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The Aim 100 2019: 90 to 81

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

90. Jadestone Energy

Jadestone Energy (JSE) vaults into this year’s rankings courtesy of last August’s $110m placing and secondary offering, which helped the Canadian independent secure the $195m purchase of the Montara project, offshore Australia.

The addition of Montara – whose fields at last count held 28.2m barrels of proven and probable oil reserves – has lifted daily production to more than 15,000 barrels of oil per day (bopd). It’s a relatively mature asset, but management plans to double output by 2024 through further infill drilling, exploration activities, and by connecting Montara’s infrastructure to the “multiple oil and gas discoveries and previously suspended fields” in neighbouring blocks.

Last November, analysts at BMO Capital Markets forecast that the group’s balance sheet cash would exceed its market capitalisation – which stood at £161m at the time – within three years. That requires free cash flow yields to range between 30 and 50 per cent a year, which requires a lot of catalysts to come good. Hold. AN

 

89. Staffline

Following concerns regarding “invoice and payroll practices” within the recruitment division, shares in Staffline (STAF) plummeted by 33 per cent at the end of January before being suspended. Trading resumed on 12 March, but questions over historical compliance with national minimum wage regulations led the group to provide for a further £3.5m in additional costs. Analysts at Liberum believe the long-term attractions of the business will outweigh the short-term damage.

The group is hoping new contract wins, including £104.6m over four years to provide prison education, will help offset declining profitability in the PeoplePlus division as it transitions from employability to skills and training. But with exceptional costs of £20m relating to its exit from government work programme contracts, net debt now stands as £63m.

Management is targeting underlying EPS of 200p by 2022. With the shares currently trading at 7.2 times forward earnings, this is below their two-year historical average. Investors would do well to exercise patience and await the delayed full-year results. Hold. NK

 

88. Creo Medical

Creo Medical (CREO) joined Aim in December 2016, but the shares have taken some time to find their footing. The group is a specialist in the surgical endoscopy market, and is focused on developing a range of products based on its CROMA electrosurgery platform. The precise capabilities of the platform can be used in a range of electrosurgical applications where controlled bleeding and/or the ablation of tissue is required. 

The size of the global endoscopic devices market is estimated to be approximately $3bn-$3.5bn, while the global laparoscopic devices market is estimated to be worth approximately $8bn. But the group is arguably using too much of its resources in the pursuit of developing new products and technologies. Last year, net cash outflow from operating activities more than doubled to £14.3m, and although the group ended the year with £44.6m in cash, that followed a £48.5m share placing in August – not to mention the £20m raised at the time of the IPO. Hold. HR

 

87. Horizon Discovery

Since last September, Horizon Discovery (HZD) shares have suffered a sharp de-rating. That might have something to do with a sluggish legacy business – something we highlighted in our analysis of the half-year results last autumn. In fact, it was the company’s acquisition of cell-line specialist Dharmacon that helped offset much of the top-line erosion, although the purchase did take a bite out of margins as lower-margin research products now account for a greater proportion of the sales mix.

That could be about to change. Full-year results this week confirmed what the company said in a pre-close trading update in January. Gross margins widened from 62 per cent to over 67 per cent thanks to changes in the product mix, while the company’s underlying cash profits moved into positive territory as the improved margin combined with higher sales and better cost management. And the company hit its £25m target for cash balances thanks to a focus on working capital management, which will underpin this year’s investment in automation and e-commerce and drive further revenue growth. Hold. HR  

 

86. Andrews Sykes

Focusing on pumping equipment and specialist climate control products, Andrews Sykes (ASY) derives the bulk of its revenue from the hire of its assets, mainly on short-term leases. The group continues to safeguard future profitability, spending up to £4m on hire fleet assets in the half-year period to June 2018 and expanding into non-weather niche markets in the specialist hire division.

Despite investment in “non-seasonal products”, most of the business is still reliant on favourable weather conditions. Half-year results indicated good opportunities for the heating and boiler business arising from the winter and sustained demand for air conditioning products in Europe throughout the summer. The group is “cautiously optimistic” regarding immediate prospects, but remains mindful of “the favourable or adverse impact that the weather can have”. With the majority of shares held privately (only 4.2m out of more than 42.2m are in free float) and no analyst coverage, Andrews Sykes remains a difficult proposition to accurately value. At 615p, the group’s price-to-book ratio is slightly ahead of its history. Hold. NK

 

85. Manx Telecom

Manx Telecom (MANX) has found itself at the centre of M&A activity. It has announced that it will buy B2B IT services company Synapse 360, but has yet to disclose how much it is paying for it. Management reasons that Synapse, which offers virtual IT infrastructure services and cloud-based solutions, would fit well alongside its more traditional telecommunications business, data centre operations and network-oriented services. 

Separately, Manx is also the target of a takeover bid itself. In March it was revealed that Basalt Infrastructure Partners would buy the company for £256m, valuing the company at 215p a share, after accounting for a 7.9p half-year dividend. At the time of the announcement chief executive Gary Lamb said that Basalt supports Manx’s growth ambitions. But Peel Hunt analysts argued that the 30.5 per cent premium to Manx’s share price at the time was too low and ignored the potential for growth in the Vannin Ventures business. Regardless, the company is set to de-list from Aim once the takeover is complete. Hold at 214p. JF

 

84. Joules

This year is shaping up to be another difficult year for UK retail. But there are companies better placed to outperform the general doom and gloom. One such example is clothing chain Joules (JOUL), which only joined the London market three years ago.

At the half-year stage, revenues rose by nearly 18 per cent to £113m, with retail sales up 10 per cent on an underlying basis when adjusted for the transition of two wholesale accounts into retail concessions. E-commerce sales also did particularly well, and now account for more than 46 per cent of all retail sales.

This higher proportion of web-based sales is having a dilutive effect on gross margins. But digital sales also carry a higher operating margin thanks to fewer physical overheads such as rent and staff costs. At the time of the results, chief financial officer Marc Dench said the benefit of higher e-commerce sales should be evident at the operating level this time next year.

Half-year results didn’t include the all-important festive trading period, but Joules emerged as one of only a handful of winners over Christmas. In contrast to many other high-street retailers, Joules was able to grow sales by nearly 12 per cent over the seven weeks ended 6 January 2019.

It’s safe to say that Joules’ mix of physical stores, online growth and wholesale operation appears to be working – after all, the shares have appreciated by around 80 per cent since their 2016 160p IPO price. But one issue retailers with physical stores now face is the introduction of IFRS 16 – a new accounting standard that will force companies to take operating leases onto their balance sheets. Joules will apply the new rules for the first time in its FY2020 accounts, but according to analysis conducted by broker Liberum, if the standard had been applied to FY2018 numbers, cash profits would have been £11m higher, while pre-tax profits would have been £0.4m lower. The right-of-use asset and corresponding liability on the balance sheet would have totalled £58m, with no impact on cash flow.

Some might argue that IFRS 16 is merely a presentational change, but it will help shed light on how bloated – or not – some retailers’ store estates are. There can be little doubt that shopkeepers must exercise caution when it comes to new openings in light of declining footfall trends and shaky consumer confidence. Buy. HR

 

83. Numis Corporation

Numis (NUM) has spent recent years shifting its income stream towards corporate advisory work, in part to reduce its exposure to the wax and wane of primary and secondary fundraising activity. But that did not prevent the brokerage from warning that revenue for the six months to March is expected to be down 26 per cent on the same time a year ago. Corporate broking and advisory revenue has so far proved to be more resilient, and was expected to come in flat on the second half of last year. 

Indeed, Numis’s network continues to grow, with corporate client numbers rising from 202 to 210 in the year to September 2018, boosting recurring revenue from retainer fees by 7 per cent to £12.4m. Given the uncertain market backdrop, it is unsurprising that the shares have fallen heavily during the past 12 months, yet still trade at a slight premium to their three-year historical average on a PE basis. Hold. EP 

 

82. Alpha Financial Markets Consulting

Providing specialist consultancy services to the asset and wealth management industry, Alpha Financial Markets Consulting (AFM) has worked with 17 of the 20 largest global asset managers. Since joining Aim in October 2017, the group has boosted its fee-generating consultant headcount to 352, serving an expanded client list of 252.

Although the US and Asia are considered the areas for future opportunity, a 34.5 per cent revenue increase in the UK, the “most mature” region, at the half-year stage demonstrates the growth potential across operating regions. Continuing to invest in geographical and service area expansion, the group recently opened its 10th office, located in Zurich, and launched its 12th practice area, exchange traded funds and indexing (continued on page viii).

Alpha has a somewhat elevated forecast price/earnings to growth (PEG) ratio of 1.4 times. But with a rising level of assets under management, increasing cost pressures and ongoing regulatory changes, global demand for consulting services in the asset management industry is set to continue growing. Buy. NK

 

81. Accesso Technology

Accesso Technology (ACSO), an exponent of ‘leisuretech’ for the entertainment and hospitality industries, has had a curious time of late. Its full-year results included $1.7m (£1.3m) in one-off costs owing to the abandonment of a “well-advanced” acquisition opportunity – it’s currently in the process of reviewing its investment objectives. 

Accesso is most famous for its work with theme parks and has contracts with leading industry players such as Six Flags (US:SIX), Universal Parks & Resorts and Merlin Entertainments (MERL), showing that the big dogs are keen to adopt its innovations, which, amongst other things, allow visitors to queue virtually for rides. Meanwhile, recent acquisitions, and deals with Google and Groupon, will hopefully take Accesso into new markets such as healthcare. 

Accesso is alive to the need to diversify away from theme parks, even though it estimates its current addressable market opportunity at $3.4bn. Bolt-on acquisitions have driven its growth, with LoQueue, its virtual queuing product, being its only organically-grown offering. Peel Hunt analysts expect a pause in M&A while Accesso replatforms. We want more detail on how Accesso, which has arguably thrived in creating its own markets, fares in new sectors before upgrading. Hold. AJ

 

 

Aim 100: Part 1

Aim 100: 100-91

Aim 100: 90-81

Aim 100: 80-71

Aim 100: 70-61

Aim 100: 60-51