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The Aim 100 2020: 10 to 1

The Aim 100 2020: 10 to 1
May 14, 2020

10. Gamma Communications

Cloud-based communications provider Gamma Communications (GAMA) is in the process of moving to a unified-communications-as-a-service (UCaaS) model. As such, the group purchased businesses Telsis in November last year and Exactive in February – the former enabling the launch of a fully integrated cloud contact centre solution in late 2020. Its Collaborate unified communications product, released in March 2019, already has more than 9,000 users.

The group also strengthened its presence in Europe, having completed its Voz Telecom purchase in Spain in April. Analysts at Peel Hunt reckon the penetration of B2B UCaaS averages only around 8 per cent in Western Europe, presenting a significant growth opportunity. But as the coronavirus crisis presses on, management has told Investors Chronicle that it will slow down its acquisitive approach until it is able to fully assess the impact of the virus on the business. 

However, its long-term growth prospects are still strong, supported by a high proportion of recurring revenue and a heightened awareness of the need for reliable and effective connectivity. Buy. LA

 

9. Secure Income Reit

Commercial landlord Secure Income Reit (SIR) may be in the process of negotiating missed rental payments with tenants, but that did not prevent management recommending the payment of a 4.2p-a-share quarterly dividend on 29 May. The group, which owns and lets healthcare and leisure properties, boasts an average weighted unexpired lease term of 21 years. More than half of leases have upward-only rent reviews linked to RPI inflation, and 41 per cent had fixed rental uplifts averaging 2.8 per cent last year. 

However, as of 6 April the group had received just 74 per cent of rent due for the second quarter. Negotiations with Travelodge – whose missed payments already account for 6.4 per cent of the company’s total annual rent roll – are ongoing. At the end of April, 15.6 per cent of the group’s £111m total passing rents were expected to be subject to deferral, which will reduce cash rents receivable in June and September. Hold. EP

 

8. Asos

Asos (ASC) has managed to trade during a period where concerns over the safety of warehouse workers temporarily limited retail rivals such as Next (NXT) from conducting online clothing deliveries. The company’s half-year results revealed a 21 per cent boost to sales during the six months to the end of February, after having remedied distribution issues last year. Meanwhile, Asos also raised £247m in April and sought additional headroom on its borrowing facilities. While coronavirus dragged group sales down by 20-25 per cent in the three weeks from mid-March, Asos looks set to finish the year in a net cash position, according to analysts at Peel Hunt. 

The bull case for Asos is partly predicated on the belief that the company will assume market share surrendered by beleaguered high-street retailers. This seems reasonable, although louder opposition to so-called ‘fast-fashion’ and the boom in sustainable clothing brands suggest that the company’s path to dominance may not be so straightforward. Add in the weak case for buying any clothes at all during an indefinite lockdown period, and we remain neutral on Asos. Hold. AJ

 

7. Breedon

Set against the UK construction slowdown, Breedon (BREE) kept like-for-like sales flat last year, offsetting a decline in volumes across its aggregates, asphalt, cement and ready-mix products with price increases. This year started off well, with trading up until mid-March in line with expectations. But the lockdown measures introduced in response to the Covid-19 pandemic brought an “immediate and significant reduction in demand”. The majority of its operations are closed, although the group plans to progressively open some sites in the coming weeks where customer demand is supportive.

Stress-testing suggests Breedon has sufficient liquidity to withstand the challenging conditions. As at 30 April, it had £79m of cash and an uncommitted borrowing facility of £222m – this is up from £60m and £220m on 25 March. The group’s banks have agreed to relax their June 2020 lending covenants and Breedon has deferred £35m of loan amortisation to April 2022. Aside from its resilience, Breedon will benefit if the government pushes ahead with its infrastructure plans post-pandemic or uses fiscal stimulus to get the economy going. Buy. NK

 

6. GB

Identity data intelligence specialist GB (GBG) should be supported by the accelerated growth in e-commerce that has occurred since lockdown measures were implemented. However, the software company, which helps to prevent online fraud, has scrapped its final dividend for 2020 and withdrawn its guidance for the coming year. While some of its business areas are still posting growth, others are seeing reduced demand. It has therefore frozen pay and paused non-essential recruitment in order to conserve cash.

The group still expects to report positive numbers for 2019, with total revenue for the year expected to grow by almost two-fifths to £199m, and organic revenues up by more than a tenth on a constant-currency basis. Analysts at Peel Hunt reckon that GB’s balance sheet can withstand up to a 30 per cent reduction in revenue, and as consumer behaviour shifts more rapidly to digital, its long-term prospects remain strong. Buy. LA

 

5. RWS

Language, intellectual property (IP) and ‘localisation’ specialist RWS (RWS) saw its 16th consecutive year of revenue, adjusted pre-tax profit and dividend growth in 2019. It might prove challenging to extend this record, with revenue falling by 2.5 per cent at constant currencies to £169m in the six months to 31 March. This came amid lower-than-expected activity in IP services and life sciences and certain clients deferring new projects. Some of this has been attributed to the Covid-19 pandemic. The group has warned that second-half sales could be dampened as Moravia customers curb marketing-related localisation spending – Moravia adapts companies’ content for consistency across geographies.

