30. Nichols
Geopolitical risk doesn’t jump out as an obvious concern for investors in a company that makes juice and soft drinks. But the civil war in Yemen prevented the delivery of some higher-margin concentrated beverages from Nichols (NICL). Add in cost inflation and investors can see why the gross margin contracted last year by 4.8 percentage points to 45.6 per cent. Tensions in Yemen are ongoing, so investors will be wondering what further impact this could have considering the Middle East represents around 10 per cent of group sales. A more obvious concern for a beverage company is the UK’s sugar tax on soft drinks that recently came into effect. But reformulations have meant that Nichols’ entire UK own portfolio is now under the level of sugar where the levy kicks in. Analysts reckon this could put the company in a more competitive position against peers that will be affected by the tax, or perhaps allow it to push through some price increases of its own. Hold. JF
29. Restore
Document services group Restore (RST) is expected to benefit greatly from the European Union’s general data protection regulation legislation (GDPR), which comes into force next month. The changes raise the bar for data processing and will increase the need for document storage, shredding and scanning – essentially Restore’s raison d’être.
At the same time, the group is set to continue with its acquisition-based growth strategy. Recently, it has almost doubled its available debt financing, after taking on £30m in additional borrowing facilities and £20m in committed funds. You can see why: TNT Business Solutions, the group’s most recent acquisition, prompted upgrades to analyst forecasts. Broker Cenkos now expects adjusted profit and EPS figures for 2018 to grow by 27 per cent and 19 per cent, respectively, year on year. The key question for investors will be whether continued M&A activity will affect the group’s ability to improve its return on capital employed figures while keeping net debt under control. The shares trade at 21 times forecast earnings, a discount to peers. Buy. TD
28. Accesso Technology
Accesso Technology (ACSO) says that long queues are the “single greatest dissatisfaction metric” for theme park goers. A good thing, then, that the ticketing and queuing software provider saw its Prism product – an in-park wearable device – installed in the world’s first 100 per cent “queueless” water park last year. Accesso believes this type of work could redefine its industry; a theme to watch.
Growth was very strong in 2017, with ticket volumes exceeding 100m for the first time. This helped to lift revenues by 30.1 per cent to $133m (£93m), taking compound annual revenue growth over seven years to 23.9 per cent. Such momentum is encouraging, but expectations are consequently high for future periods – reflected by an eye-watering PE ratio of 44 for 2018, based on a share price of 2,250p and Numis’s forecast EPS of 73.8¢. With acquisition-related charges taking pre-tax profits lower last year, Accesso will need to maintain – or improve – its growth rate to keep investors happy. Hold. HC
27. GB Group
The EU’s new data privacy rules come into effect this May. And the pressure to guard personal data has arguably only become more intense since allegations emerged last month that Cambridge Analytica may have used people’s private Facebook information.
As an identity data intelligence specialist, GB (GBG) must ensure it abides by GDPR. Reassuringly, it is “very active” in its preparations for the statute. Assuming GB gets this right, we reckon it should gain from helping customers to comply effectively too.
For now, we can expect a strong full-year performance to March 2018. A recent trading update revealed 37 per cent sales growth to around £120m – 17 per cent of which was organic – with adjusted operating profit up 53 per cent to £26m.
At 480p, GB’s shares look more expensive than their recent history. But broker Peel Hunt forecasts revenues of £133m for the 2019 financial year, implying a compound annual growth rate of 23 per cent from FY2017; momentum enough for us. Buy. HC
26. Hurricane Energy
As analysts at Cantor Fitzgerald recently noted, the hydrocarbons sitting under Hurricane Energy’s (HUR) licences equate to as much as a quarter of the UK continental shelf’s recoverable resources. Of course, ‘recoverable’ does not mean ‘profitable’ – or even that these barrels will be recovered. But what Cantor’s estimate highlights is the scale of Hurricane’s potential, and the curious disconnect with its market valuation. Indeed, it is the latter point that dominates industry chatter when it comes to Hurricane, which is hoping to pioneer the successful drilling of a fractured basement reservoir in UK waters with its Lancaster early production system (EPS). With first oil a year away, the countdown has begun.
To Cantor, the scepticism surrounding the company is overdone. Hurricane’s ability to make money from its asset base – which if the EPS works should generate annual operating cash flows of $152m at $50 Brent – should be assumed, not doubted. The perception that the reservoir play will stutter (or worse) “has been largely debunked by the successful well tests to date, given the basement wells demonstrating world-class productivity indices”, say the analysts.
But Hurricane cannot rest on others’ past successes in Indonesia and Vietnam, nor the apparent disinclination of supermajors and large independents to farm-in to its acreage on the cheap. That explains the move to prove the concept through the (fully-funded) EPS, which should generate lots of newsflow before the floating production storage and offloading (FPSO) vessel arrives in the North Sea in the second half of 2018. As project milestones are reached, and assuming the oil price holds above $60, it would not be a surprise to see Hurricane’s shares move well above analysts’ core risked net asset valuations.
