Eight AIM shares making their fortune in the US

Given the current weakness of sterling, former AIM writer of the year Andrew Hore has identified the AIM companies doing most of their business in the US. Here’s what he thinks of them.

Continued uncertainty concerning the relationship with the European Union (EU) and economic concerns have led to volatility of sterling and a downward trend against the other currencies, particularly the US dollar. 

On the 17 April, the exchange rate was $1.434 to the pound - the peak for the past 12 months - and it is currently trading at around $1.28. This means that revenue generated in dollars is worth around 10% more in sterling terms than it was during April. Admittedly, the exchange rate was $1.35 at the beginning of 2018, so the year-on-year improvement for companies with calendar year ends is less. 

This means that it is a good time to have a look at companies that have a significant proportion of revenues in the US, and which should benefit from these currency movements.

Sometimes, North American rather than US revenues are categorised in the geographic breakdown. The pound has fallen against the Canadian dollar, but not as sharply as the US dollar (from now on, dollar means US dollar and any other dollar will be stated).  

Craneware (CRW)

2,870p

Craneware supplies US hospitals with software that ensures that they calculate and charge appropriate fees to patients' insurers. The US healthcare market is moving towards value-based care and accurate information is important. Craneware reports its figures in dollars and it is a strong cash generator.

Revenues are all in dollars while the costs are in dollars and sterling. New contract wins are gaining momentum and Cloud-based platform Trisus has been launched.

The thing about Craneware is that the quality of the business and the potential of the dollar-based revenues is already recognised in the share price with the prospective multiple of 54 and dividend yield of 1%. This means that there are other companies that offer better value, which is not to say Craneware is not a quality company.

Instem Life Science (INS)

250p

The main growth area for healthcare IT software and services supplier Instem relates to the US FDA's mandated standard for the exchange of non-clinical data (SEND). Not only are software revenues increasing, there is also a growing part of the business offering outsourced SEND services. In the first half of 2018, there were bookings worth £2.5 million from 75 deals and this will underpin growth in the second half.

In 2017, US and Canada generated 56% of total revenues and they will continue to be the main source of revenues because of the strength of the US pharma and biotech sector.

In the first half of 2018, group revenues were flat at £10.5 million, but there was a swing from a loss of £627,000 to a pre-tax profit of £81,000. That was after non-recurring costs of £373,000, down from £426,000. The second half is always stronger than the first half and underlying 2018 pre-tax profit is forecast to improve from £2.2 million to £2.6 million, rising to £3.4 million in 2019.

Instem has been known to miss past forecasts because of the timing of contract wins but recurring revenues are higher than before. Based on the current forecast, the shares are trading on 21 times prospective earnings. Good value. 

600 Group (SIXH)

16.75p

Machine tools and laser marking equipment supplier 600 Group generated more than 70% of last year's revenues from North America. The US market is important for the laser markings business which has good growth prospects.

Management has rationalised its UK business and sorted out its pension problems. Interim revenues were slightly ahead but underlying margins improved from 5.1% to 6%. The machine tools and laser marking equipment supplier is expected to improve its full year pre-tax profit from $3.05 million to $3.9 million. 

The forecast multiple of seven is much lower than the other companies in this article, but it should be remembered that machine tools is a cyclical business and the track record is up and down. It does appear, though, that management has set 600 on a positive course and dividend payments have restarted. Buy for further recovery. 

Somero Enterprises Inc (SOM)

335p

Concrete levelling equipment manufacturer Somero is based in the US and around two-thirds of revenues come from the US and Canada. Non-residential construction levels in the US have been strong and this is set to continue. Somero is cash generative with a growing cash pile despite rising dividends. Another special dividend is possible.

Europe and the Middle East grew strongly in the first half. China could become a more significant market for the company but the trade war between China and the US could hamper progress.

The shares are trading on 11 times prospective 2018 earnings and the yield is 5.6%. Somero has a strong market position in its niche and the valuation is modest. Buy. 

D4T4 Solutions (D4T4)

191.5p

The US accounted for 63% of last year's revenues for data and analytics services and software provider D4t4 and this rose to 73% in the six months to September 2018. Strong growth in interim revenues from £4.75 million to £14 million was partly down to the unusual seasonality of business last year, as well as a boost from accounting standard changes. D4T4 swung from loss to profit in the interims.

D4T4 has been investing in its sales operation in the US and the benefits are showing through. Full year pre-tax profit is set to improve from £4.1 million to £5.6 million. The shares are trading on 16 times prospective 2018-19 earnings. The potential for growth in software sales makes the shares attractive. 

Next Fifteen Communications (NFC)

511p

PR and marketing services firm Next Fifteen has strong relationships with the major tech companies in the US, including Microsoft and Google. US revenues accounted for just over 50% of the group total in the recent interims.

The US business achieved organic growth of 7% in the first half, although a disposal meant that there was a small dip in reported revenues. The profit margin in the US was held back due to the initial costs of commencing work for a major new client. This meant that the main profit growth for the group was in the UK, but the US should continue to make the majority of profit in the full year.

A pre-tax profit of £35.8 million is forecast for the year to January 2019. The shares are trading on less than 16 times prospective earnings. One of the 2018 recommendations and still a buy. 

Scapa (SCPA)

347p

Scapa supplies bonding and adhesive products to the healthcare and industrial sectors. Nearly 56% of Scapa's revenues are from North America.

The healthcare market is the main focus of growth although it is still the smaller of the divisions. Woundcare, wearable medical devices and drug delivery are major areas of growth.

The acquisition of Dallas-based BioMed Laboratories earlier this year added to the wound care products manufacturing base. This is part of Scapa's strategy of offering outsourced services to healthcare businesses. BioMed is the first healthcare acquisition that is not adhesive-based and thereby widens the product offering.

On this year's forecast pre-tax profit of £35 million, the prospective multiple is 19, falling to 14 next year. Scapa has an excellent track record and is good long-term value. Buy.

Focusrite (TUNE)

467.5p

Music and audio equipment supplier Focusrite is growing internationally, particularly in Asia, but North America remains the largest market accounting for 44% of revenues.

Full year revenues grew by 14% to £75.1 million, while pre-tax profit improved from £9.51 million to £11.3 million. The dividend is 22% higher at 3.3p a share. There is £22.8 million of cash in the bank and this could be used for add-on acquisitions which would bring additional products that could be sold alongside existing company equipment.

There could be concerns about tariffs on the importing of Focusrite equipment from China, but management is using this as a way of testing out price rises for the US market so it could become a positive. 

Forecast profit growth is modest but, the estimates appear conservative, and there is potential for a better performance. The shares are trading on 26 times prospective earnings, which reflects the strong market position of the business. Buy for long-term growth. 

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.