The use of freelancers makes for a flexible cost base and RWS should have sufficient liquidity to withstand the crisis, with £29m of cash reserves and $120m (£97m) of headroom on its banking facilities. Despite the near-term interruption, the long-term growth story remains intact as globalisation and digitalisation of content will continue. With the UK  set not to participate in the European Union’s unitary patent and the German judicial system maintaining it is unconstitutional, this also removes significant uncertainty for the IP services business. Buy. NK

 

4. GlobalData

GlobalData (DATA) can count itself among Aim’s stratospheric risers over the past 12 months, with the shares more than doubling – including a general recovery since March’s market sell-off. So what has caught the eye of investors? 

The group provides data and analytics to companies across a range of sectors, and while acquisitions have played a prominent role in boosting sales in recent years, the company has also recorded healthy organic revenue growth. Last year, this came in at 7 per cent, down from 9 per cent in 2018.  

Providing online services means it has shifted to home-working with relative ease, without needing to furlough any employees. More than three-quarters of revenue is derived from recurring subscriptions, which means the top line has been largely insulated since the onset of the Covid-19 pandemic. However, some events revenue – which accounts for less than 10 per cent of the group total – has been deferred into the second half of 2020. Against this uncertain backdrop, management has delayed 2019’s final dividend payment until 9 June while it assesses the full impact of Covid-19 on the business. Hold. EP

 

3. Fevertree Drinks

Fevertree Drinks (FEVR) will “not be unaffected” by the coronavirus crisis – especially in the on-trade (bar and restaurants) area. However, the beverages group highlights the fact that it is a global company with diversified revenues and its balance sheet also looks relatively robust; it was debt-free at the time of its recent full-year results, with cash of £128m. Moreover, it is asset light, with an outsourced business model facilitating a low fixed cost base. 

Fevertree made a good start to 2020, with the first two months of trading in line with what management had envisaged – helped especially by the US, which outperformed expectations. The group has been building out its operational capacity in America, and has signed a key first bottling partner there. Presumably, we can expect such expansion to continue, along with ongoing steps to broaden the portfolio, as exemplified by Fevertree’s ginger range. 

The tonic giant reckons that the longer-term trend towards premium spirits and mixers will continue, and broker Numis believes that it is “well positioned for [a] post Corona world”. Watch this space. Hold. HC

 

2. Abcam

Abcam (ABC) says it is “not feasible to give accurate guidance on future sales” until there is more clarity about the duration of the Covid-19 outbreak. As of 17 April, the blow to group revenues was about £14m-£16m – reflecting a gradual recovery in China, offset by lockdown policies implemented by governments elsewhere in the world. Still, Abcam has seen some labs start to open up again in Europe.

The group has also joined more than 20 collaborations focused on coronavirus drug and vaccine development. Looking ahead, analysts at Peel Hunt believe that global research and development will be lifted by the pandemic, because countries will realise the importance of funding sciences. They note that “Abcam’s tools are a key component of biological research”. 

For now, Abcam looks well positioned to benefit from any such increases in expenditure when this crisis is over. The group has not furloughed staff and it also has funding headroom in the form of £80m in net cash and a £200m revolving credit facility. Hold. HC

 

1. Boohoo

Boohoo's (BOO) shares soared by around three-quarters during April, prompting us to downgrade a speculative buy tip made at the start of the month. The fashion retailer’s results for its February year-end revealed a 54 per cent increase in pre-tax profits, which preceded the outbreak of coronavirus in the UK and the accompanying damage to clothing sales. Boohoo has observed a drop in demand and is cautious about its prospects for the year, as housebound consumers relegate clothes shopping below their essential purchases. In March, UK retail sales fell 5.1 per cent, according to the Office for National Statistics (ONS). Yet while clothing store sales slumped 28.4 per cent, online sales as a proportion of all retailing reached a record high of 22.3 per cent.

While clothing demand is currently meagre, the existential threat posed to the high street (nothing new here, but certainly magnified by the coronavirus) offers online retailers such as Boohoo the opportunity to steal market share from legacy department stores. Boohoo’s technology offering is superior to many other clothing businesses, routing its six online brands through a common technology and supply chain platform. The rising use of automation in its processes is also a point of strength, and a reduced need for human labour may serve a business like Boohoo well during a time of concern for worker safety. It has invested heavily both here and in marketing, which has supported its sustained growth. While the company is reducing its number of suppliers, these remain relatively diverse, with around 40 per cent of its product ranges sourced in the UK. 

It’s of little surprise that while high-street retailers were forced to close their doors, and even other online clothing operations such as Next (NXT) were temporarily shut down in a bid to protect workers, Boohoo has seen its shares recover as it remained fully active. It has addressed a shift in consumer preference and accommodated more active-wear and night clothing in its inventories. It is questionable whether the early spike in demand for lockdown clothing can be maintained, while Boohoo faces a more daunting long-term challenge in the form of growing opposition to fast fashion and the rise of environmental, social and governance (ESG) concerns. We think it's worth a spell on the sidelines while Boohoo navigates this uncertainty once the storm passes. Sell. AJ