30. IG Design
Coronavirus hit IG Design’s (IGR) revenues for the year to March 2020 by at least £7m, with the group’s final results yet to be published. And IG – a producer of gifts and stationery – also expects to report a “significant” rise in exceptional costs, partly because of Covid-19-related inventory and account-receivable provisions at the period-end.
Looking ahead, there will be “a material reduction” in expected revenues for FY2021, even with the benefits of the $90m (£73m) acquisition of peer CSS a couple of months ago. Assuming a return to normal sales patterns, management anticipates significant year-on-year growth in the subsequent 12-month period. Bosses expect IG to be able to meet customer demand once restrictions start to lift.
It is reassuring to know that IG has decent financial headroom. Its balance sheet is in good shape to see out the impact of the lockdown, with net cash of £42m, and banking facilities exceeding £220m. The group expects to report average leverage for FY2020 below one times adjusted cash profits, which isn’t overly burdensome even under current circumstances. Buy. HC
29. Diversified Gas & Oil
Diversified Gas & Oil (DGOC) is an onshore US oil and gas company with a high level of debt. At first glance, this combination might have you asking when the bankruptcy proceedings will begin. Billions of dollars have been wiped off US oil and gas company valuations since early March, while BW Research estimates 50,000 field workers lost their jobs during the month.
But DGO is primarily a gas producer, a more resilient source of energy under the lockdown. And it has come out as one of the top-performing US onshore companies by buying up smaller producers and achieving genuine economies of scale. Covid-19 has not slowed this business model – chief executive Rusty Hutson told the IC that he saw the collapsing oil price as a buying opportunity: “This is a generational opportunity. In the 19 years I’ve been in the business, I have not seen [this] level of distress.”
He wasn’t exaggerating, with the company announcing on 8 April that it was in the early stages of a $110m (£89m) deal to buy assets producing 9,900 barrels of oil equivalent per day (boepd). This deal, with Carbon Energy (US:CRBO), would be funded with existing or new loans. As of 31 December, DGO’s net debt stood at $637m, representing 68 per cent of net assets. From this base it is paying a 3.5¢-a-share quarterly dividend for the March quarter.
Looking at similarly-sized oil companies Tullow Oil (TLW) and Kosmos Energy (KOS), their net debt-to-cash-profit ratios were 3 times, and almost 4 times, respectively. DGO’s net debt-to-cash-profit ratio was 2.3 times as of 31 March. Additionally, little of the company’s borrowings are due this year (just 4 per cent), and its earnings are protected through hedging. Around 90 per cent of 2020 production is hedged at a floor price of $2.70 per million British thermal units (btu), compared with the average March Henry Hub price – per NYMEX – of $1.79/mbtu. The gas fall of around 10 per cent is far less dramatic than oil, which went into negative pricing in the US for the May WTI crude contract because of the drop in demand and shortage of storage. DGO’s adjusted cash profit from the March quarter was level with the last three months of 2019, at $78m. This week will be one of DGO’s last on Aim – it is moving to the main board on 18 May. Buy. AH
28. Advanced Medical Solutions
Global lockdowns have led to the cancellation or delay of elective surgeries, and a fall in accident and emergency (A&E) visits. This has, in turn, caused a slowdown in demand for the surgical and wound-care products manufactured by Advanced Medical Solutions (AMS).
The group has conceded that it is unable to gauge the eventual financial impact of the pandemic. But at the beginning of April it estimated that its annual revenues would be hit by about 3 to 5 per cent for each month that widespread restrictions remained in place.
Still, management said that AMS was coping well despite such disruption, helped by a strong balance sheet, which boasted £65m in cash and no debt as of the end of 2019. The group also had an undrawn unsecured £80m credit facility at last count, although it has said that it would be “unlikely” to need this. Times are tough, but demand will bounce back once this crisis is over. Buy. HC
27. ITM Power
Hydrogen has long been feted as an emission-free option for both transport and energy storage, but it can be difficult to cross the bridge between theoretical science and practical application. The particular failure of hydrogen cars to gain a foothold despite some advantages over battery-electric vehicles is shown by ITM Power (ITM) dominating UK recharging infrastructure with eight outlets.
Beyond direct-to-consumer infrastructure, the company builds electrolysis plants, which produce hydrogen gas. The size of its projects is measured in megawatts (MW). The most recent build agreement being an 8MW electrolyser in the UK, which will earn it £10m over two years. As of 27 January, ITM had £16m in projects under contract, with another £26m in the negotiation phase. But the company is heavily reliant on government grants, with just over a quarter of its 2019 revenue (£17.5m) coming from sales.
There are limited comparisons to be made in the sector, but ITM’s total enterprise value is 95 times its revenue from the past 12 months, according to Capital IQ. This is more than double fellow green energy play Invinity Energy Systems (IES). Hold. AH
26. YouGov
Given YouGov (YOU) specialises in providing online data gathering and analysis services, it is more defensively positioned than many of its Aim peers against the tumult impacting corporate trading. The group has been growing its subscription revenue via its data products division, which includes the flagship daily brand measurement platform ‘YouGov BrandIndex’. Progress by that division, which accounted for around a third of group revenue during the first half, should also help the group move closer to its 2023 target of growing the adjusted operating margin to 26 per cent, from 15 per cent at the end of December.
While YouGov has so far seen no material impact on trading from Covid-19, management said it would be “prudent” to anticipate that some clients could delay projects, default or request longer payment terms, as well as a slowdown in some business wins. On the plus-side, it has a cash balance of £18m and no debt, excluding £10m of lease liabilities. However, the group’s defensive qualities are reflected in a rich price/forward earnings multiple in excess of 40. Hold. EP
25. Greencoat Renewables
Greencoat Renewables (GRP) invests in renewable energy infrastructure assets, with ownership stakes ranging from 25-100 per cent in 16 operating wind farms across the Republic of Ireland. Having struck an agreement to acquire a 52-megawatt (MW) wind portfolio in France in March, this marked its entry into continental Europe and increased net generating capacity to 528 MW. Ireland remains a key focus, however, and no less than 60 per cent of its gross asset value (GAV) must be invested in the country.
