20. Clinigen
Clinigen (CLIN) has only faced marginal disruption from Covid-19 – something it attributes to the strength of its diversified operations and its partners in the healthcare industry. The pharmaceuticals group said in mid-April that trading for the year to June continued to be in line with management’s expectations and that it had enjoyed a strong first nine months of the year – with organic gross profits up by more than a tenth to the end of March.
The group also appears to be in good shape from a funding perspective, with “significant levels of liquidity” available in the form of its £430m debt facility. Clinigen expects to remain within its three times net-debt-to-cash-profits covenant limit throughout this year, cutting its leverage ratio to less than two times next year.
Meanwhile, encouragingly, Clinigen also recently signed an exclusive global and licensing distribution agreement with government-owned Porton Biopharma to commercialise Erwinase, a drug approved for patients with acute lymphoblastic leukaemia. Net sales of Erwinase were $177m (£143m) in the year to December – and while the agreement is due to start next January, it is expected that net sales for Clinigen will start in the second half of 2021.
For now, Clinigen is paying Porton £5m upfront, with future sales-based milestone payments of up to £20m, as well as tiered royalty payments. Clinigen also anticipates some “modest” working capital investment of £10m-£20m to support the product.
Clinigen plans to expand Erwinase’s market opportunity by driving awareness of its availability, launching in some new countries and increasing the global supply of the product into unlicensed markets via a global access programme. The group said that Erwinase strengthens its newly established commercial infrastructure in the European Union (EU) and higher-value US market.
Numis called this deal “a significant strategic step forward for the company” – constituting the first time it has been able to license rather than acquire rights to a “sizable global product”. Analysts here currently expect Clinigen to achieve revenues of £537m in 2020, rising to £568m in 2021, with adjusted cash profits of £134m, rising to £137m – albeit we cannot rule out the potential for coronavirus-induced disruption.
In more recent news, Clinigen has added another big bank to its advisers – bringing JPMorgan Cazenove aboard as nominated adviser and joint broker with immediate effect, sharing the latter position with RBC Capital Markets. On balance, we remain positive. Buy. HC
19. Team17
Team17 (TM17) launched seven new titles and saw turnover shoot up 43 per cent in 2019, although the video games developer has yet to provide guidance on the coronavirus impact on its business in 2020. Nevertheless, the market backdrop is positive, as the wider industry has seen an uptick in demand for games during the lockdown period.
This is good news for Team17’s pipeline in 2020, which includes more original game IP launches than in any previous year. Full-year results revealed that more than four-fifths of revenue is generated from co-developed products under its Games Label or from its own intellectual property, strengthening its autonomy beyond partnerships with independent developers.
The group is actively seeking acquisition opportunities, which the current turmoil is likely to produce. Its long-term growth story is also still on track – but with the shares trading on such a rich forward multiple, it seems that the market has already priced this in. Hold. LA
18. Smart Metering Systems
Smart Metering Systems (SMS) installs and manages smart meters and carbon reduction assets (CaRe). Group revenue largely derives from energy management on behalf of suppliers. Despite the critical nature of these services, the group has been impacted by coronavirus and has temporarily stopped all non-essential field work, including the installation of smart meters.
However, full emergency field support is continuing, as is the maintenance of the IT infrastructure that supports the existing meter and data asset base and props up SMS’s index-linked annualised recurring revenue. That has allowed management to guide for underlying profitability and cash flows for 2020 to be in line with previous expectations.
Looking longer term, SMS is well positioned to take advantage of the UK’s decarbonisation targets, especially as more charging stations for electric vehicles are rolled out. Group prospects beyond the crisis are further supported by its recent partnership with the Columbia Threadneedle Sustainable Infrastructure Fund, which enables the expansion of its energy efficient projects pipeline. Buy. LA
17. Highland Gold Mining
Like most gold companies, Highland Gold Mining (HGM) is gliding over the current crisis with its valuation intact. Gold at $1,700 (£1,369) an ounce (oz) is the driver for this. This comes as Highland enters a major spending period, with capital expenditure more than doubling this year to $200m. The company is also aiming to keep paying a sizeable dividend.
Russia has not called on miners to shut, and the company has reiterated its 2020 guidance of 290,000-300,000 oz. Remoteness has become a positive: Highland’s important Novo mine is 300km from the nearest city and more than 6,000km from Moscow. The company has already shipped equipment and brought in workers for the Kekura project, which is the main draw for spending this year.
One red flag for Highland is the number of deaths at its operations last year – five. This is compared with one worker dying in 2018. The company has said it would look deeply at where it has gone wrong. Buy. AH
16. Dart
Dart (DTG) is a travel company that earns almost all of its profits from its airline Jet2.com and its Jet2 Holidays package holiday arm. Like other businesses involved in aviation, Dart has been stung in a number of areas by the coronavirus. The collapse in passenger demand for air travel has prompted a reduced flying schedule, while the oil price crash will result in a £109m exceptional charge linked to its fuel and foreign currency hedges in the current financial year.
