40. Draper Esprit
Draper Esprit (GROW) is a listed venture capital company, which means it takes stakes in high-growth companies at an early stage in their development. Although this type of deal-making can seem opaque, a longer-term focus than most private equity, married with a focus on European technology, has allowed it to amass stakes in an impressive list of private companies that stand a good chance of an eventual market listing or acquisition. Notable names include fintech Revolut, games developer Peak Games and semiconductor pioneer Graphcore.
Its track record is also very strong. A mix of canny fundraisings, investments and exits means net asset value (NAV) has grown steadily in recent years, although the market capitalisation currently sits well below the portfolio’s last reported value of £683m.
This is not surprising. Draper faces a challenge in balancing its own portfolio companies’ acute need for cash with its own ability to inject capital at sensible valuations. Fortunately, around 80 per cent of investments by NAV have the balance sheets to trade until the end of the year, while Draper’s own coffers are topped up for now. Some holdings – including online medical consultation app Push Doctor and call centre software group Aircall – are even seeing increased demand. Speculative buy. AN
39. Johnson Service
Providing linen to hotels, restaurants and caterers (Horeca), Johnson Service (JSG) was never going to escape the Covid-19 pandemic. Amid “significantly reduced” demand from the hospitality market, organic revenue in the Horeca division plunged 27 per cent and 97 per cent year on year in March and April, respectively. The workwear business has been more resilient, with a 12 per cent organic sales dip last month.
The group has cut operating costs and limited capital expenditure on plant and equipment and new textile rental items. The final 2.35p dividend declared for 2019 has been withdrawn and there will be no payout this year, either. Despite the deterioration in trading, net debt (excluding lease liabilities) has remained stable since the December year-end at £88m, equivalent to 1.3 times adjusted cash profits.
The ‘Corona crunch’ wiped out the share price gains made in 2019, although a slow recovery is starting to take shape. While Johnson Service is cyclical, it weathered the last recession well, with textile rental revenue only falling 9.4 per cent between 2007 and 2009. Competitor weakness could offer further consolidation opportunities to take market share. Buy. NK
38. Watkin Jones
Watkin Jones (WJG) is the UK’s largest developer of purpose-built student accommodation undertaken on behalf of institutional investors such as CBRE, AIG and L&G, which have forward purchased developments. As well as reducing development risk, that capital-light operating model has allowed the group to generate impressive returns on equity, which last year came in at almost 30 per cent, after adjusting for exceptional items.
At its capital markets day in November, management had targeted delivering around 3,500 student accommodation beds a year, up from 2,666 in 2019. However, following the implementation of social distancing measures, the group has stopped work on its construction sites, which will drag on completions. While management expects to report March half-year revenues and earnings in line with its expectations, it has withdrawn future financial guidance. It also said it does not intend to pay a half-year dividend.
However, during the first half Watkin Jones made progress on boosting its forward sales, including a 348-bed scheme in Bristol, for delivery in FY2021. That took its forward sold and secured student accommodation development pipeline to more than 7,000 beds. There is the risk that institutional demand for student accommodation assets will dry up over the next year, depending on how university attendance levels are impacted by social distancing measures.
The group has also entered the build-to-rent market, with developments making their first material sales contribution of £74m last year. After completing the first 159-unit build-to-rent development in 2019, the group had intended to increase annual delivery to around 1,000 units by FY 2023-24.
Watkin Jones has forward sold all of its 2020 developments and eight out of 10 of its developments scheduled for delivery in 2021 to institutional partners, which provides a certain degree of cash flow and earnings visibility. Management expects to incur costs in the range of £12m-£15m over the next two to three years for remedial work to comply with government advice on building cladding. However, it has ample liquidity, with £71m and a net cash balance after deducting site-specific loans of around £36m, with an additional £31m in undrawn debt from its revolving credit facility. Buy. EP
37. & 36. Young & Co's Brewery
Young and Co’s Brewery* (YNGA) derives almost all its sales from its managed houses segment, generating revenue through food and drink provision, in addition to accommodation. It also has a small division named ‘Ram Pub Company’, which leases pubs owned by Young’s itself, or sub-leases venues that the group holds under existing leasehold agreements.
Even ahead of the lockdown, the group bemoaned the fact that its half-year figures through to September 2019 were up against tough comparators, given that football fans had flocked to the pubs in the previous summer due to England’s progress in the FIFA World Cup. Now the group must contend with missing out on a repeat spike in business as the European football championship has been delayed by one year.
Coronavirus has severely disrupted its operations, and almost all the group’s employees were furloughed at the time of writing. In its most recent business update towards the end of March, Young’s emphasised that its gearing ratio of 25.7 per cent (which compares its debt levels to its equity) was one of the lowest in its industry. It has also highlighted the dominance of freehold sites in its estate of 200-plus UK pubs and hotels.
Young’s has reacted to the crisis in similar fashion to peers. The group has not gone to shareholders yet for capital, but in addition to reducing the wage bill, it has also suspended its dividend payout and halted capital expenditure. It has also benefited from the government’s business rates holiday and VAT deferral to the collective sum of £21.5m. The group is also seeking clarity over its eligibility for emergency government coronavirus financing and is in talks with lenders about adding headroom to its lending covenants.
That most of its properties are freehold means the group will not be caught up in potentially messy tenant disputes over deferred rental payments. Properties could also, in theory, be sold if Young’s needed to raise funds. Part of the group’s growth comes through acquiring new sites where suitable, although we do not expect any new additions over the coming months given the current uncertainty facing the industry. We have no clear idea of when pubs will reopen across the UK, but even when they do it is likely to be on a staggered basis. Young’s is sufficiently capitalised to weather the storm, at least for the foreseeable future, but in the complete absence of any growth catalysts, we downgrade to hold. AJ
*The group also has non-voting shares (YNGN) listed on Aim
35. CareTech
Many UK plcs have suspended their dividends to protect cash. But, reassuringly perhaps, CareTech (CTH) made its final payment of 7.95p on 6 May. Trading over the first half to March was in line with market expectations. And although the specialist social care group conceded within a late-April update that it was too early to understand the implications of this crisis, it added that it is not experiencing any significant impact so far.
CareTech still has an active pipeline of investments. It will attempt to strike a balance between using free cash flow for the likes of bolt-on acquisitions and reducing its net-debt-to-cash-profits ratio to below three times in the medium term.
For analysts at Panmure Gordon, “the resilience of the CareTech model is very apparent during this crisis” – with revenues remaining strong while CareTech continues to give care to its users, and local authorities still paying for care. Occupancy levels at the end of March were 85 per cent in the group’s mature estate. Presumably, demand will be maintained. For now, hold. HC
34. Craneware
As we noted in a recent tip article, Craneware (CRW) is one of the companies that should be set to benefit from medical management teams striving to cut down expenditure. The group provides financial software to the US healthcare industry, helping hospitals to achieve cost savings.
Craneware’s half-year results – delivered at the beginning of March – told of a strong sales pipeline for the current financial year, with total visible revenues of $72.2m (£58.3m) for 2020 and $201m for the three-year period to June 2022. Bosses remained confident in the outlook, and left their expectations unchanged.
Over the first six months of the year, new sales rose by 30 per cent – and, of that figure, ‘expansion’ sales to existing customers constituted 90 per cent. That cross-selling potential, along with Craneware’s increasingly popular new cloud-based platform ‘Trisus’, keep us confident. Craneware is also one of broker Panmure Gordon’s ‘top five resiliency picks’. Buy. HC
33. Restore
Document management specialist Restore (RST) had good momentum coming into 2020, with double-digit revenue and pre-tax profit growth. There has been some disruption from the Covid-19 pandemic, for example, the Datashred business has seen lower commercial volumes for waste collection. But records management – responsible for over two-fifths of total sales in 2019 – is benefiting from recurring storage income while the digital business is continuing to provide scanning services to the health sector.
Even with a “long and severe” coronavirus hit, Restore still expects to be profitable, have sufficient liquidity and remain within its banking covenants in 2020. Moving to preserve cash, the group has withdrawn the final 4.8p dividend declared for 2019, saving £6m. With net debt (excluding lease liabilities) coming down a fifth last year to £89m, it has access to a £160m revolving credit facility that matures in March 2023.
A stable client base and predictable, recurring revenue from mission-critical services makes Restore a defensive play. Analysts at Peel Hunt believe it should be a “return to business as usual” in 2021, with sales and operating profit at least in line with 2019. Buy. NK
32. Nichols
Soft drinks company Nichols (NICL) has said that it is unable to provide guidance for 2020, given the current level of uncertainty. But management expects to see a “significant impact” on its financial performance as a consequence of the ongoing pandemic and restrictions on the movement of people. While the group entered the year with a robust balance sheet – comprising more than £40m of cash and no debt – bosses have, like many others, opted to cancel the dividend, with a view to preserving cash in the near term.
This move should conserve £10.4m over the “seasonally critical” spring and summer months. The group is also reducing costs where possible, notwithstanding the fact that it operates a co-packing and licensing model and is thus asset light.
Nichols was already facing disruption due to an excise tax hike in Saudi Arabia and the UAE before the Covid-19 crisis came along. Still, chief executive John Nichols believes the group can emerge from this period “well placed to continue to deliver [its] long-term growth plans”. Hold. HC
31. Frontier Developments
Frontier Developments (FDEV), a video games developer based in Cambridge, has signed two exclusive IP licences in the past three months – one with Formula One to develop management games until 2025, and the other with Games Workshop (GAW) to develop a game for the closely followed Warhammer brand.
The developer is engaged in a fast-growing, competitive corner of the economy. Indeed, management noted in a recent first-quarter update that demand had grown as a result of the lockdown. It therefore expects revenue will come in towards the top of its previously stated range of £65m-£73m for its current financial year ending May 2020.
It has not been completely immune to the impact of the virus, however; it noted that it is still too early to judge the effect of home-working on operational efficiency. The company anticipates some disruption and potential delays to production including the next major update for its Elite Dangerous game. But with a growing portfolio, four launches set for its next financial year, and increasingly robust demand, we think it still warrants a buy based on its growth prospects. LA
