Five AIM share tips for 2020

by Andrew Hore from interactive investor |

Our award-winning AIM writer identifies the AIM stocks with either great growth or recovery prospects. 

While there were successes in last year’s recommendations, there were also disappointments. This year’s picks should, hopefully, do much better. 

The handful of stocks I’ve chosen for 2020 include a combination of growth areas and recovery and they are predominantly companies with an international perspective. 

CentralNic (CNIC) 

70p at time of writing (now 88.6p)

Domain name registry and services provider CentralNic (LSE:CNIC) is becoming a major player in the international internet domain names business. It is a profitable and cash generative business.

CentralNic is an international consolidator of the internet domain registry sector. Last year, Germany-based KeyDrive reversed into CentralNic and this year it acquired TPP Wholesale, a business covering Australasia, Hexonet, which has operations in Canada and Germany, domain name retailer Ideegeo Group and most recently Team Internet from Matomy Media for $48 million.

The company’s direct customers are the retailers of domain names and CentralNic also has retail operations of its own. The company is moving into added value services and Team Internet will make it a more significant part of the business. CentralNic also has the right to distribute a range of internet domains.

In the nine months to September 2019, CentralNic made EBITDA of $13.1 million on revenues of $77.1 million. 

Source: TradingView Past performance is not a guide to future performance

The Team Internet deal is immediately earnings enhancing before any cost savings. Net debt has increased on the back of the acquisition, but the group is cash generative so the debt will come down significantly over the next two years.

The CentralNic share price has started to move ahead in the past couple of months, but it still fails to reflect the full potential of the acquisitions that have been made in the past two years. The company also intends to start paying dividends. 

Because CentralNic reports in dollars so the underlying multiple depends on the exchange rate, but the shares are trading on around 10 times prospective 2020 earnings. Buy. 

Alumasc (ALU)

93.5p

Building products supplier Alumasc (LSE:ALU) has been reporting declining profit levels in the past couple of years, but this year should mark a turnaround. Demand for Alumasc’s products comes from new build and refurbishment. Construction market conditions have been tough, but they should start to improve.

Management has restructured the solar shading and balconies business Levolux, reducing exposure to lower margin products and amalgamating it with the roofing business. The roofing and water management division is the largest revenue generator and the rest comes from housebuilding and ancillary products division. 

Alumasc traded in line with expectations in the first quarter, with maintained revenues, and it is on course to achieve £2 million of annualised cost savings. Operating margins are improving. Full-year pre-tax profit is expected to bounce back from £5.6 million to £7.6 million, but there is still more improvement to come.

While investors are waiting for the profit recovery, they have the comfort of an attractive dividend yield. An unchanged dividend of 7.4p a share, more than twice covered by forecast earnings, provides a yield of 7.9%.

The shares are trading on less than six times prospective earnings. Once investors have greater belief in the ability of the management to improve the performance of the business the share price should recover. 

Boku (BOKU)

86.5p

Digital payments and fraud prevention services provider Boku (LSE:BOKU) is growing rapidly and, while the rating appears high, it will reduce significantly over the next two years.

Growth in digital music and video streaming and online gaming means that the digital payments market will continue to grow strongly. The shares have drifted lower in the fourth quarter and this is a good opportunity to buy.

Boku gets paid a percentage-based fee by merchants for processing payment transactions over mobile.

This includes the likes of Apple, Sony and Spotify. This is known as direct carrier billing, where the customer is billed along with the charge for the mobile service.

The acquisition of identity verification services provider Danal Inc, now Boku Identity, at the beginning of 2019 broadened the product range.

Source: TradingView Past performance is not a guide to future performance

During the autumn, Boku has signed a mobile identification verification contract with a global mobile telecoms firm and partnerships in Asia with the owners of the GoPay and GrabPay eWallets.

At the interim stage, there was 39% growth in revenues to $23.5 million – even better than expected, but additional investment means that profit forecasts were trimmed back.

Generally, though, costs do not have to go up in line with revenues, so pushing higher revenues through the platform has a large effect on profitability.

Net cash is expected to be around $30 million at the end of 2019 and, by the end of 2021, it could be $68 million. A full-year pre-tax profit of $5 million is forecast, rising to $12 million in 2020. That equates to around 30 times prospective 2020 earnings and it could fall to 20 in 2021.  

Northbridge Industrial Services (NBI)

122.5p

Loadbanks and oil and gas tools provider Northbridge Industrial Services (LSE:NBI) has historically been dependent on activity in the oil and gas sector. This is still true, but the company is diversifying its customer base, while oil and gas demand is improving.

Northbridge manufactures, sells and rents loadbanks, as well as renting oil and gas tools. Loadbanks are used for commissioning and maintaining independent power systems. This is an international business. Renewables and data centres are an increasing source of business.

The oil and gas rental business Tasman hires drilling equipment and blowout preventers. The focus of this business is Australia, New Zealand and Asia. There is a joint venture in Malaysia between Tasman and Olio Resources.

The cost base has been lowered since the original downturn in oil and gas demand. Higher utilisation levels of the rental equipment will generate a much better profit. Demand from the liquefied natural gas (LNG) sector is helping the recovery in the oil and gas sector, but there is a long way to go to get back to previous levels. 

The joint venture’s contracts have been renegotiated on improved terms and it is expected to make a profit contribution in 2021. 

Source: TradingView Past performance is not a guide to future performance

The business is cash generative and net debt is expected to fall to £5.6 million at the end of 2019 and then to £1.9 million at the end of 2020. The company is well-invested in terms of its rental equipment, so it is spending less than depreciation. The tangible net asset value per share is estimated at 86.6p.

This is a highly operationally geared business, so pushing more revenues through the company will have a significant effect on profit. A small pre-tax profit is expected for 2019 with an improvement to £2.5 million anticipated for 2020. That is based on an improvement in revenues that is similar to the rise in profit.

The share price has declined in the past year and Northbridge is valued at 17 times 2020 prospective earnings. That should come down sharply in 2021 with the help of the positive joint venture contribution. Buy for recovery. 

Ilika (IKA)

27p

Ilika (LSE:IKA) is an example of a technology company that has made good progress developing its technology but has, as yet, not made a significant commercial breakthrough.

This could be the year that changes. Ilika has interested partners/customers at various stages with some near to the point when they will make a decision whether to use Ilika’s technology.

The advanced materials developer has developed thin-film miniature Stereax solid state batteries. It also has a larger format product for electric vehicles. Patents have been gained in China, Korea, Japan, the US and Europe. 

Ilika has launched the Stereax M50 battery designed for medical implants. These batteries can be made in different sizes and shapes. A collaboration with Semefab should enable lower cost production of Stereax. 

The Internet of Things offers many potential areas for the technology. Demonstrations are ongoing for rail, wind turbines and environmental monitors. Asset tagging is another potential area.

The interims will be published on 23 January. Revenues are expected to be 50% higher at £1.5 million, including grant funding, and the loss should be slightly lower. There was cash of £1.9 million at the end of September 2019 with £700,000 of cash coming in the following two months.

It seems likely that Ilika will have to raise more cash during 2020 and that could hamper the progress of the share price. However, if it can combine the fundraising with a deal with a customer that will use Stereax in one of its products, then it will not be as big a drag on the share price. 

It is difficult to assess when Ilika will make a commercial breakthrough and there is no guarantee that it will happen in 2020. Even so, patience should pay off for investors.

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

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, and 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.

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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.

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