30. Watkin Jones
Watkin Jones (WJG) continues to be in the right place at the right time, focusing on two sectors of the property and housing market that are largely immune to the political and economic uncertainties generated by the Brexit farce. The business model centres on purpose-built student accommodation, which is attracting increased interest from institutional investors, and forward-funded build-to-rent apartments, another asset class that is proving to be highly attractive for investors seeking low-risk investment opportunities. Most recently, it secured a forward sale of a 599-student-bed accommodation to global investor DWS, scheduled for delivery ahead of the 2021-22 academic year, as well as a 245-bed scheme in Swansea. In all, there is a secured development pipeline covering 7,500 beds across 17 sites, of which 5,334 have been forward sold. On the build-to-rent side, it has three sites comprising 415 apartments with planning consent and a further 800 going through the planning process. This is on top of 315 apartments under development for M&G Real Estate and a 300-apartment scheme for a Singapore based consortium. With net cash on the balance sheet and a decent dividend, the shares remain a buy. JC
29. IQE
Softness in the smartphone market, disruption to its semiconductor laser diodes (VCSEL) supply chain and a substantial inventory correction summarised a dismal 2018 for semiconductor group IQE (IQE). A patent dispute is ongoing, in which IQE is the defendant, and is scheduled for hearing in September 2019. We downgraded our rating to sell in March, owing to the business’s exposure to weak markets and the short-term headwinds expected by management in relation to the unwinding of inventory levels in the VCSEL supply chain.
Smartphone sales are in decline – presumed IQE customer Apple recently announced a 17 per cent revenue drop in iPhone sales across its second quarter, reflecting a global fall in smartphone volumes. Benefits related to the 5G roll-out are expected to manifest more towards 2020. IQE recently expanded its wireless capacity in Taiwan, although wireless revenues, which were 62 per cent of its 2018 revenues, are expected to decline 15 per cent over 2019. Sell. AJ
28. Draper Esprit
Esoteric Draper Esprit (GROW) stands apart from fellow listed venture capital groups such as Allied Minds (ALM) and IP (IPO) by backing both established and early-stage companies along a 70:30 split. Holdings range from review site Trustpilot to cryptocurrency security specialist Ledger.
The group seems to have an eye for a good deal, with the fair value of its portfolio rising by a fifth during the six months to September 2018, and in line with management’s annualised target. One of the most accurate ways of assessing the value of a venture capital group’s holdings is the price it receives upon the disposal of its investments and, encouragingly, the sale of the group’s holding in snack-box manufacturer Graze generated a 19 per cent internal rate of return. The shares are trading broadly in line with Numis’s forecast NAV for the 2019 year-end, but given the group’s track record of generating impressive portfolio growth, we think the shares could still be too cheap. Buy. EP
27. Nichols
Political unrest in the Middle East is not often something one must consider when weighing the investment opportunity in UK-listed beverage companies. For Nichols (NICL), this has proved to be a difficult region due to the timing of shipments to Aujan and the challenges with supply to the Republic of Yemen. Sales to the Middle East fell by a quarter during 2018, which meant that group sales growth was broadly flat.
Nichols isn’t banking on such a volatile region to drive growth in the future. Instead it reckons that its longstanding Vimto brand and drinks on the go will be the key areas for growth. It recently bought Adrian Mecklenburgh Limited, an out-of-home soft drinks dispenser distributor covering the Kent region, to further this aim. Analysts at Numis believe this deal, along with a new seven-year agreement to supply Cineworld with frozen beverages, “should underpin future growth”. Still, these analysts downgraded Nichols from a buy to a hold at the last set of results due in part to “relatively low EPS growth”. At 1,650p, or 22 times forward earnings, we agree. Hold. JF
26. Smart Metering Systems
The UK government wants energy suppliers to ensure all of their domestic and small business customers own smart meters by the end of 2020. Smart Metering Systems’ (SMS) management thinks this target is overly ambitious, but it’s nevertheless spending to capitalise on this opportunity. Its net debt almost quadrupled to £142m over 2018, equivalent to 2.75 times adjusted cash profits. SMS has also reduced the expected lifespan of a conventional meter from 20 years to five years. This made up the largest reduction in carrying values for the year. The company recognised £12.6m in exceptional losses on its meter portfolio, including a £5.6m impairment charge linked to the industry’s transition.
Annualised recurring revenues are SMS’s primary choice of key performance indicator. As of 1 April 2019, these had lifted to around £80m, as its smart meter portfolio grew to 932,000 smart meters. The group begins 2019 with a healthy order book, and it is showing encouraging signs of growth, but with uncertainty over the feasibility of this smart meter rollout, we hold. AJ
25. Highland Gold Mining
Russia-focused precious metals miner Highland Gold Mining (HGM) has been generous in its most recent shareholder payout, announcing a dividend far above its usual policy of 20 per cent net cash. As the miner needs to push more of its cash into building the 172,000-ounce-a-year, $229m (£175m) Kekura gold mine, this largesse should come to an end.
But that expansion work should at least trigger future earnings growth, while an upcoming reserve upgrade and a signal from the Russian government on Far East tax breaks should help out the project’s strong feasibility study numbers even further.
