26 small-cap and AIM share picks for 2023

18th January 2023 09:36

by Graeme Evans from interactive investor

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Life hasn’t been easy for smaller companies, but this City expert believes there’s really value on offer now. Here are their best ideas for this year.

Galliford Try Holdings (LSE:GFRD), Superdry (LSE:SDRY) and AFC Energy (LSE:AFC) are among small-cap stocks to watch in 2023 after a City bank revealed its selection of 26 top picks worth under £300 million.

Peel Hunt’s annual list highlights opportunities across 13 sectors, with the most popular area being financial following the inclusion of Funding Circle Holdings (LSE:FCH), International Personal Finance (LSE:IPF), Premier Miton Group (LSE:PMI) and Secure Trust Bank (LSE:STB).

The picks span growth, value or income stocks and range in market size from IDOX (LSE:IDOX) and On The Beach Group (LSE:OTB) at around £290 million to the smallest at Serabi Gold (LSE:SRB) at under £30 million.

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The bank will be hoping for an improved performance after last year’s 35 small caps delivered a negative return of minus 23% over 2022. The best performers were John Menzies and Wentworth Resources (AQUIS:WEN.GB), offset by big declines for Morses Club (LSE:MCL) and MusicMagpie (LSE:MMAG).

Peel Hunt said: “It has been a tough few years for smaller companies, with investors preferring more liquid names. However, there are always good opportunities in the smaller cap space, whether the attractions are growth, value or income related.”

One of those with income potential is Ediston Property Investment Company (LSE:EPIC), which has a £230 million portfolio of 11 retail warehouse assets. Peel Hunt said a sales programme had left the company with £80 million of cash and the prospect of accretive reinvestment in a repriced market.

The bank, which has a price target of 85p, said EPIC offers investors an attractive dividend yield of 8% which it expects to be comfortably covered following this reinvestment. It added: “As the repricing in asset values moderates, we expect investors to once again back retail warehouses to be the winning retail format, and EPIC is very well placed to benefit from this.”

Asset manager Premier Miton trades with a yield above 9%, having been disproportionately affected by its exposure to UK equities during 2022.

The bank said the fact that Premier maintained its dividend at 10p a share in the year to September was a signal of management confidence in prospects. It added: “Premier Miton is highly geared to improving market conditions and trades at a discount to its UK quoted asset management peers.”

One of the growth opportunities in the selection is Brazil-based Serabi Gold, which the bank is backing to almost double production by 2025 and harness the potential for further expansion based on seven priority areas around its Palito and Sao Chico mines.

On 2.4 times 2023 earnings, Peel Hunt believes the market is overlooking the growth trajectory and is backing shares to more than double to 74p.

The biggest share price upside is seen at AFC Energy, which during 2022 deployed its fuel cell systems at the construction sites of several high-profile contractors. The systems provide emissions-free power for applications such as cranes or for charging diggers and excavators.

Peel Hunt said: “We are positive about AFC Energy’s prospects in 2023. It is becoming increasingly evident that the company’s products are likely to be in strong demand.” The bank’s “buy” recommendation and 195p target compares with a current price of 20p.

Superdry shares have bounced by around 50% since Christmas but Peel Hunt sees further upside to 300p after highlighting the retailer’s significant medium-term potential.

A range of self-help measures have boosted prospects, such as improvements to the fashion range, a faster supply chain and a strengthened management team. Cash generation has lagged Superdry’s return to profitability, but this should change from next year once deferred Covid rent payments are out the way.

In support services, the bank believes there’s scope for material outperformance by construction business Galliford Try, based on its sector-leading balance sheet and hidden value within the investments portfolio. It sees a 39% upside in shares to 230p.

Ahead of this week’s trading update, the bank said: “Galliford is profitable, cash generative and well placed to deliver double digit growth, yet it trades on an undemanding price/earnings multiple and offers a well-covered, growing dividend yield.”

The other stocks on the list are Afentra (LSE:AET), Alumasc Group (LSE:ALU), Ashtead Technology Holdings Ordinary Shares (LSE:AT.)y, Faron Pharmaceuticals Oy (LSE:FARN), MJ Gleeson (LSE:GLE), Gooch & Housego (LSE:GHH), LBG Media Ordinary Shares (LSE:LBG), Loungers (LSE:LGRS), MusicMagpie (LSE:MMAG), Petra Diamonds Ltd (LSE:PDL), Renold (LSE:RNO), Ten Entertainment Group (LSE:TEG), Ten Lifestyle Group (LSE:TENG), Topps Tiles (LSE:TPT) and Trifast (LSE:TRI).

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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