40. Watkin Jones
Watkin Jones (WJG) is cashing in on the shortage of purpose-built student accommodation in the UK, and has already forward sold all its student developments for 2018-19 and most for the following academic year. It also benefits from having a capital-light business model, whereby construction is based on a forward funded basis, and on completion it offers a management service for a fee. It is also making headway in the fast-expanding built-to-rent market. This represents a conduit that allows institutional funds to be used to build properties that are then rented out. In return, the institution, such as a pension fund, receives a rental income and any capital appreciation, while Watkin Jones gets paid on a forward funded basis for the construction.
Trading is expected to be in line with expectations for the year to September 2018 but, despite a reassuring update, analysts have not upgraded their forecasts as yet. And with uncertainty over the 30 per cent stake owned by the Watkin Jones family, in the wake of the resignation for personal reasons of chief executive Mark Watkin Jones, at 189p we’re keeping the shares on a hold. JC
39. Frontier Developments
Frontier Developments (FDEV) was one of the top-performing companies on the London markets in 2017. The launch of the group’s second video game, the promise of a third (Jurassic World) and a major investment by Chinese tech giant Tencent sent the share price up more than 300 per cent.
This year, that blue-sky growth is not likely to be repeated as pre-tax profits are expected to be dented by an increase in marketing spend as the group gears up for its next major game launch. Still, when taking the long-term view, Frontier looks in good shape. Jurassic World – which should hit the shelves this summer – is expected to lift revenues to £66m by 2019 (from £37m last year), according to Peel Hunt forecasts, while operating margins will return to normal levels and pull pre-tax profits up. But even on 2019 forecasts an enterprise value to adjusted cash profits ratio of 19 is a bit steep, especially considering the costs of each new game launch and the risks involved. Hold. MB
38. Sound Energy
Sound Energy (SOU) shares several features with Hurricane Energy, the only other pre-revenue oil firm among the top 50 Aim stocks by market capitalisation. One is faith in a point man: as with Hurricane’s Robert Trice, there are many people who have taken Sound chief executive James Parsons at his word, along with his bullish calls on the prospects of a corporate sale in the next two years.
Another is faith in an unproven geological terrain. This year, Sound has “three rolls of the dice” to drill its Tendrara field in Morocco and prove whether the early reading on the seismic data will indeed reveal many trillions of cubic feet of gas in place. A third feature is a lower share price than this time last year. While Hurricane shareholders were diluted in its fundraising, Sound investors were hit by a dry well in the Italian portfolio, now hived off into a new company.
Like Hurricane, Sound is also at a major inflection point, meaning the £164m valuation attached to its intangible exploration assets could well multiply if the Tendrara wells hit the top of their estimates. Given the uncertainties over valuation, we think long-term shareholders should consider taking profits, although conscious of the volatility of energy markets (and the opacity of deal-making) we remain neutral. Hold. AN
37. Learning Technologies
The corporate digital learning market is said to be worth around $90bn-$110bn (£63bn-£77bn), and is growing by at least 10 per cent each year. But, it is also fragmented, and LearningTechnologies (LTG) is successfully taking advantage of this consolidation opportunity. Indeed, on 24 April, the company announced its proposed acquisition of PeopleFluent – a talent management platform and what will be its biggest acquisition to date – for $150m (£107m). This is to be funded via a share placing to raise around £80m, and up to $48m (£35m) in incremental debt financing. LTG says the deal is transformative for its US presence, and would take total group sales to around £135m – a serious uptick on the £52.1m reported for 2017. The acquisition should be “immediately and significantly” earnings enhancing this year if completed by May.
LTG has a strong history of integrating acquisitions. NetDimensions, the learning management platform it acquired last March, made a significant £12.9m contribution to total sales for the year to December 2017. The business is earning its keep in other ways too, having upped the group’s recurring revenue base and added to the diversity of its client roster.
We expect to see more transactions over the coming months; LTG recently became the only Aim-traded company to appoint Goldman Sachs – a bank known for its work in M&A – as joint corporate broker. The shares were marked up on this news in February.
Beyond acquisitive growth, the wave of regulations coming into effect this year may also bode well for LTG’s organic sales momentum, which was 20 per cent last year. Indeed, its Eukleia business has introduced a GDPR e-learning course ahead of the EU’s data privacy rules launching in May. Elsewhere within the portfolio, Preloaded – the segment that delivers “games with purpose” – has produced virtual reality learning experiences in tandem with the Science Museum, and for the Modigliani exhibition at the Tate Modern. At the very least, this division should help to raise the company’s profile going forwards. Earlier this year, it partnered with the BBC and Google to produce the ‘BBC Earth: Life in VR’ experience.
LTG reckons the next significant change for the learning profession will be the ability to track and analyse whether “learning interventions” have had an impact on performance. The group says this should allow businesses and governments to target their resources. Accordingly, it owns a 27.3 per cent stake in a start-up software business called Watershed, which focuses on learning analytics. Something to keep an eye on in future performance updates. Buy. HC
36. EMIS
Providing the software systems to UK healthcare outlets should be big business. Indeed, EMIS (EMIS) has historically enjoyed strong customer loyalty and low capital expenditure, which allows it to generate significant cash and pay a generous dividend.
But in 2017 EMIS fell short of previously high expectations. A failure to properly report GP data back to NHS Digital resulted in a one-off charge of £11.2m, while restructuring and improving its systems will cost a further £3m this year. Of greater impact is the potential reputational damage, especially considering the group’s reliance on NHS Digital’s custom. Still, new(ish) chief executive Andy Thorburn seems to have things under control. His priority is resolving the legacy problems with NHS Digital and readying the group for the new GP systems contracts which will come into effect in 2019. EMIS’s shares currently look cheap compared with their historic levels, but we think that accurately reflects the challenges with the NHS. Hold. MB
35. Johnson Service
Peter Egan is preparing to take the reins as chief executive at Johnson Service Group (JSG), having been made chief operating officer this month in preparation for the role. He will be helped until the end of the year by incumbent Chris Sander, who on recent evidence has left Mr Egan with a business in decent health.