In the meantime, Highland has a high-end production forecast for this year of 300,000 ounces of gold, 11 per cent above the 2018 figure, at impressively low costs. The risks remain the jurisdiction and operating standards – the first three months of 2019 saw the deaths of three workers, including two from gas poisoning. Shareholders can prepare for headlines, as well, with Chelsea FC-owner Roman Abramovich holding 10 per cent. Buy. AH
24. Young & Co’s Brewery
The most recent Coffer Peach Tracker spelled good news for the dining out industry, with total sales growth of 6.1 per cent in March, driven by a 4.2 per cent increase in restaurant sales and a 7.2 per cent improvement for pubs. This bodes well for Young & Co’s Brewery (YNGA), whose estate consists of both food and drink-focused pubs. But this represents a weak comparator, as it’s set against the heavy snowfall that deterred punters in 2018. A tougher comparative period lies ahead of the pub sector, which was boosted by the World Cup and sunshine.
The pubco is going into the summer season well prepared, though, with a premium estate that should keep it insulated from any fluctuations in consumer spending. But it’s not without challenges. The pub sector has faced a series of added costs, from rising business rates to a higher national living wage. The resulting squeeze on margins is expected to continue through the second half of the current financial year, but stabilise after that. At 1,612p, or 23 times forward earnings, we think Young’s premium rating is justified by its premium estate. Buy. JF
23. Advanced Medical Solutions
Advanced Medical Solutions (AMS) is being swept along by growth in the broader polymeric adhesives market. The Cheshire-based group specialises in the production of wound-care products and surgical dressings – a fragmented market, ripe for consolidation (at least in the UK), but one that is increasingly at the mercy of regulators. So AMC is being forced to contend with a tightening approval and recertification regime, along with significantly increased demands for evidence on established commercial products. The enhanced regulatory strictures – particularly via the European Union (EU) – have added to industry costs, but have also had the effect of shaking some smaller players out of the market.
The group, partly on the back of bolt-on acquisitions, saw its own-brand revenues increase by 13 per cent through 2018, along with a 2 per cent increase in market share. It has delivered annual earnings growth of 14.4 per cent since 2014, throws off cash, exited last year with net cash of £76.4m and with no borrowings in tow. This well-run outfit continues to benefit from strong market support, but we don’t believe an adjusted forward PE ratio of 32 is extravagant given AMS is now well positioned to benefit from wider industry trends. Buy. MR
22. EMIS
Emis (EMIS) has been one of the standout performers within the Aim 100 over the past five years, delivering an annual return of14.7 on a total return basis, against 8.6 per cent for the index. Indeed, Emis’s shareholders have received a total shareholder return of 35 per cent over the past year. Impressive, but not surprising given the group is engaged in one of the fastest-growing areas within the global healthcare market. Emis provides digital technology that clinicians rely on to manage patients. This encompasses the provision of software, maintenance and support services, including hardware installation, hosting services and training.
Estimates on the global Healthcare IT Market by corporate research specialist MarketsandMarkets point to a compound annual growth rate (CAGR) of 15.8 per cent through to 2024, by which time the global market should be worth in the region of $391bn. This reflects increased government mandates and the rising use of ‘big data’ in healthcare IT solutions, as administrations across the globe scramble to curtails the costs associated with one of the biggest draws on the public purse.
If public health authorities such as the NHS can shave a percentage point or two off administration costs, that translates into massive savings. Consequently, there’s limited resistance on pricing from end-users, so it’s a predictably high-margin affair. Over the medium term, Emis is expecting mid-to-high single-digit revenue growth, moving towards an even split of revenue derived from its NHS and enterprise sectors, and operating margins increasing towards 30 per cent. To this end, the group has been hiving off non-core assets. At the beginning of April, management completed the disposal of the specialist and care division to Northgate Public Services (UK), the leading UK public sector software and services provider.
Emis is nevertheless a relative minnow in a market dominated by multibillion dollar US providers such as Cognizant Technology Solutions (US:CTSH), but that enhances its growth prospects in relative terms, while leaving it open to the attentions of potential suitors (a prospect periodically raised on bulletin boards). Potential bids aside, the immediate focus for management is on ensuring the group secures its place on the £450m GP IT Futures framework (a replacement for the expired GP Systems of Choice framework), and on growing the private sector enterprise side of its business. The shares are bang in line with a selection of historical trading metrics. Hold. MR
21. GlobalData
Delivering data and analytics, GlobalData’s (DATA) mission is to help its clients “decode the future”. By creating content once and leveraging sales across multiple formats and geographies, revenue is generated from a largely fixed cost base. Annual subscription contracts account for around 75 per cent of revenue, paid upfront and deferred over the year. Invoiced forward revenue of £81.4m in 2018 (a 34 per cent increase) therefore gives good visibility for the forthcoming year.
Acquisitions are the main driver of growth – a “transformational year” saw three smaller purchases alongside “strategically important” Research Views Limited, which has provided exposure to new sectors and broadened existing coverage. Net debt did increase to £64.1m while amortisation of acquired intangible assets contributed to a widened statutory pre-tax loss of £7.7m (from £0.8m) in 2018. However, with the adjusted cash profits margin remaining resilient, Berenberg predicts the group will meet its medium-term 25 per cent target in 2019. Currently trading at 27 times forward earnings, we prefer to monitor this one from the sidelines. Hold. NK
