Andrew Hore’s tips for 2020 returned an average of 70%. Find out what our AIM expert is backing this time.
The 2020 recommendations will be a hard act to follow, but this year’s picks offer opportunities for a significant uplift in share price by the end of 2021, and some also provide income. They are predominantly UK-focused, although there is some exposure to wider international markets.
Credit hire and legal services firm Anexo (LSE:ANX) has been held back this year by the lack of traffic and therefore accidents during the original lockdown. Even so, it has a pipeline of cases and profitability should recover next year. There is also the medium-term potential for significant revenues from VW emissions cases.
Anexo provides credit hire and legal services to impecunious motorists in non-fault road traffic accidents. This is people who do not have the cash to get a replacement vehicle. The cost of the credit hire vehicle is recovered from the insurer of the at-fault driver. The company’s legal services subsidiary Bond Turner handles these cases, and it is opening a new office in Leeds early next year. The business is gaining market share as competitors drop out of the market.
City broker Arden expects a decline in full-year profit from £23 million to £16.5 million in 2020, following the interim slump from £10.8 million to £6.7 million. That shortfall is partly due to additional investment in VW emissions cases.
A marketing campaign helped Anexo to add 2,500 cases to its VW emissions litigation case list, taking the number to 13,200, and there is potential for claims against other manufacturers. Assuming an average claim value of £3,000 and commission of 25%, then the revenue could be £750 a case. That suggests the current cases could be worth nearly £10 million.
Institutional investor DBAY recently took a 29% stake at 150p a share. That is above the current share price. Even though the 2020 figures are disappointing, the shares are trading on less than 13 times 2020 earnings. The multiple falls to nine for 2021, providing room for a re-rating. That is without taking any VW emission case revenues into account.
By the end of 2021, the potential income stream from this source could be clearer. This year’s dividend is expected to be 1.5p a share and it is set to grow steadily from this base. Buy.
Business restructuring company Begbies Traynor (LSE:BEG) has remained highly profitable, even though the number of insolvencies has declined in the past year. That decline is not likely to continue in 2021 as the government withdraws and reduces Covid-19- related financial support.
Recent interims showed a one-quarter increase in pre-tax profit to £5 million, while the dividend was raised by 11%. Begbies moved into a net cash position. Both the business restructuring and property services divisions grew revenues organically, although there was a lower profit contribution from the latter.
Management believes that Begbies is still on course for a full-year pre-tax profit of £9.8 million despite the headwinds this year. A jump in profit to £13 million is anticipated for 2021-22. There is potential for further acquisitions plus the recruitment of teams of professionals, like the Grant Thornton team that joined earlier this year, that can enhance earnings.
The shares are trading on 15 times prospective 2020-21 earnings, falling to less than 12 the following year. AIM-quoted rival FRP Advisory Group (LSE:FRP) is trading on a higher rating for the current year and its growth next year is expected to be more modest than for Begbies. Buy.
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SourceBio International (LSE:SBI) is one of the companies that is benefiting from the need for Covid-19 testing. Demand for its laboratory testing services is soaring and it is hugely cash generative. That will not last for long, but it will leave the company with a large cash pile that can be spent on earnings enhancing acquisitions. The core operations have longer-term growth prospects.
Despite the new vaccines, testing will still be important. SourceBio should know how much will be generated from Covid-19 testing when the framework agreements are finalised next February. City broker Liberum expects SourceBio to end 2021 with £47 million in the bank, rising to £73 million at the end of 2022. The broker estimates that £66 million will be generated from Covid-19 testing, although this required initial investment by the company. That cash in the bank covers the majority of the market capitalisation. No Covid-19 testing revenues are in the forecasts after 2022, but they could continue.
The core operations are health diagnostics, genomics and stability storage. These are areas with high barriers to entry for competition. Genomics, which offers DNA sequencing services, is the smallest division, but the market could grow at up to 20% a year. Health diagnostics offers pathology and personalised medicine services, and SourceBio is increasing market share as these services are outsourced. Additional capacity will help stability storage to grow, although it will be more slowly than the other divisions.
The core activities, which have been hit by Covid-19 spending this year, are expected to recommence growth next year, with earnings before interest, tax, depreciation and amortisation (EBITDA) of £3.4 million forecast for 2021 and £4.9 million for 2022. Liberum estimates average annual growth of 22% between 2019 and 2023. Those businesses are cash generative and the cash pile will continue to increase. If the money is not spent on acquisitions, then there could be some significant special dividends.
A placing raised £35 million gross at 162p a share when SourceBio joined AIM in October. That paid off debt and financed investment in the Covid-19 opportunity. Non-exec Christopher Mills has been adding to his shareholding at prices above the current share price. You should buy as well.
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Real Estate Investors (LSE: RLE)
Real Estate Investors (LSE:RLE)) has an attractive dividend yield and the shares are trading at a significant discount to net asset value (NAV). There is little exposure to non-essential retail and leisure, and management is expert in the Midlands property market so it will be able to reinvest in property at attractive values following the fallout from Covid-19.
There have been recent sales, including an Aldi supermarket, for more than book value. Even so, NAV is expected to decline to 59p a share at the end of 2021. Occupancy levels are 93% and at least 90% of rents have been paid in each of the past three quarters.
Infrastructure investment and the upcoming Commonwealth Games in Birmingham provide a solid background for the Midlands property market. Real Estate Investors also specialises in offices outside of the main city and town centres, where there has been an upturn in interest.
Loan-to-value is currently 43%. Net debt is expected to be £89 million at the end of 2020. There are likely to be further disposals. Management spent £2 million on buying back shares, but the discount to forecast 2021 NAV is still more than 40%. The forecast NAV appears reasonably conservative and selective property acquisitions could enhance the figure.
Real Estate Investors is a REIT, or real estate investment trust, so it is required to distribute at least 90% of its earnings. The 2020 dividend is expected to be lower, but it could still be 3.5p a share, so the prospective yield is more than 10%. There is scope for a re-rating. Buy.
Franchised lettings and estate agency business Belvoir Group (LSE:BLV) is trading above pre-Covid-19 expectations thanks to a surge in activity after the original Covid-19 lockdown. Belvoir is on course for earnings of 15.2p a share, even after repaying government grants, putting the company on a 2020 multiple of just over 10. The merger talks between The Property Franchise Group and Hunters Property indicate that there is continuing consolidation in the sector. Belvoir is already one of the largest players in the market.
The company predominantly trades under the Belvoir, Newton Fallowell and Northwood brands and has more than 300 offices. The core lettings business is strong in the regions that are performing better. More than three-fifths of revenues are recurring lettings income.
There has undoubtedly been a boost to the sales business from the government’s stamp duty reduction, which will come to an end in 2021. The financial services business has helped to propel profitability in the past couple of years.
A strategic alliance with the Nottingham Building Society broadens Belvoir’s reach and gives it access to its partner’s members. Most of the Nottingham Building Society estate agency and lettings activities will transfer to Belvoir and its franchisees. The franchisees will also be able to offer services to members from their own offices or the building society’s offices. More of these types of deals with rivals could enhance earnings.
Stripping out the additional dividends relating to 2019, the ongoing dividend is around 7.2p a share. That provides a yield of 4.6%. The business is cash generative with potential for continued growth in a consolidating sector. Buy.
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