100. Mattioli Woods
Like its peers, Mattioli Woods (MTW) has been battling the impact of volatile markets and political uncertainty on fund levels in recent months. Unlike its rivals, the wealth manager achieved net inflows during the closing months of 2018, although they were offset by negative market movements. More than half of Mattioli’s revenue is earned via time-based or fixed fees, rather than according to the level of assets under management, making it more defensively placed than many of its wealth management peers in times of market volatility.
Given market uncertainty, it is unsurprising that management has been focused on operational efficiencies. That strategy helped push the adjusted cash profit margin up to 26.4 per cent during the six months to November 2018, up from 22.9 per cent in the previous year and ahead of a 20 per cent target. The shares trade at 20 times forecast earnings for 2019, based on Shore Capital estimates; a premium to the sector and in line with the three-year historical average. Given ongoing market instability, we do not think that valuation constitutes a buying opportunity. Hold. EP
99. Savannah Petroleum
In last year’s Aim 100 round-up, we suggested anyone interested in Savannah Petroleum (SAVP) should wait for the dust to settle on the group’s complicated purchase of two producing onshore oil and gas fields and a midstream business from struggling Nigerian integrated player Seven Energy. Twelve months on and extra layers of complexity have been added, but the market is still waiting for the deal to close.
The latest update came at the end of March, when Savannah assured shareholders that ministerial consent would be “forthcoming shortly”, meaning completion is now expected this quarter – more than a year late. And while regulatory assent is out of Savannah’s hands, repeated delays have a habit of eroding market faith, no matter how many shares directors agree to purchase.
Still, the prize remains big, however binary it now appears. Should the deal eventually complete, investors have been told to expect a $90m cash inflow and a $12.5m maiden dividend with 2018 results. We’ll believe it all when we see it. Hold. AN
98. Morses Club
The hostile takeover attempt of Provident Financial (PFG) by smaller upstart Non-Standard Finance (NSF) may have grabbed much of investors’ attention in the sub-prime lending sector in recent weeks, but rival Morses Club (MCL) has quietly been making gains via less dramatic means. Since the start of the year the lender has made three acquisitions, with the largest – online non-standard specialist Curo Transatlantic – bringing with it £19m in gross receivables. The purchase is part of a move to diversify Morses’ lending streams, but builds on the group’s existing Dot Dot Loans strategy in terms of loan duration, given the latter has been shifting away from very short-term lending.
As a result, the group’s gross loan book grew by over 7 per cent in the year to 23 February, although most of this was attributable to increases in the core book. Impairments are also trending in the right direction, thanks to a more stringent underwriting approach and an increase in higher quality customers. There is also a generous dividend on offer. Buy. EP
97. Premier Asset Management
For an asset manager with a business mix skewed towards retail investors, Premier Asset Management (PAM) has managed to withstand recent market volatility surprisingly well. Admittedly net inflows were just £3m during the first three months of the year – a fraction of the £175m gained in the same period in 2018 – but it nonetheless marked the group’s 24th consecutive quarter of net new business. That bodes well for 2019, when Brexit-related disruption and fears around slowing global growth could cause further market turmoil.
Part of the reason for Premier’s success has been its focus on multi-asset strategies, which have been popular with ordinary investors seeking income in a low interest rate environment. Naturally, this means Premier faces a continual threat from passively managed funds, which are growing in popularity among retail investors and charge lower fees than active products. But given the business’s momentum, we think the shares’ discount to their two-year historical price/earnings (PE) multiple looks like an opportunity. Buy. EP
96. Taptica International
Taptica International (TAP) is set to become one of the UK’s leading video advertising companies following the acquisition of RhythmOne for £124m earlier this year. The deal will give the combined entity much greater exposure to the US market, where advertisers spent $48bn (£37bn) on programmatic ads last year. Analysts at FinnCap say the group will have impressive capabilities in audience targeting and media reach, with an emphasis on the fast-growing connected TV space. They expect Taptica – as a combined entity – to generate pre-tax profit of $63.4m and earnings per share (EPS) of 44p during the 2019 financial year, compared with $42.7m and 53.9¢ as a standalone business in 2018 (the drop in EPS largely due to an increase in issued shares).
But the integration of RhythmOne will not come without its challenges. Analysts say that concerns persist around brand safety, malicious activity, poor-quality data and a lack of transparency. RhythmOne is a “very complex” business, so Taptica management may have its hands full in the integration process. While this process takes place, we maintain our hold recommendation. JF
95. Sensyne Health
Sensyne Health (SENS) only came to market last summer, but the group has been busy signing a flurry of research agreements with various institutions. Maiden half-year results released at the end of January revealed an agreement with Jefferson Health for “the clinical and economic evaluation” of the group’s GDm-Health’s digital therapeutic product and “generation of curated patient data within a US hospital system”. Sensyne also revealed it had reached conditional agreements for two further NHS Trust Strategic Research Agreements (SRA) with George Eliot NHS Trust and Wye Valley NHS Trust. Both will be issued with £2.5m-worth of Sensyne shares at £1.75 apiece.
