The 2017 recommendations have not done badly, but they have not done particularly well relative to AIM as a whole. AIM is more than one-fifth higher over the year, which is treble the average gain of the five recommendations where the performance is more in line with the FTSE 100 index.
Those gains on AIM have been fuelled by the strong performance of large companies, such as boohoo.com (BOO) and Fevertree Drinks (FEVR), and the FTSE AIM 50 and FTSE AIM 100 have grown by even more than the FTSE AIM All-Share index.
None of the 2017 companies has done significantly badly, although a couple have had problems during the period. They remain good investments that will pay off to a greater extent over the longer-term.
Full-year 2017 Company Ticker Recommendation price (p) Price as at 21/12/17 (p) % change Chamberlin CMH 76 64 -15.8 Fulcrum Utility Services FCRM 50.75 66.25 +30.5 Gresham House Strategic GHS 775 850 +9.7 Satellite Solutions SAT 7.75 7.63 -1.5 Stride Gaming STR 223 247.5 +11 Average +6.8 FTSE AIM All-Share index 844.41 1027.71 +21.7
*Chamberlin shares ended 2017 at 81p, giving an annual positive return of 6.6%
First half 2017 Company Ticker Recommendation price (p) Current price (p) % change Chamberlin CMH 76 125 +64.5 Fulcrum Utility Services FCRM 50.75 54.75 +7.9 Gresham House Strategic GHS 775 920 +18.7 Satellite Solutions SAT 7.75 7.5 -3.3 Stride Gaming STR 223 213 -9.6 Average +14.2 FTSE AIM All-Share index 844.41 963.48 +14.1 Chamberlin (CMH)
Tip price: 76p | Current price: 64p | % change: -15.8
Chamberlin (CMH) is an example of how a high share price in the middle of the year is no use if the final judgement comes at the end of the year. The foundries operator’s expansion plans were on track and new business was being won. That changed by the end of the year and the share price came clattering down to below the level of the original recommendation.
Expansion is the problem. Chamberlin has invested in finishing machinery and it does not work properly. This means that production of turbo charger bearing housings is inefficient and margins have been hit. On the plus side, no work appears to have been lost – for the time being at least. Chamberlin is working with the manufacturer of the finishing machinery to rectify the problems and it is likely to seek compensation from this supplier.
Demand for turbo charger bearing housings continues to grow and Chamberlin is growing its revenues. Margins need to be improved, though.
The significant improvement in profit will not come until 2018-19, when £1.3 million is currently forecast, and that is well down on previous expectations and depends on Chamberlin successfully sorting out its manufacturing problems. Net debt is expected to be £9.4 million by next March and this is a concern. The pension deficit is currently £4.9 million.
There appears little confidence in the recovery, at the moment, given that achieving the 2018-19 forecast would put the shares on five times prospective earnings. If debt can be kept in check and the problems sorted out, then Chamberlin should bounce back.
Stride Gaming (STR)
Tip price: 223p | Current price: 247.5p | % change: +11
One good thing about online bingo operator Stride Gaming's (STR) problems during 2017 was that they were early enough in the year for restorative measures to be undertaken. Social gaming revenues were 37% lower last year and this part of the business has not lived up to expectations. It cost £19 million and nearly £10 million of that has been written off.
In the year to August 2017, pre-tax profit improved from £11.3 million to £18.9 million – showing the benefits of increased scale. That is slightly more than expected 12 months ago, even with the underperforming part of the business. The total dividend was increased from 2.5p a share to 2.7p a share.
Cash generation continues to be strong and net cash was £19.8 million at the end of August 2017. That could more than double to £43 million by August 2019. That cash is likely to be spent on further acquisitions. Market share in bingo is already significant and other areas are likely to be built up.
Stride has taken a 51% stake in Passion Gaming, a loss-making early stage, online gaming business, for $3.75 million. The Rummy-focused company provides an entry to the Indian market. Stride is also trying to obtain gaming licences in Spain and Denmark.
Stride has set up a division to market its technology and any deals could boost income. Profit will decline this year – due to the higher Point Of Consumption tax burden – but is expected to rise to £23.5 million next year – putting the shares on nine times prospective 2018-19 earnings.
Gresham House Strategic (GHS)
Tip price: 775p | Current price: 850p | % change: +9.7
Small company-focused investment company Gresham House Strategic (GHS) seeks out undervalued and underperforming companies. It backs managements with a three-to-five year strategy and will provide advice and help to the businesses, particularly when it comes to deals. Cash flow is a major focus.
Late last year the net asset value (NAV) was 1,025p a share and, on 15 December, the unaudited NAV was 1,128.3p a share. That is after a 15p a share dividend payment. A strong share price performance by IMImobile (IMO), still nearly one-third of the portfolio, has helped to boost NAV since the half-year end.
One of the investments that investment director Graham Bird is particularly keen on is AIM-quoted digital marketing group Be Heard (BHRD). He believes that investors do not fully understand that this is more of a technology, rather than advertising and media business. Cross-selling between subsidiaries is paying off and it recently acquired The Corner Communications, which adds to the creative services of the group and its client base.
Bird also thinks that Northbridge (NBI) is attractive because of its significant discount to net assets. There is also pre-IPO investment, MJ Hudson, which provides outsourced asset management services. The investment is a convertible that is either convertible at a discount to the flotation price or redeemable at a premium if there is no flotation.
There have been disappointments, such as book publisher Quarto (QRT), but all the investments need to be viewed with a longer-term perspective. The company’s strategy is less than 18 months old.
The share price has been higher during 2017, which meant that the discount to NAV narrowed, but it is currently nearly 25%, which is too high even for a company with relatively illiquid smaller company investments. The discount will narrow and there should be further growth in NAV. This is a good time to buy, bearing in mind the potential lack of liquidity in the shares.
Satellite Solutions Worldwide (SAT)
Tip price: 7.75p | Current price: 7.63p | % change: -1.5
Satellite Solutions Worldwide (SAT) has been a disappointment this year, but that is mainly to do with the fact that it is taking longer than expected for the benefits of the company’s expansion to show through in profit terms. This is despite the satellite broadband provider hitting its 100,000 subscribers target before the end of November 2017.
Moving broker from Arden to Numis led to a reduction in forecasts as a more conservative approach was taken to the future numbers. The 2016-17 profit will be modest, with a much larger profit expected for the financial year that has just started. Even so, the prospective multiple for 2017-18 will still be in the 30s.
Acquisitions have continued and they have widened the scope of the business geographically, and by adding operations outside of satellite broadband. Further share placings have helped to fund these deals.
The acquisition of Quickline Communications in August widened the product range of Satellite Solutions by taking it into the fixed wire broadband market in the UK. Quickline has been awarded grants by the government to fund investment in its infrastructure.
A joint venture between Viasat and Eutelsat has done a deal with Satellite Solutions that will see the company providing localised sales, installation and subscriber management. The services will initially be offered in Poland, Norway, Sweden and Finland with more to come. This deal will spread Satellite Solutions admin costs across a wider customer base.
Satellite Solutions will continue to grow its customer base both organically and by acquisition. This will provide an enormously cash generative business in the long-term.
Fulcrum Utility Services Ltd (FCRM)
Tip price: 50.75p | Current price: 66.25p | % change: +30.5
Utility installation services provider Fulcrum Utility Services (FCRM) is the best performer of this year’s bunch. Trading has been in line with expectations and there is more growth to come.
The latest interims show revenues 8% higher at £19.6 million and pre-tax profit increased by 19% to £3.7 million. Net cash was £14.5 million and the interim dividend raised 17% to 0.7p per share. The order book is worth £33.7 million, an 11% increase.
Fulcrum has invested in an online portal that will make quoting for work more efficient. Gas installations remains the core of the business but electricity and water are increasing in importance.
The cash pile will help to finance further investment in company-owned gas and electricity infrastructure. The independent distribution network operator (iDNO) licence, which is required to own electricity assets, was granted by Ofgem during November, and Fulcrum will be ready to start buying electricity assets early in 2018.
The succession of the finance director to chief executive appears to have gone smoothly. The full-year pre-tax profit is forecast to be £7.4 million. This will be the final year when there will be no tax charge, thanks to past tax losses.
This means that earnings per share will reduce slightly in 2018-19, despite a forecast profit of £8.1 million. The shares are trading on 17 prospective 2018-19 earnings and a forecast yield of more than 3%. The forecast appears relatively conservative and the rating reflects the good track record.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.