Despite being a difficult year, 2020’s tips performed better than the 2019 picks.
The 2020 AIM recommendations performed much better than the 2019 picks. AIM has been one of the best-performing markets in the world and these recommendations significantly outperformed AIM over the year with an average gain of 70.1%. That compares with a 14.4% gain for AIM since the beginning of 2020. The FTSE 100 has fallen by 13% over the same period.
There was a wide spread of performances across the five recommendations and here are updates on each one.
% change: +272.2
For a change, the best performer at the halfway stage did not just hang on to its early gains it moved even higher. There was a share price dip in line with the market during March, but there has been an upward trend for the whole year. Battery technology developer Ilika (LSE:IKA) has evolved its strategy for the manufacturing of its Stereax solid-state battery technology.
Stereax batteries are designed for wireless sensors and medical devices. Contract manufacturing was considered but management has decided to establish its own manufacturing facility. This will speed up the product launch and lead to improved operating margins.
In March, Ilika raised £15 million at 40p a share, so there is plenty of cash in the bank to invest in the manufacturing facility. This should start at the beginning of 2021 and production capacity will be 70 times the current level by the end of the year.
Revenues will start to build up in the year to April 2022 and the following year they could exceed £12 million, which could make the company profitable. Longer-term, there is the larger Goliath battery, which can be used for electric vehicles. This could address an enormous market.
This recommendation proved well-timed considering the years of investment that have gone into the battery technologies. The share price is high enough for the time being, but the technology being developed will have a substantial value over the next decade.
% change: +65.3
Digital payments and fraud prevention services provider Boku (LSE:BOKU) has done better than expected thanks to increased levels of online gaming and shopping due to the spare time people had during lockdowns. Forecasts were upgraded for 2020 during December.
Underlying pre-tax profit is set to improve from $4.1 million to $9.2 million in 2020 and then increase to $12.3 million.
The acquisition of Fortumo Holdings for an enterprise value of $41 million has broadened the customer base. Profitable Fortumo has smaller companies among its clients and there is little customer overlap. Signing clients up to Boku’s eWallets will enhance profit growth.
The downside of the past year is that it has been difficult to build up the customer base for the identity division. This business has been a disappointment since it was acquired, and it has held back the performance of the group. However, the strategy to go into fraud prevention is sound, and the identity business will be highly profitable once it passes breakeven.
Cash generation remains strong and net cash should be $19 million by the end of 2020 and could reach $55million by the end of 2022.
The shares are trading on around 76 times estimated 2020 earnings, falling to 60 in 2021. That appears high, but payment processors are trading on high multiples. There is significant growth to come from the payments business and this will be supplemented by improving contributions from the identity division. The share price appears fully valued in the short-term, but the longer-term prospects warrant the high rating.
% change: +19.6
Internet domain name registry and services provider CentralNic (LSE:CNIC) continues to grow rapidly even on a pro forma basis. In the first nine months of 2020, pro forma revenues grew by 17%. The Team Internet monetisation business has grown fastest and that has led to a slight decline in margins.
CentralNic has organised itself into three new divisions. The indirect division covers domain sales through resellers, the direct division generates revenues from retailing domain names and providing services to businesses and the monetisation division helps businesses to generate revenues from their domains and attract web traffic. The direct division has the highest margins and there is potential to grow brand protection and cybersecurity revenues from what is still a relatively low base.
CentralNic continues to acquire businesses that increase its international coverage. The latest is the $36 million purchase of Poland-based Codewise, which is a similar business to Team Internet, which was acquired at the end of 2019. This deal widens the scope of the monetisation business and should add one-fifth to 2021 earnings.
A placing raised £30 million at 75p a share when the Codewise acquisition was announced. Net debt is expected to be $75.2 million at the end of 2021 and it should fall to $53.6 million by the end of 2021, although that assumes no more acquisitions, which seems unlikely.
The share price has fallen back at the end of 2020, but there is still a gain on the year. The shares are trading on around 12 times 2020 earnings, falling to ten when the full benefit of the 2020 acquisitions shows through. A maiden dividend is expected in 2021. The level of the recurring revenues, which were 99% of the $145.1 million generated in the first nine months of 2020, means that the shares are still attractive.
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% change: +20.3
Building products supplier Alumasc (LSE:ALU) was chosen as a 2020 AIM recommendation because of the low rating and the potential for recovery. That did not look so likely halfway through the year when the share price had fallen by one-quarter. Operations started to reopen during April and demand has been rebuilt since then.
The trading update at the company’s AGM revealed a record first quarter to September 2021. The UK and export markets have been strong. Cost reductions are helping to increase profit. Solar shading and balconies business Levolux has returned to profit. Management remains cautious and points out that the improved demand could be delayed from lockdown or sustainable growth. Alumasc will benefit from increasing government spending on infrastructure projects.
The dividend was an attraction of Alumasc. It was 7.4p a share in 2018-19 prior to the Covid-19 disruption but the interim dividend was cancelled and a reduced final dividend of 2p a share was paid last year. A total dividend of 5p a share is forecast for this financial year. That still provides a yield of more than 4%.
The shares are trading on around eight times prospective 2020-21 earnings, so there is scope for a further re-rating combined with potential for upgrades if trading continues to make progress.
Northbridge Industrial Services
% change: -26.9
The weak oil price hit demand for tools from the oil and gas sector and this has hampered the recovery of Northbridge Industrial Services (LSE:NBI) at least as much as Covid-19. This is the reason why Northbridge is the disappointing 2020 recommendation. Even so, Northbridge should at least achieve breakeven in 2020 and return to profit in 2021.
The loadbanks and oil and gas tools provider has not made the progress that was expected at the beginning of the year. Sales of Crestchic loadbanks increased in 2020 and the order book is at a record level, but rental revenues were lower. Oil and gas tools rental declined in the second half, after a strong first half. Northbridge continues to diversify away from its dependence on the oil and gas sector. Renewable energy, carbon capture storage, batteries and datacentres are growing areas.
Debt facilities have been extended to June 2022. Net debt is expected to fall to £5.4 million at the end of 2020, although there has been capital investment during the year.
Equity Development estimates a NAV of 109p a share, so the shares are trading at a 18% discount. Costs are being kept under control. The business is highly operationally geared so as revenues recover, profitability will improve even faster. The shares remain a recovery buy, but that recovery will take longer than originally expected.
|2020 AIM recommendations|
|Company||Ticker||Recommendation price (p)||Current share price (p)||Annual % change|
|Northbridge Industrial Services (LSE:NBI)||NBI||122.5||89.5||-26.9|
|Tip average return||+70.1|
|AIM All Share||+14.4|
Andrew Hore is a freelance contributor and not a direct employee of interactive investor.
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