40. YouGov
Analysts at Numis reckon that data and analytics company YouGov (YOU) is on track to meet its five-year target of a 25 per cent compound annual growth rate by the end of the 2019 financial year. The company used the half-year results in early April as an opportunity to unveil “stretching” new targets that are meant to keep pace with building a “strong business”. By 2023 YouGov is aiming to double revenues, double its adjusted pre-tax operating margin, and achieve a compound annual growth rate of more than 30 per cent for its adjusted EPS. Management’s pay is dependent on these objectives, which is reassuring for investors.
YouGov also decided to start including the amortisation of intangible assets within its adjusted earnings metric from the end of the 2019 financial year. This seems sensible, as its operations are increasingly data- and tech-centric. As a result, some analysts adjusted their forecasts to give a forward price/earnings (PE) ratio of more than 40 times. This looks like an expensive entry point. Hold. JF
39. Midwich
Although the majority of its revenue currently comes from the UK and Ireland, specialist audio visual (AV) distributor Midwich (MIDW) has international ambitions. Operating in a global AV market valued at over £100bn, recent acquisitions represent solid platforms for future expansion. An 80 per cent stake in market-leading Prase Engineering SpA has brought exposure to Italy, the sixth-largest European AV market, while the acquisition of Blonde Robot has strengthened the group’s foothold in Asia-Pacific, the largest AV market in the world.
Berenberg expects technical products (audio, broadcast, lighting, LED and video) to be a significant area of upside in the coming years. Representing 26.4 per cent of group revenue, sales of these products increased by 54.7 per cent in 2018. With higher than average gross margins, they should enable the group to build on more than 10 consecutive years of improved gross profit margin. At 19.6 times forward earnings, Midwich’s shares are trading slightly below their two-year historical average. Buy. NK
38. Scapa
We can expect record revenues and trading profits from Scapa’s (SCPA) full-year results later in May, according to a year-end trading update from the adhesive products business. The shares have been in recovery mode since investors took fright at the warning of a “challenging macro environment” at the end of the first half. This malaise drove down industrial revenues by 4.6 per cent for the 2019 financial year, with the automotive and European cable markets particularly vulnerable.
However, there was better news in healthcare, where revenues have grown 22.1 per cent on a constant basis. Scapa’s acquisition of Systagenix, a specialist in wound management, has performed ahead of revenue and profit expectations. Management says acquiring Systagenix’s research and development (R&D) and manufacturing capabilities has been transformative. House broker Berenberg suggests that Systagenix’s long-term revenues of £200m, versus £30m today, aren’t out of the question. Things are looking good in healthcare, but with uncertainty hovering over Scapa’s industrial division, we remain neutral for now. Hold. AJ
37. Learning Technologies
Learning Technologies (LTG) notes that the global corporate training market is estimated to be worth around $365bn. Within this, the outsourced digital learning arena is said to be growing at around10 per cent every year. The talent market is estimated to be worth over $6bn, expanding at around 9 per cent each year. A good thing, then, that Learning Technologies broadened its reach beyond corporate e-learning last April with its $150m acquisition of talent management platform PeopleFluent – and more recently via its purchase of Breezy HR for up to $30m.
It’s highly possible that we’ll see further acquisitions from Learning Technologies in the coming months. But large-scale transactions could, potentially, require it to tap the market. It raised gross proceeds of £85m to finance the PeopleFluent deal.
In any case, management remains confident about achieving its revenue and operating profit targets by the end of 2021. It is aiming for run-rate figures of £200m and £55m, respectively. Admittedly, the shares now sit well below last September’s highs – but this could represent an (albeit speculative) entry point. Buy. HC
36. Polar Capital
During the past three years, Polar Capital (POLR) has made strides in diversifying its strategies away from four original core areas – Japan, technology, Europe and healthcare – to 12 investment teams. That has helped arrest what had been heavy redemptions, with the asset manager reporting net inflows of £1.9bn during the 12 months to March 2018 and £932m during the first half of the current financial year.
However, Polar Capital was not immune to the market volatility suffered by its peers during the last quarter of 2018, and recorded £286m in net outflows. The good news is that asset levels seem to be recovering (or at least not getting worse), as net outflows came in at £90m during the first quarter of 2019.