That takes the number of SRAs with NHS trusts to six (there were four at the time of the IPO), effectively increasing the patient population covered by those NHS trust partners from roughly 2.5m to approximately 3m. Operating losses prohibit a traditional PE valuation, so we prefer to watch from the sidelines. Hold. HR
94. Impellam
With contraction in the UK education, healthcare and retail markets, 2018 was a self-described “challenging year” for staffing group Impellam (IPEL). These woes look set to continue in 2019 with “continued market and technological disruption and downward pricing pressure”. This is in addition to Brexit-related uncertainties, which could affect candidates’ willingness to switch jobs and businesses having the confidence to invest and hire new staff.
The group is hoping to see returns from strategic investments aimed at countering these headwinds – from geographical diversification to lower reliance on the UK, and technological solutions to exploit the NHS’s shift from agencies towards internal staff banks. However, with Cenkos downgrading its 2019 earnings forecasts by 30 per cent, and not expecting a return to “meaningful growth” until 2020, the investment case is unconvincing.
Despite this, and somewhat worryingly for investors, the group recently decided to undertake a £12m share buyback programme in lieu of a final dividend payment. Management might point to a lowly 8.2 times forward earnings multiple as justification, but we see this as an unwarranted premium to the five-year historical average. Sell. NK
93. Earthport
Earthport (EPO) may not feature in the Aim 100 for much longer. The cross-border payments group is currently the subject of a recommended takeover offer from Visa International Services Association – valuing its shares at 37p each, or £247m in total.
Visa’s original proposal for Earthport, announced last December, was 30p a share – representing a 250 per cent premium to the latter’s six-month weighted average share price. But Mastercard trumped this figure a few weeks later. Visa improved its terms, and Mastercard’s offer subsequently lapsed.
At the time of writing, the Competition and Markets Authority was considering whether Visa’s acquisition could “result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services”. The deadline for its phase one decision has been set at 4 June 2019.
All being well, Earthport shareholders will receive a sizeable pay-out. Some might opt to re-inject that cash into other listed payments companies, while merger and acquisition (M&A) activity in this arena continues to bubble away. Hold. HC
92. Brooks Macdonald
Brooks Macdonald (BRK) is likely to face further market volatility in 2019, but at least it has resolved the legacy issues stemming from 2012’s Spearpoint acquisition. At the end of the 2018 calendar year, 82 per cent of goodwill offers to discretionary portfolio clients had been accepted, with an agreement in principle also reached with the new directors of the Dublin-based fund for which Spearpoint acted as discretionary manager. Overall, a £12m provision still stands.
The wealth manager has been faster to shift towards a discretionary management model than some of its peers, and managed to continue to gain £241m of net inflows during a tumultuous latter half of 2018. Management is also attempting to boost margins via numerous means, including centralising client account opening and reporting. Whether or not that is effective, the shares appear ahead of events, and trade at a premium to peers such as Brewin Dolphin (BRW), which have superior margins. Hold. EP
91. Ceres Power
Whether you agree or not, the fear of climate change is growing. Recent protests in London under the banner ‘Extinction Rebellion’ brought the city to a standstill along many of its busiest routes. As institutions start to tailor their investment strategies in response to growing unease over the effect of hydrocarbon emissions, companies developing means of energy generation that create low or no emissions look like an increasingly viable investment option. This is the underlying argument for Ceres Power (CWR), whose fuel cell technology can be used to power homes, offices and vehicles.
The company has seen rapid growth, with sales doubling annually over the past three years and on track for a fourth, as well as an increasing proportion of revenues coming from customers rather than private and public grants. However, it is still haemorrhaging cash, with annual losses far outstripping revenues. For all the promise its technologies afford, the group has yet to turn a profit. This isn’t expected to change any time soon, either, with broker Investec predicting the group will remain in the red at least until 2021.
It’s a challenge to ascribe a meaningful valuation when the group is still developing its business model, leading to erratic capital allocation, but management says the group should be judged by its partnerships. In recent years it has been pursuing lucrative investment and development tie-ups with companies such as German engineering giant Bosch and Chinese engine manufacturer Weichai, with which it is developing a fuel cell electric bus programme aimed at addressing urban pollution issues in the world’s ascendant superpower. The group’s prospects suffered something of a bloody nose recently when Beijing slashed subsidies for electric vehicles, but the global energy industry’s direction of travel is clear. What’s more, partnership investments and the issue of new equity left the group with £78.4m in net cash at the end of 2018, which management says is sufficient to carry it to cash flow break-even.
More partnerships are expected and the order book – which rocketed tenfold to £30m at the June full year – is expected to continue growing, although at some point those orders will need to translate into earnings. Ceres holds great promise, but developing new technologies is inherently risky despite new licensing arrangements in the pipeline. We wait to see if existing cash resources will prove sufficient to take it through to the cash-flow break-even level. Hold. TD
