70. Camellia
When looking for an example of a diversified business model, one might look towards Camellia (CAM), which has agriculture, engineering and food service operations. The idea is that trouble in one can be offset by the performance from the others. And trouble may be brewing in the agriculture division, as exceptionally high volumes have suppressed auction prices in some key markets, prompting analysts at Panmure Gordon to downgrade pre-tax profit forecasts by 36 per cent to around £23m based on “lower margin” assumptions.
This may be concerning, considering that the agriculture business is where the bulk of group profits are generated. Encouragingly, the UK engineering business reduced its trading losses to £0.6m after it divested three of its businesses and bought Black Gold Oil Tools during the year. Camellia also has a healthy balance sheet, with around £110m of net cash to help it withstand any shocks. Still, with agriculture generating around 80 per cent of revenues, we’re wary of weakness to come in tea. Hold. JF
69. Serica Energy
Before November 2017, Serica Energy (SQZ) was a minor player in the North Sea. Its most important assets were a small stake in Chevron’s Erskine field, and the Columbus gas development. That all changed with the acquisition of BP’s holdings in the ageing Bruce, Keith and Rhum (BKR) fields, which within a year had ballooned to include the stakes owned by BHP, Total and Marubeni. In one transaction, Serica’s production had soared 15-fold to more than 30,000 barrels of oil equivalent per day (bopd).
Last month provided the first clear snapshot of the impact on cash flows, when the group reported its full-year results. Though the terms of the BKR deal mean a significant portion of its earnings are directed to BP et al, Serica’s net cash balances leapt 67 per cent to $92m in the first quarter of 2019, providing “an indication of the cash generating capability of our assets”, to quote the group. That may be true for now, but investors should ask how much added value the company can add to the BKR fields – which on WH Ireland’s estimates are worth 84p a share. Hold. AN
68. Renew
Engineering services (energy, environmental and infrastructure) remains the driver of growth at Renew (RNWH). The division generates over 95 per cent of operating profit, and its order book strengthened by £72m in 2018.
Future momentum hinges on securing the long-term frameworks that underpin revenue, particularly as investment cycles conclude. Having already renewed several ‘CP6’ frameworks and supplemented by the acquisition of specialist rail contractor QTS, the group is well positioned to capitalise on Network Rail’s £48bn spending plan for 2019 to 2024, a 17 per cent increase on the previous control period.
The group concentrates on existing infrastructure rather than large capital projects. With the UK’s critical infrastructure networks needing continued investment, there are long-term growth prospects in current addressable markets such as 4/5G networks, and new target markets such as highways maintenance. Focusing on non-discretionary UK infrastructure markets provides relative shelter from Brexit-related uncertainties. The group has signalled half-year trading is ahead of 2018, “in line with forecasts”. With half-year results due on 21 May, hold for now. NK
67. Strix
The next time you’re brewing up a cuppa, there’s a decent chance that you’re out of harm’s way due to Strix (KETL), a global leader in the manufacture and design of kettle safety controls – a tech segment that probably doesn’t have the same allure as artificial intelligence (AI) or gene therapy. But there are a lot of kettles out there, and the Isle of Man-based group had a 38 per cent share of global sales by volume in 2018, and accounts for three out of every five controls sold in regulated western markets. An outlier is North America, where Strix recorded a double-digit volume increase in 2018, but has a penetration rate of just 13 per cent – that represents a huge opportunity. There’s an income case on offer, too, backed by free cash flow of £26.1m, and a pay rate covered twice by adjusted EPS of 14.9p. Those earnings aren’t set to grow during the current financial year, as its separate water filtration business – Aqua Optima – is set to draw in increased capital, although the dividend isn’t likely to be constrained given the healthy cash flows. The shares are one of Simon Thompson’s favoured options. Buy. MR
66. Gooch & Housego
Our November decision to downgrade Gooch & Housego (GHH) has been vindicated over the ensuing five months. At the time, the photonics technology specialist warned of a softening in demand growth for critical components in microelectronic manufacturing. It has since confirmed our fears of a downturn, felt particularly in China. The cyclical nature of microelectronics, coupled with the Sino-US tariff war, have hurt Gooch & Housego.
But there’s better news in other parts of the business. Gooch has witnessed strong demand for fibre-optic products and undersea high reliability fibre couplers (these fared poorly over the first half of last year, before recovering). The group anticipates a “multi-year growth phase” for the latter segment, and has invested in adding capacity accordingly. Management expects the first benefits of this growth to be felt in its second half this year.
We’re also waiting to see whether Gooch’s aerospace and defence (A&D) division can take off in the near future. A rise in goodwill impairments in A&D forced down full-year statutory profits in November. But over half of Gooch’s record £96m order book for the year is made up of A&D and life sciences orders, according to house broker Investec. And in acquiring Gould Fiber Optics in September, Gooch has new inroads into the US A&D market for its fibre products. Life sciences also received a recent boost in March, when Gooch signed a five-year deal with liver transportation and perfusion specialist OrganOx. The Oxford-based spinout from Oxford University is collaborating with Gooch in the manufacture of ‘metra’, a medical device that allows livers for transplant to be stored and transported at body temperature.
All in all then, Gooch is in perfect hold territory – priced in line with its recent history, vulnerable to external pressures, but innovating and growing in niche markets. At its full-year results, FinnCap analysts introduced ‘prudent’ 2020 forecasts based on sales growth of 3.4 per cent and cash profit margins of 16 per cent, which delivers 5 per cent earnings per share growth. There are rumours that a US-China trade deal is near, which will hopefully bring some sanity to a disruptive economic backdrop and improve Gooch’s prospects in the Far East. So for now we continue to hold. AJ
65. Randall & Quilter
Maintaining its appetite for acquiring legacy portfolios that are no longer underwriting new business, Randall & Quilter (RQIH) had little trouble in raising around £107m through a share placing and open offer in March. And less than a month after the fundraising, it received regulatory approval from the Central Bank of Ireland to complete the acquisition of the entire issued share capital of Western Captive Insurance from its owner, Coffey Group.
This and other recent acquisitions will be brought into its existing business model, thereby generating greater operational efficiency. It has also announced that its Florida-based Accredited Surety and Casualty subsidiary has secured a programme partnership with Pronto General Insurance Agency to act as underwriter.
Premium income is likely to get a significant boost from these acquisitions, the pipeline for which appears to know no end. With a decent dividend yield on offer, the shares retain their attraction. Buy. JC
64. Atalaya Mining
Since 2017, Atalaya Mining (ATYM) has had a neat proposition. With the Riotinto mine revived and once again profitable, management set out a vision to expand its capacity and repeat the resurrection trick with the Proyecto Touro in Galicia. With the help of shareholders and a resurgent copper price, the Spanish resources group has so far delivered. Last year, the group juggled these dual mandates with a 13 per cent boost in copper production and a drop in all-in sustaining costs at Riotinto. By the end of this year, daily output should be 20 per cent higher again, and could climb to 63,000 tonnes a year by 2021, according to Peel Hunt.
That would represent a 50 per cent increase in three years, and could be buttressed by secondary sales from Touro, if regulators say yes. The question of how this will be financed might help explain a Reuters report last October that Atalaya is looking for a buyer. Whether its relatively high-cost operations will appeal remains to be seen, although with copper prices at close to $3 a pound, the market backdrop is supportive. Buy. AN
63. Ideagen
Based on data from research house Gartner, the ‘integrated risk management’ (IRM) market is calculated to have been worth around $5bn globally in 2017, and is estimated to be growing at 13 per cent each year. That’s excellent news for Ideagen (IDEA), which provides IRM software and services to highly regulated industries. The group notes that its customers are “increasingly required to take a holistic view of risk management, internal audit and compliance”. Over 4,700 companies use its products, including seven out of the top 10 UK accounting firms and three-quarters of the world’s major pharma organisations.
Adding to its plus points, Ideagen’s visibility over future reporting periods should continue to improve as it shifts towards a subscription licence model. It now expects to generate 74 per cent of its revenues from recurring contracts by the end of 2020 – up from a previous target of 70 per cent. And signalling progress already made on this strategy, recurring revenues for the half-year to October 2018 grew by 30 per cent to £14m – representing 67 per cent of total sales, up from 63 per cent a year earlier. Like-for-like software-as-a-service (SaaS) bookings – referring to new sales contracts won – were up 80 per cent to £6.6m.
True, pro-forma organic sales growth of 8 per cent represented a decline from 13 per cent. But acquisitions are bolstering Ideagen’s strength in its product markets, while adding to its geographical diversity. In last year’s edition of the Aim 100, we noted its purchase of healthcare software business Medforce in April 2018. Later that year – in September – it bought Morgan Kai and InspectionXpert. These have, respectively, doubled the size of the group’s audit management business and quality inspection business, while also extending its reach in the US. It also bought Scannell in January of this year, enhancing its presence in the environmental, health, safety and quality market.
It seems feasible that we’ll see further, targeted M&A activity in the months ahead. As of October, it had net debt of £1.3m after spending £24.3m on acquisitions, and raising net proceeds of £19.4m via a share placing. It has a revolving credit facility of up to £16m.
House broker FinnCap notes that Ideagen’s “overseas diversification of risk, and acknowledgement of the genuinely global opportunity, presents further confidence in growth opportunities, product quality and applicability, and the investment case”. We remain positive, although are mindful of the shares’ lofty forward PE of around 30 times for FY2019. Buy. HC
62. AB Dynamics
If some journalists are to be believed, society is minutes from being overrun by a swarm of electrified, networked self-driving cars, probably owned by Uber. Automotive testing specialist AB Dynamics (ABDP), which designs some of the driver assistance systems that could make this happen, disagrees.
At its recent half-year results, AB said that “we anticipate an extended time period for the incremental implementation of advanced driver assistance systems (ADAS) on conventional vehicles than is currently being reported and an extension to autonomy implementation periods”. Draft regulation laid down by the United Nations Economic Commission for Europe (UNECE) and signed by 40 countries led by Japan and the European Union (EU) mandates the installation of assisted emergency braking and other ADAS in all new cars, from 2022 onwards. But the US, China and India aren’t on the list of signatories.
AB chief executive Dr James Routh thinks the mainstream adoption of autonomous vehicles is “probably 15 to 20 years away”. There are still technological complexities to overcome, while questions surrounding second-order issues such as insurance and ethics are yet to be convincingly answered. AB’s driving simulators will help to answer some of these, and will also improve the standard of automotive testing in 2019. Human test drivers are different to each other and are fallible; they are variables themselves. But AB claims that its simulators provide better feedback to testers and a more realistic portrayal of the driving experience. It recently delivered its second simulator to Kempten University in Germany, following a first order to a customer in China.
The shares have risen steadily over the years. They currently trade at a significant premium to the industrials and technology sector, at a 2020 calendar full-year forward PE of around 30 according to analysts, compared with the sector, which sits on a multiple of around 17.With the company’s cautious tone, and a weaker second half on the horizon, we’re inclined to take the profits. Sell. AJ
61. Codemasters
First impressions matter, and after Codemasters (CDM) floated in June last year, the video game group’s first half-year results were marred somewhat by unfortunate timing. Sales figures are mainly dependent on launches, and with only two games released in the six months to September 2018 – versus three in the comparable period – sales dropped by a fifth.
But since then the group has revealed plenty of good news. In January it announced its second partnership with Chinese game publisher NetEase, prompting house broker Liberum to up its profits forecasts for 2019 by a tenth. Then, in early April a year-end trading statement revealed cash and profits ahead of expectations.
Codemasters is starting to build up some momentum. Whether it can keep this going will depend on its ability to capitalise on the growing trend towards digital channels – which represented 53.4 per cent of revenues at the half-year – as well as its ability to build a diversified portfolio of racing titles. Buy. TD