Following a strong first half, analysts at Numis estimate a jump in EPS of more than a third this year. That bodes well for the generous dividend, which was increased for the first time in four years in 2018. Numis estimates a dividend per share of 33p for FY2019, which would leave the shares yielding around 5.6 per cent. Buy. EP
35. Johnson Service
Textile rental and cleaning specialist Johnson Service (JSG) follows a three-part growth strategy – targeted investment in current sites, development of new capacity according to market opportunities and expanded geographical coverage through acquisitions.
Capital investment (improving productivity and processing capacity) saw organic growth accelerate to 7.8 per cent in 2018. A planned high-volume linen plant in Leeds is aimed at driving further organic growth in HORECA (hotels, restaurants and catering) from 2020. It will not only provide additional capacity for the northern England business, but will also improve efficiencies in areas such as trunking. Strengthening its presence in the West Country, the acquisition of Cornwall-based South West Laundry will allow the consolidation of customer distribution and free up capacity in the Dorset business.
Hovering around its 52-week high, Johnson Service is trading at 15 times forward earnings, in line with its two-year historical average. With Investec conservatively forecasting total revenue growth of 5.2 per cent and RBC Capital Markets seeing “no near-term slowdown to this growth story”, we remain buyers. NK
34. Summit Properties
Summit Properties (SMTP) – formerly Summit Germany – purchases and lets commercial properties in seven main German cities, and has been working to reduce risk within its portfolio by concentrating on multi-let assets. This lessens the chance of a significant rental loss – as would be the case with losing a large tenant – and allows greater opportunity to crystallise reversionary value by frequent rent reviews as leases come up for renewal. At the end of December its portfolio had an estimated annual rental value of €104m (£89.2m), reflecting upside potential of 28 per cent on the current run-rate.
Last year, Summit’s rental income rose 11.4 per cent, helped by lease renewals and acquisitions. The latter included the purchase of a 77.4 per cent holding in Frankfurt-listed GxP German Properties for €44m, which added 12 properties with a value of €167m and annual rent generation of €10.8m. This not only boosted holdings in central locations, but management also believes there is further value to extract by streamlining the company’s operations. Given continuing strong demand in the German market and the reversionary potential of the portfolio, we remain buyers. EP
33. Greencoat Renewables
Investing in onshore wind power generation assets in Ireland, Greencoat Renewables (GRP) benefits from favourable policy and increasing demand. Under the Renewable Energy Feed-In Tariff (REFIT) framework, inflation-linked floor prices reduce exposure to price volatility – the 2018 wholesale electricity price was €62/MWh versus €80/MWh under REFIT. The upcoming Renewable Energy Support Scheme potentially entails four gigawatts of onshore wind capacity being contracted by 2026, double current capacity. Wind is the dominant renewable technology in Ireland, permitting significant opportunity as the government targets 55 per cent of electricity generation from renewable sources by 2030 (versus 32 per cent achieved in 2018).
Ten new wind farms were added in 2018, increasing net generating capacity to 384 megawatts (MW), from 137MW. With a potential pipeline exceeding 250MW, Greencoat’s growth prospects are enticing. But expected gearing (debt as a proportion of gross asset value) of 44 per cent is above the group’s 40 per cent target and wind resource variation is an inherent risk – 2018 electricity generation was 9 per cent below budget. We take a neutral stance. Hold. NK
31. Applegreen
Just a few weeks after our buy tip (527p, 19 July 2018) on petrol forecourt retailer Applegreen (APGN), the group announced an ambitious reverse takeover of Welcome Break, which operates service areas on motorways and trunk roads, as well as a portfolio of hotels.
Following the announcement, the group’s shares were suspended pending the release of an admission document. They stayed suspended until the end of September, and now that they are back in action, the pressure is on to prove it can make the most of the acquisition.
Initial indications are promising, with the combined effect of Welcome Break and deals in the US increasing the estate by 130 sites in 2018. Cash profits were up 46 per cent as a result. Strip out the effect of Welcome Break, however, and they are still up by a fifth.
The main challenge for the group now will be its debt. Acquisitions pushed net borrowings to €506.9m from €10.2m, a staggering8.7 times adjusted cash profits. Management says reducing leverage is a priority, but the group will continue looking at expansionopportunities. Hold. TD