However, the proof won’t come until next year, when we can expect either chief executive Robert Trice or the broader industry to be on the end of a few ‘I told you so’ missives. To many, the geology is untested and very risky. But if Lancaster ramps up as smoothly as Premier Oil’s Catcher field, Hurricane’s valuation is likely to catapult the company towards the top of next year’s Aim 100. That’s assuming a leap to the main market isn’t made before then, thereby answering the questions apparently raised by former chairman Robert Arnott, who quit in protest over corporate governance standards last year.
For now, we are happy to sit in the cautious camp, especially with so many heavily discounted UK oil and gas stocks for sector investors to choose from. Hold. AN
25. Gamma Communications
The days of landline telecommunication systems in offices are coming to an end. Instead, we’re increasingly using the internet to make corporate calls and access our documents from home via the cloud. That is why online telecommunications is a fast-growing marketplace. Gamma Communications (GAMA) managed to outpace the wider market growth in 2017 as its SIP Trunking and Cloud PBX products saw a 33 per cent and 44 per cent increase in their respective customer bases.
The problem now is maintaining that pace of growth. Roughly half of the addressable market uses the internet for its telecommunications and management at Gamma thinks converting the other half will be tough. Still, brokers expect the group to gain further market share, which is why adjusted cash profits are expected to rise by more than 10 per cent both this year and next. But with the market dynamics marginally less attractive than previous years, we think a forward price/earnings ratio of 27 times looks fair. Hold. MB
24. Advanced Medical Solutions
The US now represents Advanced Medical Solutions’ (AMS) largest market, and sales grew by a whopping 47 per cent there in 2017, helping the group put its failed US distribution agreement in 2012 firmly in the rear-view mirror. Sales of adhesive product Liquiband have done well across the pond, and the company is busy getting its hernia mesh product approved to sell in that market. It’s also signed an original equipment manufacturer (OEM) deal with a local US woundcare business.
Unfortunately, it seems trading in Europe is a little trickier. Weaker demand across a number of the group’s partners has inevitably led to slower sales for AMS, even on an underlying basis if royalty income is excluded. This doesn’t make the shares’ lofty price/earnings valuation of around 30 times forward earnings expectations look very justified, particularly if trading conditions in Europe worsen in the near term. Royalty revenues aren’t helping cash flows either, so we’re inclined to remain neutral until the broader picture improves. Hold. HR
23. CVS
The veterinary group’s long-term buy-and-build strategy has clearly started to grate with some CVS (CVS) investors. The shares are down 15 per cent over the past 12 months, not helped by news of a discounted 5.6m share placing at 1,075p apiece.
Although some have labelled the group’s strategy as ambitious – specifically its plans to invest £40m in acquisitions over the next six months – its track record should hopefully speak for itself. At the half-year stage, sales were up by a fifth thanks to the contribution from new deals, but even excluding these the organic growth rate still hit a credible 5.6 per cent. True, associated costs took a bite out of operating profits, but cash profits were substantially higher.
From our vantage point, CVS isstill positioning itself to take advantage of a fragmented market – a market still forecast to grow at a highly attractive rate. The shares aren’t cheap on a forecast PE ratio of 21, but we’re still excited by the consolidation opportunity. Buy. HR
22. Young & Co.
The acquisition of Smiths of Smithfields in London had analysts upgrading their forecasts for Young & Co (YNGA) at the half-year results in November last year. We agree that this purchase looks like a sensible addition to a portfolio of premium pubs. It is this premium positioning that should continue to keep the pub group well insulated from challenges across the sector, just as it has done in recent results.
It’s no secret that costs have crept up for pubs over the past year, from an increase in the minimum wage and business rates to inflation. While this has led to falling like-for-like sales and margin contractions at some other listed pub groups, Young’s has remained resilient on both fronts. It has also managed to increase sales across its drinks, food and hotel offerings, while others have found it difficult to operate outside of a drinks-led format. Indeed, it’s even continued to push higher-margin products, with cocktails, rosé wine and craft beers becoming more popular. We don’t see any signs of Young’s success waning anytime soon and the shares don’t look overly expensive. Buy. JF
21. Scapa
Shares in adhesive-based industrial and healthcare products specialist Scapa (SCPA) have fallen sharply recently despite an in-line trading update. A fatal accident at one of its production facilities won’t have helped, but the drop in price is otherwise hard to explain.
Trading for the year to March 2018 is expected to show that cash profits were ahead by over 15 per cent, with both the core industrial division and healthcare segment showing steady growth. Margins are expected to be slightly lower in the latter, but a restructuring in Asia and full integration of adhesive specialist Markel Industries will lift margins on the industrial side.
Both divisions throw off a lot of cash, so net debt is nominal at just £3.8m. Following the recent fall to 424p, the shares are now trading on 22 times forecast earnings for the year to March 2019, so while revenue growth looks solid enough the share price looks up with events. Hold. JC
For our completed run-down from 100-1, see below:
