Last year, larger AIM companies performed strongly and they are trading on high multiples that make them look fully valued.
The main potential for share price growth is at the medium-to-lower end of the market.
Here are five AIM companies that have strong growth prospects over the next year and beyond.
SigmaRoc (SRC) has made three acquisitions in the past 12 months and been transformed from a former technology shell into a significant building materials supplier. The purchase of Channel Islands-based cement supplier Ronez provided a strong base and the latest two acquisitions have both been earnings enhancing. SigmaRoc also created SigmaGsy to provide bulk shipping for Ronez and other cement suppliers.
SigmaRoc has been able to secure these acquisitions because of the management team’s experience in the sector.
Chief executive Max Vermorken previously worked at LafargeHolcim where he was responsible for integrating parts of the businesses and selling non-core assets following the merger between Lafarge and Holcim, while another director, Charles Trigg, was head of capex at the same firm. This means that they know the sector and the non-core businesses at the larger firms, including LafargeHolcim, which owned Ronez.
The latest acquisition is concrete products supplier Poundfield Products, which will cost £10.25 million and be earnings enhancing in 2018. This fits well with Topcrete subsidiary, Allen Concrete. Poundfield made an EBITDA of £1.5 million on revenues of £7.4 million in 2016 and it will make more this year. A placing at 41p a share raised £13.9 million. There is an option to pay £1.5 million to acquire Poundfield’s operating facilities.
The SigmaRoc directors have been buying shares at 43p a share and 43.5p a share. The shares are trading on around 11 times 2018 prospective earnings even after the additional shares are taken into account. Expect further earnings enhancing acquisitions in 2018.
Next Fifteen Communications (NFC)
International PR and marketing services group Next Fifteen Communications (NFC) has been quoted for the past two decades – first on Ofex/NEX, then the Main Market and now on AIM. The original core of the business is the technology PR firm Text 100 and the group is still heavily focused on the technology sector. This is an international business with strong relationships with fast-growing companies, such as Google and Amazon.com.
Growth has been through a combination of organic and acquisitive elements. Next Fifteen has a good long-term track record. The most recent acquisition is Charterhouse Research, which is part of group strategy to increase the range of data-based services and it also adds to the exposure to the financial services sector.
In the six months to July 2017, revenues were 16% ahead at £93.5 million and pre-tax profit was 13% higher at £12 million. The majority of profit was from North America. Net debt was £20.8 million.
Next Fifteen should be able to achieve a pre-tax profit of more than £29 million in the year to January 2018 – treble the level four years ago. The prospective multiple is around 16. The share price has recovered strongly at the end of 2017. This has taken the edge off the undervaluation, but Next Fifteen remains an attractive investment.
Parity (PTY) has had some ups and downs as a quoted company. The share price soared on the back of the IT boom at the turn of the century and then fell back. More recently, there was an attempt to move into the social media sector, which did not pay off. The management team put in place two years ago has rationalised the business and has nearly completed the disposal of the social media activities.
There are two parts to the business: IT recruitment and consultancy. These have started to work together.
The main growth is coming from the higher margin consultancy activity, which helps government and private organisations to maximise efficiency and reduce costs. Parity has identified £15 million worth of savings for the MoD. When demand increases the consultancy business taps the personnel on the books of the recruitment business, so it does not have underutilised staff on its books.
The recruitment business has continued to perform well despite the disruption caused by the more stringent enforcement of the IR35 tax rule for freelance workers by the government. Both divisions will grow, but consultancy is set to move from one-third to one-half of group profit.
Inition is the remaining non-core business. This could be sold in the next few months. It is in the books at £1.8 million, but if there are further losses this figure would fall and there is no guarantee that Parity will achieve asset value.
Parity can generate £2 million plus in cash each year from its existing operations. Net debt is forecast at £2 million at the end of 2017 and there should be net cash by the end of 2018. That is without the cash from the sale of Inition. There could be dividends in the future.
The shares are trading on less than seven times 2017 prospective earnings and this could fall to six for 2018 – based on pre-tax profit of £1.9 million.
Mercia Technologies (MERC)
Technology businesses developer and fund manager Mercia Technologies (MERC) has built up an attractive portfolio of technology companies and has plenty of cash in the bank, thanks to the dilutive £40 million fundraising at the beginning of 2017.
That cash is being invested and it enables Mercia to take larger stakes in its investee companies. Mercia has invested £3.5 million in Manchester-based website traffic software developer Intechnica. The TrafficDefender software can remove unwanted traffic from bots and Mercia had previously made a small initial investment.
A further £2.5 million has been put in drug delivery patch developer Medherant. Mercia has secured a partnership with Edinburgh University and this should provide further life sciences opportunities.
Mercia’s investment focus is on software, digital, electronics/engineering and life sciences and 99% of the value of the investment portfolio is accounted for by 18 investments.
Additional fund management mandates will increase income so that it will cover a majority of group costs. This means that more of the cash raised can be invested rather than used to cover operating costs.
The NAV was 41.1p a share at the end of September 2017, including cash of 16p a share, although some of this has since been invested. The discount to NAV is 12%. Rivals, such as IP Group and Frontier IP, are trading at a premium to assets. This is a good time to buy the shares. Existing investments are maturing and cash still has to be put to work.
Diurnal Group (DNL)
Diurnal Group (DNL) is on the brink of gaining regulatory approval in Europe for its Alkindi/Infacourt treatment for children between birth and 18 years with adrenal insufficiency. Currently there is no treatment specifically for children and the initial focus will be on up to six year olds.
The treatment could be launched, via the sales force built up with the help of Ashfield, in the second quarter of 2018. This means that the revenues will not be significant until the year to June 2019.
The same sales force can be used for Chronocourt, a treatment for congenital adrenal hyperplasia and adrenal insufficiency, which is in phase III clinical trials in Europe. Both treatments are also undergoing clinical trials in the US.
A key attraction of Diurnal is that by 2019-20, the revenues from should be covering all group costs and contributing towards the research and development spending. There could also be additional deals outside of Europe.
Diurnal floated two years ago at 144p a share and since then the business has been de-risked – in terms of Alkindi and the progress made with Chronocourt. IP Group is a major shareholder. There has already been a strong share price recovery in 2017, but there should be more to come.
The main uncertainty is the timing of the share price improvement. One thing that could hold the share price back is the requirement for further cash to push ahead with clinical trials. There could be a fundraising by the middle of the year as cash will be running low by that time. That might hold back the share price this year.
That is more of a concern for the performance over the 12-month period than for the investment in Diurnal, which will undoubtedly reap rewards even if it takes longer than one year.
ii publishes information and ideas which are of interest to investors. Any recommendation made in this article is based on the views of the writer, which do not take into account your circumstances. This is not a personal recommendation. If you are in any doubt as to the action you should take, please consult an authorised investment adviser. ii do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
Please note that our article on this investment should not be considered to be a regular publication.
Details of all recommendations issued by ii during the previous 12-month period can be found here.
ii adheres to a strict code of conduct. Members of ii staff may hold shares in companies included in these portfolios, which could create a conflict of interests. Any member of staff intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. We will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, staff involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.