Specifically, the textile, cleaning and care group’s pivot towards higher-margin rental work appears to be paying off. Full-year numbers for 2017 revealed a 21 per cent increase in pre-tax profits and a bullish forward-looking tone from management, which in turn prompted analysts to increase their 2018 estimates. These upward revisions – 2 per cent at the EPS level from Investec – may not have been eye-watering, but should be seen in relation to the group’s strategy to increase its geographic coverage and route density. This requires investment, particularly if management continues its recent track record of acquisition-led growth.
Despite those investments, shares in the group have narrowed to 16 times forecast earnings, below the 2017 highs and behind peer multiples. Buy. TD
34. Highland Gold Mining
Gold, Russia and mining: three high-risk corners of the investment universe, each befitting of the junior market’s sink-or-swim reputation. Highland Gold Mining (HGM) may tick each of these three boxes, but has a steady and diversified growth profile, lower costs than many of its peers and – handily – no sanctions-hit oligarchs on its shareholder register.
That didn’t stop investors selling out of the company in the wake of this month’s fresh US sanctions, whose disparate, scattergun nature stoked fears that any Russia-linked company or individual could be placed in the firing line. What is left, however, is an interesting investment proposition. With a 7 per cent dividend yield, a manageable debt pile and an upgraded portfolio of mines which on Numis’ forecasts should be producing 295,000 ounces of gold equivalent in 2020. Following a drop in the rouble, this year’s all-in sustaining costs could well fall below the $664-an-ounce average in 2017. Further exploration work is needed to boost the reserves, but despite recent progress on this front Highland’s shares trade at an unwarranted discount to book value, or half peers’ rating. Buy. AN
33. Redde
Accident management group Redde (REDD) enjoyed strong sales growth of 11.5 per cent for the six months to December 2017, leading to a 23.4 per cent leap in statutory earnings per share. Such momentum continued in January and February, supporting management’s confidence in the full-year outlook.
Still, we’ll keep an eye on debtor days and cash balances over future reporting periods; these rose and fell respectively at the half-years, driven partly by Redde’s decision to end a protocol arrangement with an unnamed large insurer.
What could bolster trading? In its latest results, Redde noted its participation in successful pilot schemes to help manage and reduce insurers’ indemnity spends. The company is now looking to incorporate these pilots into a “one-stop shop approach” for vehicle incident and accident management services, while doubling down on its legal services offering.
The shares trade on a modest multiple of 14 times JPMorgan’s adjusted forecast EPS for its June year-end. But we’re neutral, awaiting a stronger cash profile. Hold. HC
32. Summit Germany
Back in June, Summit Germany (SMGT) bought a €100m (£86.6m) portfolio of property in the north German city of Wolfsburg, and full-year results to December 2017 were expected to show a marked increase in profits. And the latest estimates from the company suggest that net profits for the year have more than doubled, boosted by a trebling of the valuation uplift.
This and an increase in rental income are responsible for a jump in adjusted net asset value of more than a fifth in 2017. Group finances have also been given a makeover following the successful sale of €300m of seven-year notes, carrying an interest rate of 2 per cent. Around €220m of this has been used to repay existing debt facilities, which charged 3.62 per cent, and this is expected to reduce interest costs by about €3.4m a year.
Trading in Germany is expected to remain relatively robust for a year or two yet, underpinned by a shortage of suitable space in logistics warehousing and offices. This has helped to underpin rents, with both sectors reporting rental increases. However, the retail side is expected to remain relatively moribund as consumers do more and more shopping online, although retail assets comprise just 7 per cent of the total portfolio’s net market value.
Summit continues to recycle capital to help finance further acquisitions and the latest disposal was an office building for €51.4m. The point to note here is that this was a 24 per cent premium to the book value as at September 2017, and underlines the fact that yield compression is still taking place.
Centred primarily around five main cities in Germany, Summit has worked to reduce risk within its portfolio by concentrating on multi-let assets. Not only does this remove the risk of a significant rental loss, as would be the case with losing a large tenant, it also allows greater opportunity to crystallise reversionary value by frequent rent reviews as leases come up for renewal. The portfolio comprises around 920,000 square metres of lettable space, and there is scope for further rental income from the 8.9 per cent that is currently vacant. The shares are up from our buy tip (90.5¢, 7 May 2015) and yet still trade at a discount to adjusted net asset value. Given the strength of the market in Germany, we’re still buyers. JC
31. Central Asia Metals
Up more than 40 places since this list’s last outing, Central Asia Metals (CAML) is reshaped. No longer a high-margin, single-asset copper miner with limited growth potential, the group now has a low-cost zinc-lead mine in Macedonia, a viable exploration programme in Kazakhstan, and $139m of net debt.
Managing the latter presents a novel challenge for the recently re-jigged management team, but the latest results included a roadmap for three years of aggressive repayments. Assuming metal prices stay where they are, CAML should generate enough cash to clear a minimum $100m of borrowings by the end of 2020, thereby all but wiping out interest payments. That could necessitate a refinancing later this year, although limited capital expenditure commitments for Sasa and Kounrad mean there should be more than enough cash for CAML to keep up its impressive track record of distributions. And with group-wide cash costs below 80¢ per pound of copper equivalent, the group is well positioned to maintain its status as one of Aim’s true success stories – a rarity for the junior market’s miners. On broker Peel Hunt’s forecasts, the shares should yield 5.7 per cent this year, and are an income buy. AN
For our completed run-down from 100-1, see below:
