50. Faroe Petroleum
On 4 April, just hours after Faroe Petroleum (FPM) announced discoveries at its Iris and Hades prospects, there was a change in the company’s shareholder register. Exit Delek Group – acquirer of Ithaca Energy, the highest-ranking oil producer on last year’s Aim 100 – and enter DNO, an Oslo-headquartered driller that shares interests in two of Faroe’s North Sea exploration fields.
Within a day, following a further reverse book-building process and other on-market share purchases – all at 125p – DNO’s stake had climbed to 27.7 per cent. Despite this, DNO said it had no intention of bidding for the company, and is now apparently barred from an acquisition attempt for six months. But with Faroe soon set to declare its Fogelberg field commercial, and following the profitable sale of a stake in the Fenja development, should investors feel bullish?
Possibly not. Instead of a cash offer, Colin Smith of Panmure Gordon believes DNO might instead “seek to use its equity position to exert pressure on Faroe” in ways potentially more favourable to itself than other shareholders. With fewer near-term catalysts ahead (other than higher oil prices), we suspect the shares could plateau from here. Hold. AN
49. YouGov
Making money from personal data has become a risky business in the wake of the recent Facebook scandal. Should there be any tightening in regulation, it is likely that companies will find it harder to make money from information gleaned from the internet. YouGov (YOU) is not only prepared for any changes, but welcomes them. It is upfront in its use of personal data and diligent in the protection of its contributors. Meanwhile, its regular questionnaires have allowed the company to build up a huge backlog of valuable data.
Use of this data by consumer-facing companies is big business, particularly now it is becoming increasingly important in marketing or branding exercises to target specific populations. YouGov now makes half of its revenues from its data services and has reduced its reliance on its lower-margin custom research work. With demand so high and YouGov well suited to the changes in data protection laws, pre-tax profits are expected to grow nearly 40 per cent over the next two years, which justifies the 28 times PE ratio. Buy. MB
48. MP Evans
Palm oil companies can be a contentious topic among more environmentally-minded investors, but MP Evans (MPE) looks like a good buy from a cash flow perspective. The sole focus is now on own-produced palm oil after the cattle business was sold off in 2016 and a joint venture terminated last year. To that end, it bought a 10,000 hectare project in East Kalimantan and is on the hunt for another similar purchase. Management is aiming to ultimately own 70,000 hectares, up from around 50,000 now. Investors in the business should, as ever, keep an eye on the price of palm oil; the end of a poor weather pattern has meant that production has surged, which could push down the price, although a bad soybean crop, a competitor oil, could offset this. Analysts have forecast that output could increase as much as 150 per cent over the next seven years, which would drive a “substantial” increase in profits and cash flow. Buy. JF
47. SafeCharge International
Patient investors were rewarded for investing in Safecharge International (SCH) in 2017 after the group’s long-promised investment in building out its book of ‘tier one’ customers – large companies for which it builds custom payment platforms – began to pay off, leading to revenue growth of 7 per cent. The group has been diversifying its customer base across industries to reduce regulatory risk. While transaction volumes and values have continued to rise, the move to lower-risk sectors has hit the group’s margins and analysts don’t expect the free cash flow yield to start rising until 2019. However, cash flow conversion has continued to rise and the group’s dividend payment has remained as generous as ever.
With the cash pile stripped out, shares in Safecharge trade at 13 times forecast earnings, which is significantly below the multiple seen in recent years. With plenty of cash for acquisitions and rapid growth in transaction volumes, it still looks like a buying opportunity to us. Buy. TD
46. Midwich
Midwich (MIDW) offers a range of services or ‘solutions’ that centre primarily on audio-visual facilities covering conferences, video walls, webcasting, as well as audio systems for the medical profession. This is an industry that is driven by innovation and advances in technology, and it is vital to be able to apply these advances by working closely with clients, and being able to offer a package of services tailored to their needs. Midwich appears to be up with events here, and its business model is easily exported, sensibly by acquiring local operators in countries such as Spain and Benelux. And while most people would like to see England progress past the preliminary stages of the 2018 FIFA World Cup later this year in Russia (assuming the team still goes), Midwich has a special desire to see the team do well because it has joined up with television manufacturer Cello to take advantage of increased demand for big-screen televisions in pubs and clubs and anywhere else for that matter. However, at 504p, the shares have tumbled by a fifth since the start of the year, and remain at best a hold. JC
45. Polar Capital
Polar Capital (POLR) is finally back in favour with investors. After reporting three years of net redemptions, the active asset manager reached an inflection point in the final three months of 2016. Since then, flows have remained positive. In fact, during the first three months of 2018, it gained £525m in net inflows, taking the total for the March year-end to £1.9bn. That’s equivalent to 21 per cent of assets under management at the start of the period.
Crucially, the performance of Polar’s funds has also been improving. At the end of March, 62 per cent of its assets in its Ucits funds were in the top quartile of performance over one year, measured against the Lipper-ranked peer group. That’s up from 56 per cent half-way through its financial year. Those funds represent more than three-quarters of total assets under management. What’s more, recently appointed chief executive Gavin Rochussen said around 82 per cent of assets under management performed ahead of their respective benchmarks. That was despite adverse UK and US equity market conditions at the start of 2018. If this solid performance continues into the current financial year, it bodes well for an uptick in performance fees.
One of the main reasons for a recovery in Polar’s performance has been improved sentiment towards Japanese equities. That strategy may have suffered £82m in net outflows in the six months to September 2017, but that’s down from a hefty £352m during the preceding half-year. Management reckons the rate of redemptions for that strategy will decline further, amid rising interest in Tokyo-listed stocks. Added to this are Mr Rochussen’s efforts to further diversify the business by client type, geography and fund strategy, although Polar recently closed its emerging market strategy, which suffered £9m in net outflows in the six months to September. In its place, the asset manager has launched a fund targeting companies benefiting from the rise of automation and artificial intelligence.
Despite the fund manager’s recent progress, risks remain. Around 17 per cent of funds are invested in North American strategies, which makes Polar vulnerable to a correction in US equity markets, as seen in February. In fact, adverse market conditions took a £252m chunk out of funds during the first three months of the year, offset by fund performance. There’s also the growing popularity of passive investment, although Polar’s current outperformance may insulate it for now. Analysts at Shore Capital forecast EPS of 34.2p for the year to March 2019, which at 516p means the shares trade at around 15 times forward earnings. That’s a slight premium to its two-year average and we reckon it prices in the improvement in flows. Hold. EP
44. Eddie Stobart Logistics
Eddie Stobart Logistics (ESL) has made some strategic acquisitions since it demerged from Stobart Group (STOB) a year ago in its April IPO. Of its three purchases – Speedy Freight, Logistic People and iForce – it’s the latter that will most significantly shape the company going forward. It’s already transformed Eddie Stobart into one of the big players in the consumer logistics space and more than doubled sales in this division to £130m in the year to November 2017. Management said iForce “ticked all the boxes” in terms of acquisition criteria, and is now on the lookout for further acquisitions that could be similarly beneficial.
The company is also looking to expand its presence in Europe by extending its relationships with its UK clients that also have operations on the continent, including Amazon and Coca-Cola. Around £89m-worth of new contracts were signed last year, and analysts don’t think that recent contract wins have been fairly reflected in the share price yet. Neither do we. Buy. JF
43. Mulberry
Luxury stocks are doing well in a buoyant environment. So this prompts us to ask why Mulberry’s (MUL) shares are down so steeply since the start of the year. It’s especially baffling given the brand’s recent association with soon-to-be royal bride Meghan Markle, who has been photographed toting several styles from the label over the past year or so. It’s also done well to capitalise on demand for luxury goods in Asia, setting up a dedicated subsidiary operation to handle business across the region.
Could it be that investors are growing weary of Mulberry shares’ eye-watering valuation – 59 times forecast earnings according to Bloomberg – particularly when the company seems to rely heavily on one product category (bags) and a singular vision (English heritage)? It’s certainly not an accessible entry point for private investors, and the company’s track record hardly speaks for itself: a misunderstood pricing strategy managed to decimate sales only a few years back. For our money, there are better picks in this sector, so we remain neutral at 680p. Hold. HR
42. Applegreen
Applegreen (APGN) certainly isn’t the only Irish company in London, but it does stand alone in terms of being the only publicly listed petrol forecourt retailer. The company continues to go from strength to strength too, after several international deals expanded its operations outside of its native country and into the UK and US. It’s this slew of new work that helped the group add 99 sites to its portfolio last year and propel pre-tax profits up by a fifth.
There’s more of this strategy to come. Post year-end the group has already added another 11 sites to its estate, although analysts believe that the associated working capital commitments look well-funded thanks to a £41m fundraising last September. The group is also hoping to capitalise on strong underlying growth in food and store sales – something that has been intrinsically linked to a robust economic backdrop thus far. All this potential doesn’t come cheap at 23 times forward earnings, but we still think the shares are worth shelling out for. Buy. HR
41. Craneware
Recent global economic figures revealed that the US spends twice as much on healthcare per individual than the UK, but life expectancy is significantly lower. It’s a sure sign that something needs to be done to increase efficiency in the sector. Enter Craneware (CRW), whose healthcare support software has been in high demand over the past 12 months. As a result, analysts at Peel Hunt expect 10 per cent compound annual growth in revenues between 2017 and 2020.
Market share continues to grow as current users become advocates for Craneware’s systems, while the stickiness of existing customers means recurring revenues make up more than 85 per cent of the top line. But quality of earnings and growth come at a cost, and an enterprise value to adjusted cash profits ratio of 21 (following a 50 per cent share price rise in the past 12 months) means the shares are currently a tad expensive for new buyers. Hold. MB
For our completed run-down from 100-1, see below:
