Award-winning AIM writer Andrew Hore names his top small-cap share picks for the year ahead, including one with a yield of more than 8%.
Following last year’s debacle, my 2023 AIM recommendations are generally slightly more solid businesses than they were in 2022.
Four of the companies are cash generative and pay dividends, providing an attractive income for investors, but all of them also have prospects for at least steady growth.
Here are the five AIM companies I like for 2023.
Self-storage company Lok'n Store Group (LSE:LOK) has proved to be a consistent performer through the past two decades. That is not to say that it is unaffected by the up and downs of the economy, but it is resilient.
The investment in new sites means that there is inbuilt growth in the business even if trading does get tougher. Last year, there was 25% growth in revenues on a same store basis as well as contributions from new stores. There are 10 new stores in the development pipeline.
In the year to July 2022, revenues increased from £21.9 million to £26.9 million, while underlying pre-tax profit jumped from £9.1 million to £13.1 million. There were trebled non-recurring managed store fees of £1.5 million during the period, but that profit excludes the £5.7 million gain from the disposal of four sites. The total dividend was higher than expected at 17.25p a share.
Net debt was £20.3 million at the end of July 2022 and loan-to-value was 6.6%. Net debt could reach £61 million by the end of July 2024 following investment in new sites, but that is within the debt facilities available.
There will be higher interest charges and operating costs this year. There will also be lower revenues due to the disposals and no non-recurring management fees are assumed. A pre-tax profit of £11.1 million is forecast for this year, but the dividend is expected to increase to 19.25p a share.
The sites are becoming increasingly valuable. finnCap increased its July 2023 net asset value (NAV) forecast from 914p a share to 1,018p a share – at the beginning of 2022 the figure was 877p a share - with 1,098p a share expected for July 2024. Rival self-storage operators are trading at a premium to forecast NAV. Buy for long-term income and growth.
Renew Holdings (LSE:RNWH) generates most of its revenues from providing maintenance and other services to utilities and infrastructure sectors. This is a cash-generative business and last year’s trading was ahead of expectations.
Renew provides engineering services for markets including energy, nuclear, water, environmental, telecoms, rail, road and other infrastructure. Much of the business is based on long-term framework contracts and ongoing maintenance spending, rather than one-off capital projects. The company still has a construction business, which is involved in major structural engineering works for upmarket residential properties in London and the Home Counties, but it is a reducing percentage of the business – less than 3% of operating profit.
The order book is worth £775 million, including £717 million for the engineering services division. The long-term contracts make it easier to manage rising costs and margins are improving.
Organic growth has been supplemented by acquisitions. There was net cash of £20.2 million at the end of September 2022 and £15.6 million of that cash is being spent on Enisca, which provides services in the water sector. This should be immediately earnings enhancing.
This deal will help pre-tax profit to improve from £58.2 million to £61.5 million in the year to September 2022. Even after paying for Enisca, net cash could be £29 million by September 2022. There could be further acquisitions, though.
The shares are trading on 11 times 2022-23 prospective earnings. The forecast yield is 2.6%. The rating is modest for such a cash generative business with limited downside. Buy.
Professional services network DSW Capital (LSE:DSW) has been quoted on AIM for one year and it is one of the few new admissions to be above its placing price – 100p a share. Revenues come from licence fee income paid by professionals using its brand. The focus is servicing small and medium-sized companies. There is little requirement for capital investment, and admin costs do not have to increase in line with income.
DSW stands for Dow Schofield Watts, and founder James Dow is chief executive. DSW Capital licences its brand to professionals involved in corporate finance and accounting services and provides them with back-office support. The fee earners pay DSW Capital a licence fee of 22% of income is standard. There is also profit share income, including income from associates. There are 93 fee earners.
Network revenues were 35% ahead at £9.8 million in the six months to September 2022, while DSW Capital’s income was 40% higher at £1.6 million. The recruitment market has been more difficult in recent months, but the number of fee earners is increasing. M&A work appears to be holding up at the smaller end of the market and insolvency work is growing.
DSW Capital is paying an interim dividend of 1.76p a share and it is on course for a full-year dividend of 6.1p a share. The ongoing policy is to pay up to 70% of distributable earnings in dividends. Even so, cash is likely to increase.
This is a solid business that is cash generative and there is still plenty of potential to grow by adding fee earners and expanding in new geographic areas. A full-year pre-tax profit of £2.3 million is forecast, which puts the shares on 14 times prospective earnings and the forecast yield is 5.1%. Buy.
Duke Royalty Ltd
Duke Royalty (LSE:DUKE) invests cash in businesses and receives a royalty income stream in return. This is a form of financing that is suitable for cash generative businesses. Duke Royalty is in the process of investing the cash it raised in the spring.
The royalty deals can last for up to 40 years and the initial yield can be 12%-14% of capital. Due diligence is done on the business to ensure that the royalties can be comfortably paid out of cash flow. The security provided by the companies limits the downside. River cruising company Temarca, which was hit by Covid restrictions, is the only investee company that has failed, and Duke Royalty managed to recoup cash from selling riverboat assets.
- Investor poll: fears, predictions and strategies for 2023
- 10 top themes for investors to consider in 2023
In the year to March 2022, cash revenues increased from £12.1 million to £18.4 million and free cash flow was 3.5p a share. Interim cash revenues rose by two-thirds to £10.4 million with free cash flow of 1.71p a share. Third-quarter recurring cash revenues were £5.5 million.
The dividend is expected to increase to 2.9p a share this year and it could rise to 3.1p a share in 2023-24.
During 2022, there was £20 million raised at 35p a share and the debt facility was increased from £55 million to £100 million in December, while the interest rate was lowered. That means that Duke Royalty has cash to invest in new and existing investee companies and that will accelerate the growth of cash revenues. It also offers a yield of more than 8%. Buy.
Management process automation software provider ActiveOps (LSE:AOM) is loss making, but revenues are growing, and it is moving towards profitability. ActiveOps provides software that helps to improve the efficiency of back office operations of organisations, particularly in the financial sector. This software is particularly attractive in tougher times when organisations are seeking to control costs.
In the year to March 2022, revenues improved from £20.4 million to £22.9 million, while the underlying loss increased from £400,000 to £900,000. Interim revenues grew by 10%. Annual recurring revenues (ARR) are £20.1 million. The top 40 accounts grew ARR by 19%. Net revenues retention was 104% as existing clients spend more. Net cash is £11 million.
This year, revenues are expected to improve to around £25 million, but there will still be a loss. That is due to investment in sales and product development. However, there should be a minimal cash outflow due to recognition policy of the SaaS-based revenues.
Finance director Paddy Deller is leaving the company, but this should not be a negative. He will leave after a successor is appointed.
This is the riskiest of the five companies I’m backing for 2023, but the cash pile, which is one-fifth of the market capitalisation, and the potential ending of the cash outflow from operations mean that the prospects are good. ActiveOps could breakeven in 2023-24 and, once it passes that point, the profit should start to rise steadily as revenues grow. The valuation is low for a software company with this level of ARR. Buy.
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 to buy or sell any financial instrument or product, or to adopt any investment strategy as it 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.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
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.
Please note that our article on this investment should not be considered to be a regular publication.
Details of all recommendations issued by ii during the previous 12-month period can be found here.
ii adheres to a strict code of conduct. Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.