Join our community of smart investors

The Aim 100 2019: 80 to 71

The Aim market has become more respectable than ever
May 2, 2019

80. Benchmark Holdings

The UK’s Brexit deadline may have been significantly delayed, but that hasn’t stopped companies such as Benchmark Holdings (BMK) from taking mitigating actions to protect its – and its customers’ – best interests. At the time of full-year results in January, chief executive Malcolm Pye told us he was confident the animal health and nutrition group could withstand any near-term shocks: “Around 70 to 80 per cent of our business is outside of Europe,” he said. “But, like any sane person, we’re not supportive of a no-deal, or even a hard Brexit.” 

Even though those numbers were largely what investors expected to see, a slower start to the new financial year caught some shareholders off-guard, prompting a share price fall on the day. A volatile shrimp market had caused softer demand across the advanced nutrition business, although Mr Pye believes the division will recover in the second half, while the genetics business should help make up some of the shortfall. We’re keeping the faith. Buy. HR

 

79. WANdisco

Live data specialist and former IC buy tip WANdisco (WAND) is shifting towards a subscription-based business with annual recurring cloud revenues – away from “large, difficult-to-forecast on-premises transactions”.

Encouragingly, the group – whose flagship ‘Fusion’ product replicates data, aiding real-time collaboration and disaster recovery – works with some of the biggest names in technology. It has original-equipment-manufacturer relationships with IBM (US:IBM) and Alibaba (US:BABA), and “go-to-market” partnerships with giants including Amazon Web Services (US:AMZN) and Microsoft (US:MSFT).

But sales fell by 13 per cent to $17m in 2018, and adjusted cash losses widened from $0.6m to $9.4m – attributed to the cloud transition and strategic investments. House broker WH Ireland had expected losses of $3.9m. Still, analysts here note that the group had previously relied on large, one-off Fusion contracts – which were “conspicuous by their absence in FY2018” – and that it now has “a broader base from which to grow a stronger business”.

Revenues were up considerably in the first quarter of 2019, with cash underpinned by a Valentine’s Day fundraising. The suggestion of improving future visibility is encouraging, but while the shares sit far below levels seen last summer, we retain our neutral view. Hold. HC

 

78. Boku

Boku (BOKU) expects 2019 to be a record year in terms of revenues, cash profits, investment in new products and ongoing cash generation. It has guided towards sales of “at least” market consensus of $52m, and adjusted cash profit growth of45-50 per cent.

The direct carrier billing group – which floated in 2017 – hopes to achieve this from an elevated base. Payment volumes more than doubled in 2018. Revenues escalated by nearly a half to $35.3m, and – after costs edged up “modestly” – Boku reported its first positive full-year adjusted cash profits.

But it hasn’t been plain sailing for the former IC buy tip. Its shares plunged last December on the news of its acquisition of mobile-identity specialist Dana. This is expected to be earnings dilutive this year, with earnings improving in FY2020 and accretion thereafter.

Peel Hunt notes that Boku’s identity platform is “starting to see traction with new customers” and its current offering to payment companies “will make for an interesting opportunity with Apple”, given the arrival of Apple Card. A triple-digit forward PE for 2019 (not unknown in the sector) keeps us monitoring from the sidelines. Hold. HC

 

77. Alpha FX

As a provider of currency hedging services to corporates and institutions, Alpha FX (AFX) is one of the few companies that stands to benefit from further geopolitical tumult this year. The group has been increasing its sales headcount and investing in new technology to expand its business internationally, which included opening a new office in Toronto last October. That expansion helped boost customer numbers by 55 per cent in 2018, although associated costs have weighed on operating margins, which fell seven percentage points to  43 per cent on an underlying basis.  

Now management is focusing on institutions, following last year’s launch of a new division dedicated to servicing bigger clients. If they are met, consensus forecasts for earnings of 23.7p a share for 2019 would cap a remarkable run, equivalent to three-year compound annual growth of 21 per cent. However, this momentum hasn’t gone unnoticed by the market, and the current trading multiple looks too steep to us. Hold. EP 

 

76. Focusrite

Founded in 1985 by Rupert Neve, Focusrite (TUNE) designs and markets audio products such as audio interfaces, microphone preamps, proprietary software and recording consoles. It’s by no means unique in the broader industry in which it operates, but rare enough in the listed sphere. Strong European demand fed through into record sales in the first half of the financial year ending 31 August 2019, while cash conversion has also remained positive. 

Aside from the technical expertise and support that Focusrite offers its clients – essentially an intangible barrier to entry – it’s clear that the company is prioritising effective working capital management. So, year-end net cash was on the rise despite substantial inventory build to meet escalating demand. That’s reassuring given that sales volumes in the audio interface market are predicted to expand rapidly over the next decade. For now, profit growth is expected to be subdued over the coming year, at least compared with a five-year average growth rate of 19 per cent. Nevertheless, we’re still buying into the long-term growth potential. Buy. MR

 

75. dotdigital

Marketing and automation: two specialisms that spring to mind when one considers those areas most likely to have been affected by the EU’s new data privacy rules. And, in truth, marketing automation group dotdigital (DOTD) saw some European customers lengthen their purchasing cycles in the run-up to the introduction of the new general data protection regulations (GDPR) last May, as they reassessed their customer data obligations. But the company is ostensibly working its way through to the other side of the regulation. While organic sales growth in the UK came in at just 7 per cent for the half-year to December 2018, broker Panmure Gordon cites a “GDPR hangover”. It expects momentum here to “re-accelerate” in the second half.

