Award-winning AIM writer Andrew Hore names his top small-cap share picks for the year ahead.
This year’s portfolio of AIM recommendations is a slightly riskier bias than last year’s, which was dominated by companies paying dividends.
Many of the share prices have drifted back in recent weeks, but I believe they have potential to bounce back by the end of 2022.
IG Design Group
These days there is little forgiveness from investors for profit warnings. One of the companies that has suffered is gift wrap and craft products supplier IG Design Group (LSE:IGR) Revenues are in line with expectations, but additional costs have hit profit. Management warned that operating margin could be between 1.75 percentage points and 2.25 percentage points lower than last year, when it was 4.8%.
IG Design has strong relationships with retailers and other customers and, despite supply problems and difficulties recruiting the staff it requires in North America, the company has not lost any significant business. New prices are being negotiated and some customers are taking on transport costs themselves.
In the past, Christmas dominated IG Design revenues. It is still important, but diversification into craft products means that the seasonality has been reduced. That means that IG Design could still do better than expected in 2021-22, but it makes more sense to assess the potential for the year to March 2023.
The integration of the CSS craft products acquisition, which was made in 2020-21, continues and there are more cost savings to come. The production efficiencies that IG Design is undertaking to offset the current problems will benefit the business next year.
The share price has made a modest recovery since the profit warning. The current consensus forecast 2022-23 pre-tax profit of around $30 million, is still well below the $37 million achieved in 2019-20. That forecast would put the shares on around 19 times prospective earnings, but this appears to be deliberately cautious with opportunities to upgrade over the next year if there are no additional problems.
The net tangible asset value is around 200p a share. Polar Capital has built up a 5.18% stake and Octopus has increased its shareholding from 11% to 12.3% since the profit warning. Buy for recovery.
eEnergy Group (LSE:EAAS) was formed when eLight, which installs LED lighting and provides the energy required in return for a monthly service fee, reversed into Alexander Mining at the beginning of 2020. The LightasaService (LAAS) business helps clients to reduce energy consumption without the upfront payment. The plan is to become a broader EnergyasaService business.
Since then, further acquisitions have been made, including energy consultancy Beyond and a stake in a smart metering business renamed MyZeRO. This means eEnergy can offer a combined LAAS and smart metering service.
The most recent acquisition is energy management consultancy UtilityTeam Trading for up to £21 million depending on performance, with an initial payment of £15.9 million in cash and shares – issued at 24p each. UtilityTeam has to generate underlying profit (EBITDA) of £3 million in the current financial year to trigger the full deferred payment. eEnergy raised £12 million at 15p a share at the same time.
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The deal adds more than 800 customers that provide potential for eEnergy to cross-sell its products and should be earnings enhancing before any additional benefits.
The share price has fallen from its high back in March, when it had got well ahead of events, and it is lower than the placing price to fund the UtilityTeam acquisition. The group is moving into profit. In the year to June 2022, earnings are forecast to be 1.02p a share, rising to 1.45p a share the following year.
Cash generation is strong and there could be net cash of more than £9 million by the end of June 2023. Acquisitions will use at least some of that cash, though. The shares are trading on 13 times prospective 2021-22 earnings, which is modest for a business with such strong growth prospects. Many energy efficiency business on AIM – and planning to float – have fancy ratings without the underlying commercial business. eEnergy provides exposure to energy efficiency at lower risk, but with rapid growth. Buy.
Ebiquity (LSE:EBQ) provides independent media analysis and is an international business, although North American revenues are low in relation to the size of the market. The company works for the majority of the top 100 advertisers in the world and helps them to spend their advertising funds more efficiently.
The company’s media specialists analyse $55 billion of media spending in 75 markets. The FirmDecisions compliance business audits $40 billion of value each year. Newer clients include Unilever and BMW.
A new office was opened in India in October because of the strong growth in the Indian advertising market. Advertising spending is expected to grow by more than 20% in the latest year, with digital growing even faster. One of the ways that Ebiquity can grow is by selling more of its services to existing clients, as well as expanding in markets such as North America.
Ebiquity slumped into loss during 2020 and bounced back in 2021, when earnings per share are estimated at 3.1p.
The share price had a strong run early in 2021 as advertising spending rebounded. Even so, the shares are trading on 17 times prospective 2021 earnings, falling to 11 in 2022. Hargreave Hale recently increased its stake to 18.1%.
Ebiquity warrants a higher valuation and could be an attractive bid target for a larger media and marketing business if the share price does not rise. Buy.
Shield Therapeutics (LSE:STX) has developed the Accrufer iron deficiency treatment and there is patent protection until 2035. Accrufer is an oral treatment with approvals in the US and EU. It is much more convenient than the existing alternative, so it should be attractive to patients and clinicians.
Iron is critical for red blood cells, which transport oxygen around the body. Low iron levels cause defective production of red blood cells and that leads to anaemia. Accrufer is more tolerable than salt-based oral products and there is no risk of too high an iron dosage as there is with injectable treatments. It can replace the more costly intravenous administration of iron.
Shield has launched Accrufer in the US. A decision was made to launch directly rather than through a distributor. A new management team has been brought in to oversee the US launch. Shield believes that it could generate sales of $100 million in the third year after launch.
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Accrufer has been out-licenced to Norgine in Europe, Australia and New Zealand, ASK Pharma in China and Taiwan and Korea Pharma in South Korea. Sales are building up in Europe.
Shield is expected to have more than £7 million of net cash at the end of 2021, after significant spending on launching Accrufer. There is a concern that it could require more cash if sales do not build up as expected.
It will take time to build up the sales of Accrufer and Shield has not yet given any indication on progress. It may be well into 2022 before the success of the launch can be assessed. If sales reach £85 million, a £38 million cash inflow is forecast for 2023, which would provide a significant cash pile. That could prove optimistic, but it provides an indication of the potential for Accrufer.
The share price is just above the 30p placing price early in 2021, which itself was a significant discount to the then market price. There is a risk that sales will not build up as expected, but Accrufer is effective, easier to use and cheaper than the alternative, so it has a good chance of success. Buy.
Compliance and energy saving services provider Sureserve (LSE:SUR) has been turned around from a loss-making business to a highly profitable one. There is still growth to come from all parts of the business.
Sureserve has two divisions: compliance and energy services. The compliance division provides planned maintenance, installation and repair services to local authorities and housing associations. The focus is gas, fire, electrical, water and lifts. These are highly regulated areas, where investment is required to be made. This is a solid business that is winning new contracts.
Energy services provides energy efficiency products, such as insulation and renewable energy technologies. It also installs smart meters. Covid and other factors have delayed business and the energy division’s profit contribution, but the long-term outlook for energy efficiency services is good.
Sureserve is managing to increase its profit with a lower contribution from the energy services division, which should recover in this financial year and accelerate growth.
There was net cash of £16 million at the end of September 2021. Since then, £2.9 million has been spent as the cash part of the £5.9 million acquisition of CorEnergy, which provides sustainable energy services, such as solar PV, battery storage and EV charging, to the private and public sector. This broadens the product range and will be immediately earnings enhancing with CorEnergy expected to generate EBITDA of £1 million in 2021, which could spark a further payment of up to £1.6 million.
Compliance provides a solid base, and the upside comes from the energy services division, where the performance has been subdued in recent times. The shares are trading on less than 12 times prospective 2021-22 earnings and there is a growing dividend. Buy.
Andrew Hore is a freelance contributor and not a direct employee of interactive investor.
Andrew was recently named Journalist of the Year at the 2021 Small Cap Awards.
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