Airlines are beginning to draw up plans to resume a fuller service, but these appear contingent on some relaxation of Covid-19 travel restrictions and normal service is unlikely to resume soon. Dart is keeping an eye on the health of its hotel partners in respect of deposits it paid in advance. It says some deposits could be reallocated to future bookings. The company had net cash of £455m at its September half-year, but has fully drawn down its £100m revolving credit facility, and in April said it was seeking eligibility for Bank of England financing. Whether Dart remains in a net cash position is unknown, but we do know that Dart had gross cash of £1.5bn in March. This figure includes customer deposits, the amount of which was undisclosed. Hold. AJ
15. Learning Technologies
Learning Technologies (LTG) provides online educational services for corporate clients and institutions, which has largely sheltered it from the impact of coronavirus. Despite the turmoil, the company says the current financial year has started in line with expectations, without a material impact on performance so far. However, it has exercised some caution, postponing a final dividend and cash bonuses for directors “until market conditions normalise”.
Turnover shot up in 2019 by almost two-fifths, led by its acquisition of BreezyHR and the integration of talent management software provider PeopleFluent. The group has since added remote learning outfit Open LMS, which management said has seen “an astonishing spike in activity” as more students adapt to education under lockdown. While new business wins are proving elusive for many of its competitors, LTG’s subscription-based model and high proportion of recurring revenue should see it through this period of disruption. Buy. LA
14. James Halstead
Flooring manufacturer and distributor James Halstead (JHD) had remained resilient in the face of Brexit uncertainty, growing UK sales by 7 per cent year on year in the six months to 31 December 2019. But while trading in 2020 through to the end of March was in line with expectations, the group has guided that office refurbishments and demand from retail and leisure customers will “slow drastically” due to the Covid-19 lockdown. This will be somewhat offset by demand from the healthcare sector, both at home and abroad, as temporary medical facilities are established.
Panmure Gordon expects the crisis to knock £16m off sales this year, partially mitigated by cost reductions and government assistance. It forecasts a slimmer drop in adjusted pre-tax profit, from £48.3m in 2019 to £47.7m in 2020. With £64m of net cash (excluding lease liabilities), James Halstead should have the balance sheet strength to weather the storm. Rather than cancelling the half-year dividend outright, it is paying half the normal amount and mulling a second payout later in the year. Hold. NK
13. Blue Prism
Robotics software provider Blue Prism (PRSM) has recorded a gargantuan rise in revenue in recent years, but still has not made a penny in profit. It has been gathering new clients apace, including blue-chips such as Audi, Amazon and L'Oréal, by capitalising on the trend towards automating tasks via the use of artificial intelligence. Revenue – which almost doubled last year – has benefited from the group’s licence model, which means recurring sales accounted for 96 per cent of the top line.
However, those customers have been gained via heavy investments in staff and marketing, which contributed towards a doubling in operating expenses last year and meant the group recorded an adjusted cash loss of £71.9m against a loss of £21.6m in 2018. The group had a cash balance of £42m and raised £100m via a share placing in April, but this buffer should be seen against a lower potential demand given the broader economic downturn. Hold. EP
12. Keywords Studios
Keywords Studios (KWS) provides technical services to video games companies and so, unlike some developers, it does not stand to gain immediately from mass social distancing. Still, the group had a robust start to 2020, and trading was in line with market expectations – although management has reported some operational disruption due to coronavirus.
The group grew significantly over the course of last year, adding more than 1,400 workstations and completing eight acquisitions. However, its investment in operational capacity, infrastructure and management did cause margins to stumble, with analysts at Peel Hunt calculating a 2.6 percentage point decline year on year.
Despite this, Keywords has seen growing demand for its services, as clients look for support and to reappraise their production arrangements. With lockdown measures accelerating growth in the video game industry, which is likely to benefit the group in the long run, we stick to our buy call. LA
11. Burford Capital
Last year, Burford Capital (BUR) was the largest constituent in this index. Since then – depending on your viewpoint – the litigation finance company has either been the victim of malign short-sellers, or exposed as a serial manipulator of its accounts and financial metrics.
For investors, the most vivid marker of this fissure can be found in the company’s share price, which cratered from £16 to less than £4 a share over two weeks last summer. Since then, the rehabilitation of investor trust – not to mention a trading multiple many times the group's net asset value – has proved elusive. Investors in the one-time Aim darling must now contend with the current appetite towards risk assets, and what Burford recently characterised as “market and economic turmoil, slow-moving courts and challenges at some of our shareholders”.
Investors are also no closer to being able to answer big questions surrounding the investment case. Burford has so far been frustrated in its attempts to unveil what it alleges is the source of a conspiracy to crash its share price. At the same time, it is debatable whether the group has settled the claim – levelled most prominently by short-seller Muddy Waters, but also by analysts at Canaccord – that it overinflates the unrealised value of incomplete cases.
To critics, this amounts to little more than “trust us” accounting, even when these judgments are audited by E&Y. Last month, Burford responded by publishing a greater level of detail about the carrying value of its cases, including the $773m marked to a stake in Petersen, a high-profile claim against Argentina’s expropriation of YPF. Of that figure – which amounts to 38 per cent of Burford’s investments by value – 95 per cent is made up of unrealised gains. Some analysts were shocked by the disclosure, and the implication that these fair value assumptions have allowed the group to call itself profitable for the past three years.
Unfortunately, the job of bank rolling protracted legal claims will always involve both speculative estimates and lumpy, unpredictable paydays. As E&Y noted in its 2019 audit, “there is inherent valuation uncertainty in the assessment of fair valuation”.
While the company has flagged a string of recent high-value court victories, we expect sentiment will be tempered by growing fears that a successful judgement in the Petersen case can lead to cold hard cash, as Argentina lurches dangerously close to debt default. Hold. AN
