There was another mixed performance from the 2023 AIM recommendations, but they did slightly better than AIM itself. This year is difficult to predict. It could continue to be a tough stock market, or there could be the start of a recovery later in the year.
This year’s five recommendations cover a range of sectors, and again they are predominantly dividend payers. Their forecasts are generally conservative and leave room for upgrades if the economy improves.
Oxford Metrics (OMG)
Oxford Metrics (LSE:OMG) is cash rich and has an opportunity to invest the cash to enhance earnings. The core business is motion capture technology. New chief executive Imogen Moorhouse started in October, and this will be her first full year in charge. The underlying strategy is being maintained.
Main subsidiary Vicon developed 3D motion capture technology and has customers in the entertainment, life science and engineering markets. Location-based entertainment, such as virtual reality games, is a newer market. Valkyrie is the latest motion capture system, which can track even fast-moving subjects.
There was still £64.8 million in the bank at the end of September 2023. Oxford Metrics acquired Industrial Vision Systems, which adds machine learning for automated quality control, for £8.1 million in cash and shares. This broadens the addressable market. Some of the remaining cash will be reinvested in developing the existing technology, but most is available for earnings enhancing acquisitions.
In 2022-23, revenue was 53% higher at £44.2 million, while pre-tax profit improved from £2.6 million to £6.5 million. The dividend was 2.75p/share and could be raised by 10% this year. The order book is worth £11.5 million.
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The existing operations can achieve a pre-tax profit of £7.9 million this year. The shares are trading on 20 times prospective 2023-24 earnings. Given that two-fifths of the market capitalisation is cash and there are strong growth prospects in entertainment and industrial markets, the shares are attractive. Buy.
Michelmersh Brick (MBH)
The construction sector is going through a tough time, but brick-making capacity is limited and Michelmersh Brick Holdings (LSE:MBH) focuses on niche brick markets and can be more resilient than other construction materials companies. There is also a strong balance sheet with good asset backing.
The customer base includes new housing, commercial, architectural specification and repair and maintenance. Michelmersh Brick has long-term relationships with many customers. Products include clay pavers, wirecut, terracotta and champ-fired bricks. They are manufactured in the UK and Belgium. The 2022 acquisition FabSpeed manufactures off-site pre-built brick products, such as chimneys. That is a newer market for Michelmersh Brick.
Management hedged more than 90% of energy costs for 2023. Interim revenue was 23.5% ahead at £42 million – organic growth was 10%. Pre-tax profit improved from £5.6 million to £6.1 million. Net cash was £11.8 million at the end of June 2023 and the interim dividend was raised 15% to 1.5p/share. Net asset value (NAV) was 95.7p/share at June 2023. There is potential of an uplift in some of the values of land holdings.
Capital expenditure is running below depreciation and cash should continue to build up. There are undrawn borrowing facilities if Michelmersh Brick finds a substantial acquisition.
Michelmersh Brick has launched a website called SustainableBrick.com to highlight the benefits of clay bricks. At the Floren site in Belgium, 50% of electricity will be generated from solar and at Blockleys in the UK solar is being installed.
Full-year pre-tax profit is forecast to improve from £12.5 million to £12.8 million – that assumes a tougher second half. The share price has been on the rise since November, although the prospective multiple is still less than nine.
Next year, more than two-thirds of energy costs are hedged, so management can plan ahead. A modest improvement in pre-tax profit to £13.4 million is expected for 2024, but any upturn in the construction sector could make that appear conservative.
New housing is required, and when housebuilding recovers Michelmersh Brick is well placed to take advantage. A near-5% forecast yield and the cash generative nature of the business means that investors can be patient even if it does take time for the economy to improve. Buy.
Trident Royalties (TRR)
Mining royalties investor Trident Royalties (LSE:TRR) has been building up a significant portfolio of royalties and it is on the verge of moving into profit. In fewer than four years Trident Royalties has acquired 21 investments. The latest acquisition is a 0.9% net smelter royalty on New World’s Antler copper project in Arizona for A$11 million.
The gold portfolio provides the near-term upside. This accounts for one-third of the company’s NAV, while lithium accounts for two-fifths. The rest of the portfolio covers copper, silver, iron ore and mineral sands. This means that there is significant exposure to electrification technologies.
At the end of November, Trident Royalties secured a three-year $40 million revolving credit facility at a lower interest rate than previously – this could save $1.3 million/year. The facility can be expanded to $60 million. This can be used to fund acquisitions. There is no short-term danger of a share issue hampering the share price given the amount of fire power available.
Trident Royalties made a loss in 2022, but it is expected to report a pre-tax profit of $8.4 million in 2023. More importantly, $16 million in cash is likely to be generated, helped by a reduction in receivables. In 2024, $11.5 million could be generated, although cash generated prior to working capital movements should double. Cash generation should really take off in 2025.
The share price has hardly changed from the start of 2021, yet the company is on the verge of being highly cash generative. This is an excellent opportunity to buy and have less risky exposure to minerals markets.
Legal services provider Gateley (Holdings) (LSE:GTLY) has a diversified customer base over a range of sectors. Counter-cyclical businesses compensate for transactional revenues when they are weaker. Gateley has been a consistent dividend payer.
Gateley was one of the first partnerships to become an LLP and the second law firm to gain approval to change to a corporate structure. It joined AIM in June 2015. The business has four main areas of operation - property, employment, business services and corporate. M&A work has been weak in the past year, although areas such as business recovery help to offset that.
Property continues to be the largest revenue generator with around 50% of the group total. Corporate is the next largest accounting for nearly one-quarter. Business services and employment generate similar revenues.
Management says that interim underlying pre-tax profit will be at least £10 million, up 4%. That is a good performance under current conditions. Interim results will be reported on 17 January.
A full year pre-tax profit of £26.6 million, up from £25.1 million, is forecast. That equates to a multiple of ten times the current share price, while the forecast yield is nearly 6%. Net cash should be £6 million at the end of April 2024.
Gateley remains cautious but there are signs of improving activity levels. There is a strong base from which to benefit from any upturn. Buy.
Business support services provider Restore (LSE:RST) appeared to be trading well in the early part of 2023, but in the middle of the year it warned that results were going to fall well short of forecasts and the chief executive exited. This led to Charles Skinner returning as chief executive.
The technology recycling operations were weak and there was a reduction in scanning demand. The core business of records management is a steady growing business with recurring revenues and Restore is in a strong market position. This business alone could be worth more than the group’s current market capitalisation.
Analysts had been expecting a 2023 pre-tax profit of £41 million, which was similar to the year before. This has been cut to £31 million and it is likely to take more than two years to return to 2022 profit levels based on current forecasts.
Restore had been growing via acquisition and that had pushed up the debt levels. Net debt is expected to be £102 million at the end of 2023. The new focus is on organic growth and improving margins and that will bring down the debt figure.
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Restore has already cut around £2 million from overheads, as a more decentralised approach is taken, and there are other potential cost savings. Some properties could be consolidated but that will not be achieved immediately. There is also a focus on improving pricing. This has been easier in records management than in other parts of the business.
The recent capital market day presentation appears to have reassured investors that trading has at least stabilised. A 20% margin is being targeted - the 2023 figure is likely to be around 16%. Utilisation rates need to be improved.
The prospective 2023 multiple is less than 13 and, even though the dividend will be reduced, the yield could still be nearly 2.5%. The current share price does not reflect much recovery for the group, and experienced management is in a good position to improve the return from the existing businesses. Buy for recovery.
Andrew Hore is a freelance contributor and not a direct employee of interactive investor.
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