80. Camellia
Agriculture is a notoriously temperamental business, plagued by variable weather conditions, price volatility and labour issues. That’s a problem for Camellia (CAM) given that it derives more than three-quarters of its revenue from a core portfolio of tea, macadamia and avocado and supplementary crops such as natural rubber.
A global tea glut last year saw significant downward pricing pressure, and this has continued. Overall tea prices in the first quarter of 2020 have been described as “exceptionally poor”. The Covid-19 pandemic could see some pricing improvement, but this would be at the expense of production volumes. Some of Camellia’s tea estates in India are using as little as 25 per cent of their workforce in order to maintain social distancing. The group expects to lose the majority of its lucrative first flush of tea and, if restrictions continue, potentially a “significant portion” of second flush as well.
With uncertainty over production levels, distribution and demand for its crops, results for 2020 are currently expected to be “substantially below those of 2019”. Sell. NK
79. Gooch & Housego
Disruption caused by the US-China trade dispute and a cyclical downturn in the microelectronics market weighed on demand for Gooch & Housego’s (GHH) industrial laser products last year. The group, which manufactures optical components and systems for sectors including industrial, aerospace and defence, recorded a decline of more than 40 per cent in pre-tax profit in the 12 months to September 2019. The order book also edged down 2 per cent.
So can investors expect the long-awaited recovery in trading to materialise this year? In April, management said orders for fibre-optics, high-reliability fibre couplers for undersea cables and aerospace and defence and life science uses had continued “at a good level”. However, the forecast decline in global gross domestic product (GDP) would indicate that demand for industrial use products, which accounted for almost half of group revenue last year, may weaken this year. What’s more, while US-China relations had begun to thaw at the start of 2020, President Trump’s criticism of China’s handling of the Covid-19 outbreak could reverse this easing of tensions. Sell. EP
78. Numis Corporation
Financial market volatility is rarely good for investment bankers, who tend to rely on relative stability to strike deals. But for mid-tier City firm Numis Corporation (NUM), the ongoing hit to transactional activity has at least been cushioned by the recent market turmoil’s impact on securities markets.
Last month, the bank said it expects revenues for the half-year to 31 March to climb 10 per cent after a “materially stronger performance” from equities trading, and higher average advisory fees compensated for subdued investment banking deal volumes. In the absence of corporate activity, Numis has said it will spend the coming months supporting its corporate clients.
Quite how much these services will be required – as opposed to restructuring work – remains to be seen, although a pivot to private capital in recent years now seems sensible. Management has also reassured investors of the strength of its own capital position and liquidity, although taken alone these ingredients do not add up to a strong buy case. Hold. AN
77. Serica Energy
Gas producer Serica Energy (SQZ) is confident enough in its performance to still pay investors a 3p-a-share dividend, despite the current energy market volatility. The bullishness comes from the Bruce, Keith and Rhum North Sea assets (known as BKR), bought from BP (BP.), Total (Fr:FP) and BHP (BHP) in 2018. The company has around an 80/20 split of gas to oil production.
A healthy balance sheet with £102m of net cash is the result of the canny deal it made for BKR. The upfront payment was just £12.8m. The real cost was handing over half of net cash flow from the fields, which will drop to 40 per cent for the next two years until the arrangement ends in 2022. There are also contingency payments of up to £39.1m.
So far this year, Serica has had to shut down the Bruce platform through February for maintenance, cutting sales, and has reduced the number of workers at operations due to Covid-19. The company says this won’t have a major impact on production. Buy. AH
76. Sumo
Video game streaming platforms have been hitting record levels of usage as nations hunker down at home. This is good news for developer Sumo (SUMO), which forecasts a 9 per cent compound annual growth rate in the industry over the next three years.
Indeed, the group has noted early indications of growing demand during the lockdown period. That hasn’t spared Sumo from some operational disruption, and a possible downside scenario that assumes slower recruitment, remote working inefficiencies, reduced new work and additional costs. Even so, a robust net cash position of £13m, netted against lease liabilities, should be enough to see it through any significant levels of disruption.
Full-year results, published last month, also broke down revenues generated from so-called ‘Own-IP’ and ‘Client-IP’ activities. The former accounted for a third of total revenue last year, up from just a tenth in 2018. Given these growing signs of autonomy, a robust market backdrop and high level of contracted revenues, we remain positive. Buy. LA
75. Warehouse Reit
There could be value to be had in the shares of logistics property specialist Warehouse Reit (WHR). The rise in e-commerce had already pushed up asset values and rental income within the industrial property sector, particularly for so-called ‘last-mile delivery’ warehouses, where the gap between supply and demand has been most acute. These types of assets account for a third of Warehouse Reit’s portfolio.
With a number of tenants experiencing significantly increased trading both before and after the government-mandated lockdown, increased demand for warehouse space allowed the group to secure new lettings that are expected to further boost the annual rent roll. On 9 April, the Reit’s management said it was in active discussions with both existing and potential occupiers for additional space across the current portfolio.