Strong wind conditions in Ireland saw power generation come in 16 per cent ahead of budget in the first quarter of this year. The Covid-19 pandemic has triggered a decline in power prices amid lower industrial and commercial demand. But with almost all its revenues contracted under the renewable energy feed-in tariff (REFIT) scheme, Greencoat is insulated from this short-term weakness.
Outstanding debt as a proportion of GAV will rise to 43 per cent thanks to the French acquisition, but this is within the group’s 40-50 target range, leaving scope for further purchases. As an attractive pure-play renewables bet, buy. NK
24. CVS
Under the UK’s current lockdown measures, veterinary practices have been told only to remain open for urgent and emergency care – with all other cases handled as tele-consultations. It follows that CVS (CVSG) has endured a serious reduction in both small-animal billable visits, and in revenues. So it has temporarily closed half of its small animal practices – representing about one-third of its capacity in this area of operation. Meanwhile, all of the group’s referral hospitals, labs and crematoria have remained open.
That said, 40 per cent of CVS’s small-animal client base are members of its Healthy Pet Club – providing some form of revenue visibility. And, at the time of the group’s last update – in late March – its ‘Animed Direct’ online business had seen record levels of food and medical sales.
The group has also taken steps to protect its supply chain, while ensuring that it has decent financial flexibility. As of 29 February, it had undrawn borrowings of £79m. CVS describes its sector as one of “considerable resilience”. We’re sitting on the fence. Hold. HC
23. First Derivatives
First Derivatives (FDP) provides a range of software and consulting services, targeted at clients in the finance, technology and energy sectors. Management noted in early April that it had not seen a financial impact from the effects of coronavirus, with all services being conducted remotely with no impact on revenue.
Indeed, the company said that consulting services that it provided prior to the outbreak were being delivered remotely, with utilisation rates remaining in line with February. However, its consulting business is likely to take a hit as lockdown restrictions affect its ability to secure new wins. First Derivatives has said that it will not recommend a final dividend and anticipates a lengthening of software sales cycles in the near term, at least until the full impact of the pandemic is clearer. However, beyond the crisis it is likely that clients in its target group will accelerate digital projects in order to improve efficiencies. With proven remote capability, and £64m available in gross cash, we think it should be able to weather the storm. Hold. LA
22. Ceres Power
Ceres Power (CWR) is hoping that its solid oxide fuel cells will play a central role in the world’s green energy transition. Its patent-protected ‘SteelCell’ technology produces an electric current from a chemical reaction rather than combustion and is compatible with a range of inputs, including natural gas, biogas, ethanol and hydrogen. This fuel flexibility aims to be part of a low-carbon solution that balances the intermittency of renewable power sources. Designed to be cheap to manufacture and scalable, Ceres has ambitions that its SteelCells can power data centres, homes and commercial buildings, and extend the range of electric vehicles.
The group licenses its technology to original equipment manufacturers and receives payments for its engineering services as it adapts its fuel cells for customers’ specific applications. The six months to 31 December saw around a 70:30 split between revenue from engineering services and supplying technology hardware, and licensing fees – this is versus an almost even mix at the June year-end. As engineering services are lower margin, greater weighting towards this work saw the gross margin drop from 75 per cent to 67 per cent.
Ceres has signed four major partnership agreements so far. This includes a strategic collaboration with Bosch to develop a module that can generate 10 kilowatts of power and joint development of a range extender system for electric buses with Chinese manufacturer Weichai Power. The first commercial launch has taken place on a modest scale in Japan, with boiler manufacturer Miura deploying the ‘SteelCell’ in its combined heat and power system. Full-scale commercialisation is Ceres’ ultimate aim as it can then generate royalty payments and boost margins.
In the meantime, the group posted a narrowed operating loss of £2.8m for the first half. At the time of the half-year results in mid-March, it flagged that the Covid-19 pandemic could impact the timing of partner programmes and UK manufacturing output.
Long-term trends point in Ceres’ favour, with increasing focus on the decarbonisation of global power generation. It is also exploring electrolysis, the ability to produce hydrogen from water. Investment from partners suggests they have confidence in SteelCell’s prospects. Bosch has increased its stake from 4 per cent to 18 per cent, having purchased £38m-worth of new and existing shares in January. Following this, Weichai opted to acquire £11m of new shares to maintain its 20 per cent holding. While this is all positive, we’d like to see further progress towards commercial viability and the pathway to profitability. Hold. NK
21. EMIS
More than three-quarters of Emis’s (EMIS) revenues are recurring in nature, meaning that the group should have good visibility over future reporting periods. Broker Numis noted in March that Emis was “particularly defensively positioned” due to those repeat sales, largely from the NHS, for mission-critical software. Helped by a strong balance sheet – with net cash of £31.1m as of December – management has also argued that the group is well placed “to weather the short-term market uncertainties created by coronavirus”.
At the time of the full-year results, Emis noted that trading in 2020 had been in line with its expectations so far, but there might be some limited new-business revenue delay. The group added that its products and services were being tailored to customers’ needs, and responding to change in the market, giving it confidence in the mid-term outlook.
Emis secured a place on both the NHS National Securities Scotland (NSS) framework and the NHS GP IT Futures framework and Digital Buying Catalogue in England last year – events that were, in the group’s words, key customer retention goals. Still a buy. HC