Cloud communications business Comapi – acquired in 2017 – has been knocked by a challenging retail environment. But it has also helped dotdigital to expand its offering from email to omnichannel engagement. The group’s geographically diversified, growing revenues mean we’re not too concerned by a pricey forward PE of 26 times for FY2019. Buy. HC

 

74. Impax Asset Management

Increased awareness of environmental, social and governance (ESG) issues within the public psyche, highly valued equity markets and concerns about global growth are driving new business for Impax Asset Management (IPX). Client appetite proved more resilient than many mainstream asset managers in the face of last year’s market volatility, with the ESG specialist gaining £540m in net inflows during the final quarter of the year, just slightly down on the £672m attracted during the same period in 2017.  

The majority of inflows come via clients in North America and Europe, but following last year’s acquisition of Pax World Management – which brought £3.5bn in assets – the former looks like the bigger market opportunity.

The shares have outperformed Aim-listed peers including Premier Asset Management (PAM) during the past year, and now trade at around 18 times consensus forecast earnings for 2019, a slight premium to a three-year average multiple of 16. However, with growing demand from institutional investors and pension funds, we think that is justified. Buy. EP

 

73. Mortgage Advice Bureau

A slowing UK housing market means Mortgage Advice Bureau (MAB1) entered 2019 in a precarious position. The mortgage broking specialist warned in March that ongoing Brexit-related uncertainty would result in “muted” trading and flat revenues for its estate agency-based adviser representatives in 2019.

Adviser representatives pausing expansion plans and dawdling on empty vacancies is also expected to impact “marginally” on the growth rate this year, before an expected return to normal levels in 2020. Boosting representatives is the main way the group gains market share, though a 12 per cent increase in representative numbers in 2019 only resulted in an increase in its market share of new lending from 4.3 to 4.7 per cent.

What’s more, gross profit margins have been contracting as lower house purchase mortgages have caused a jump in product transfers and a drop in protection sales. Any further slowing of the housing market could erode margins further, the threat of which offsets a high-yielding dividend. Hold. EP

 

72. Eland Oil & Gas

Since its inception, Aim has been a hotspot for early-stage, capital-hungry resource companies based in risky parts of the world. But in recent years it’s fair to say that investor appetite for one particularly ravenous sector – oil and gas exploration – has shrunk. That might reflect the sense that the era of $100-a-barrel crudeis over, that ever-increasing oil demand is no longer a given, and that US shale is now an effective and elastic swing supplier. Or perhaps investors are simply tired of the gap between promise and reality that has long clouded the reputation of small independents.

One by-product of this subtle change has been a greater focus on the junior market’s cash-generating, self-funding producers. Eland Oil & Gas (ELA) neatly fits in that category, even if its shares show little sign of a premium. And while the first years following its 2012 listing were marred by stuttering production and security issues, the Nigeria-focused group has been on a steady rebound ever since markets bottomed in 2016.

That turnaround crystallised last year, when Eland’s production entitlement from the OML 40 field more than doubled, operating costs more than halved, reserves were replaced at a greater speed than pumped, and the balance sheet stayed broadly unleveraged despite a near-fourfold rise in capital expenditure to $146m.

There’s little sign of a deceleration. This year, backed by an expanded reserves-based lending facility, Eland has told investors to expect capital expenditure of $80m-$90m and for production to rocket to 14,000 to 17,000 barrels per day net to Eland, once production from the Gbetiokun and Ubima fields is factored in.

And as long as the group is in receipt of all free cash flow from Elcrest – the joint venture in which Eland holds a 45 per cent stake, and which in turn owns 45 per cent of OML 40 – then shareholder returns will be on the agenda. A share buyback programme was recently extended, and investors have been told to expect a maiden dividend equivalent to a yield of 2 to 2.5 per cent for 2019.

However, Eland’s longer-term free cash flow yield is less clear. On 30 April, Elcrest’s ‘Pioneer’ tax status came to an end, meaning it no longer has relief from Nigeria’s steep petroleum profits tax. The accrual of $83.6m-worth of deferred credits means Eland “does not anticipate cash taxes will be payable in the near term”, although Panmure Gordon cautions that cash taxes will “begin to kick in next decade”. Increasingly averse to oil and gas growth stories, we remain neutral. Hold. AN

 

71. Eco Animal Health

Eco Animal Health’s (ECO) flagship product – an antibiotic called Aivlosin – contains the antibiotic tylvalosin, and is absorbed into target tissues to treat respiratory and enteric diseases in both pigs and poultry.

On the release of half-year numbers in December, Aivlosin accounted for nearly three-quarters of total sales, and contributed strongly to cash profit growth. Unfortunately, an outbreak of African Swine Fever in China and the threat of potential trade wars overshadowed this progress, forcing the shares down on results day.  But a timely currency exchange rate boost meant pre-tax profits still grew comfortably, while decent cash generation made room for a special dividend worth 3.5p a share.

As for the second half, management says trading has started well, with a strong order book, which broker Peel Hunt estimates to be 10 per cent fuller year on year. The market backdrop remains “tough”, however, leading us to view the shares’ 18 times forward earnings price tag as reflective of any near-term outperformance. Hold. HR

 

 

Aim 100: Part 1

Aim 100: 100-91

Aim 100: 90-81

Aim 100: 80-71

Aim 100: 70-61

Aim 100: 60-51