Rent collection has also proved more robust than other corners of the real estate market, with 74 per cent of contracted rent due for the quarter to 24 June 2020 collected at 7 April. After including tenants that had switched to monthly payments, that figure rose to 82 per cent. While some tenants have requested alternative payment arrangements, Warehouse Reit has ample headroom beneath group debt covenants on both a loan-to-value and interest coverage ratio basis.
Valuations would need to fall by around 25 per cent and rent would need to decline by around 45 per cent when compared with 30 September 2019 before those covenants are tested. The group also has £39m in cash and undrawn facilities on hand, equivalent to more than three times finance and operating expenses in 2019.
The third-quarter dividend of 1.6p a share was paid as planned at the end of March, and while management continues to monitor developments, the group is currently committed to meeting a 6.2p full dividend target for the financial year to 31 March 2020.
Despite this, the shares – which had been trading at a premium to net asset value (NAV) at the start of the year – have been subject to the sell-off affecting the broader real estate market. That has left the shares trading below the audited NAV at the half-year mark, although it is worth noting that valuers have introduced material uncertainty clauses into their property appraisals. However, given the group has ample funding resources and headroom on its debt covenants – as well as exposure to the structural rise in online retail – we think the shares look positioned for long-term growth. Buy. EP
74. Pan African Resources
Gold miner Pan African Resources (PAF) increased production at just the right time. It saw a 15 per cent increase in sales in the six months to 31 December, to 92,941 ounces (oz), and it was on its way to 185,000 oz for its financial year. While this second figure is now unattainable because of South Africa’s Covid-19 shutdown, with gold at $1,700 an oz this does not matter greatly. The company will see costs climb from the closure, but has the green light to run its mining and processing operations at 70 per cent capacity even if the lockdown continues, maintaining exposure to the high prices.
While its costs aren’t spectacular for a company that processes tailings as well as mined ore, Pan African has greatly increased production in recent years and is well on the way to upping its margins by improving its mining operations. Its share price climbing to a three-year high this month shows widespread confidence in this. Buy. AH
73. Cohort
Cohort (CHRT) is comprised of five defence and security-focused operating subsidiaries, which the parent company believes can prosper under the oversight of a wider group. Collectively, these divisions provide a wide range of services and products for UK, Portuguese and other international customers. Its largest segment, MASS, supplies electronic warfare operational support, cybersecurity and digital solutions. Having commenced project work for export customers, adjusted operating profit from the segment surged by almost three-quarters to £3.8m in the six months to 31 October.
The group is expected to add a sixth business line this year, having struck an agreement to purchase naval sonar systems provider ELAC for €11.25m (£9.5m). Expanding Cohort’s footprint to Germany and other new markets, the deal is expected to complete before the end of June 2020.
There has been no update yet on the impact of the Covid-19 pandemic. But defence companies have tended to be more insulated, underpinned by long-term demand and global security concerns that will still exist when this crisis abates. Buy. NK
72. WANdisco
Live data group WANdisco (WAND) issued revenue guidance for the first time last September, as its operating losses widened to $16.5m (£13m) in the first six months of its financial year. This placed pressure on a serious uptick in the second half, although the publication of full-year results has been kicked back to June due to “ongoing restrictions from Covid-19”.
Despite this, an update in late March revealed that business momentum had been encouraging, typified by a $1m contract with a division of one of “the world’s largest media and telecommunications companies”. This follows its first multi-cloud contract win and two contracts worth $2.9m signed with Chinese clients in the first half.
Management noted in its last business update that the demand environment was strong and that its partner pipeline was continuing to grow. But its second delay to full-year results, which had already been pushed back to April following Financial Conduct Authority guidance, does not feel encouraging. We remain cautious. Hold. LA
71. Central Asia Metals
Central Asia Metals (CAML) has been a popular Aim pick for years thanks to its dividend, which is underpinned by steady, low-cost production. But the current uncertainty has seen it scrap its final payout for 2019, a year after a dividend cut. Both times, this has caused the shares to sell off by around 15 per cent.
The current scenario is more serious than trying to balance debt reduction and output improvements. The company is trying to keep cash on hand in case its Kounrad copper operation in Kazakhstan is shut, and due to weak copper and base metal prices, its margins will not provide a buffer. As opposed to the major swings seen in gold and oil, copper fell after the initial Covid-19 jolt and has only crept up slightly since, to $2.32 (£1.87) a pound (lb). Mine closures in Peru and Chile have not had much impact on the price.
Helpfully, CAML’s cash cost in 2019 was 94¢ per lb, giving it plenty of headroom should prices remain low. Buy. AH
In the links below you will find our round-up of the constituents of the Aim 100, as it was configured at the end of March. Our survey of the index’s 50 largest stocks will follow next week.
