11

Aim 100: 10-1