Former AIM writer of the year Andrew Hore has a handful of great income ideas from the junior market.
It is time to consider how to make the most of your £20,000 annual ISA allowance for this tax year and ahead of the next tax year.
This week covers five AIM companies that provide a significant, growing dividend plus growth prospects. These are predominantly companies with international businesses that are not too reliant on the UK economy and they have strong cash generation.
Next week the focus will be growth businesses, whether, or not they pay a dividend.
Cello Health (CLL)
Forecast yield: 3.4%
Cello Health (LSE:CLL) has built up a strong position in the provision of marketing services and research for pharmaceutical businesses in the US and Europe. This has come through a combination of acquisitions and taking on teams to start-up operations in specific areas. A fall in the pound would boost the significant US earnings.
The core health business accounts for three-quarters of profit. An office was opened in Philadelphia last year and in the next few months a new office will open in Berlin in order to develop the European client base.
Cello Signal comprises the non-health related operations based in the UK. These have not made the steady progress of the health division. Last year, there was a dip in performance and Signal is trying to increase its services to health-based clients.
Investment has held back stated pre-tax profit growth. There were £1.2 million of start-up losses for new business operations, while next year there will be £300,000 of reorganisation costs for Cello Signal. Underlying pre-tax profit is expected to be £12.4 million in 2018, rising to £13.1 million.
There was net debt at the end of June, but the company had moved back into net cash of £4.7 million by the end of 2018. The shares are trading on less than 13 times prospective earnings.
Cello Health is an attractive investment and could even be an attractive takeover target for a rival, even at a much higher share price.
Forecast yield: 3.1%
It may seem perverse, but window ventilation components manufacturer Titon (LSE:TON) is particularly attractive at the moment. The share price has slumped since a profit warning associated with its 51%-owned South Korean subsidiary. That warning led to a £1 million reduction in pre-tax profit forecast to £2.21 million for the year to September 2019.
In a decade, South Korea has grown to become the largest profit contributor of the group. Last year, was a bumper one for the South Korean business and management had been cautious about the current year. The speed of the move towards window ventilation designed to combat pollution caught out Titon management. New products for this market are due to be launched but the benefits won’t show through until next year.
The UK and other international business is in line with expectations. These operations will continue to grow.
Minority interests relating to the South Korean business means earnings per share will not be hit as hard and the forecast has been cut 16p, down from 19.2p the previous year. That will still cover the forecast dividend of 4.85p a share more than three times and net cash is expected to increase from £3.42 million to £3.7 million over the year - equivalent to around one-quarter of Titon's market capitalisation.
The bid/offer spread can be wide – currently 130p/145p – because the shares can be illiquid. This is a solid, well-run business which has failed to react rapidly enough to a change in one of its markets, but it is remedying that, and the rest of the business is growing. The strong cash position provides comfort and the forecast multiple is ten, falling to around eight next year.
Nexus Infrastructure (NEXS)
Forecast yield: 3.5%
Nexus Infrastructure (LSE:NEXS) is another company that has had short-term blips. Nexus provides infrastructure and utility connections services and it already has bumper order books stretching out for many years. However, there were planning and development delays to some contracts last year, which led to a shortfall to original forecasts.
Infrastructure engineering services provider Tamdown is the most mature part of Nexus and it tends to win an initial phase of a project and then win the subsequent phases. This means that the average duration of work on a project is eight years.
Utility connections business TriConnex has recently moved into water and fibre connections so there is plenty of growth to come from picking up work in additional sectors, having historically focused on the electricity and gas sectors. There is also scope to widen the geographic exposure of TriConnex.
Additional, longer-term growth will come from eSmart Networks, which designs and installs electric vehicle charging points. This made a start-up loss last year, but revenues are building up.
In the year to September 2018, revenues were flat at £134.9 million and underlying pre-tax profit was also flat at £9.2 million. The full year dividend was raised by 5% to 6.6p a share.
A 2018-19 pre-tax profit of £10.4 million is forecast and the dividend could rise to 7.3p a share - covered nearly three times by earnings. The following year pre-tax profit could reach £12.5 million. The shares are trading on ten times this year's earnings, falling to nine next year.
Forecast yield: 1.9%
International recruitment company Empresaria (LSE:EMR) has been hit by legislative changes in Germany and Japan, but this is a strong business with a good geographical spread and exposure to many different sectors. This has enabled it to continue to make progress and it will report record results for 2018.
Empresaria confirmed that 2018 trading was in line with expectations. Allenby expects full year pre-tax profit to grow from £10.8 million to £11.4 million, with most of the improvement coming in the second half. Higher minority interests will reduce earnings per share. The dividend will be edged up to 1.35p a share.
Net debt is set to be substantially reduced over the next couple of years unless Empresaria finds a suitable acquisition. That is a possibility and management does have a good overall acquisition record.
Germany and Japan should preform more strongly this year as the contract recruitment operations recover. If the short-term uncertainty in the UK market comes to an end, then there could be further growth in the home market. Empresaria is also exposed to higher growth regions such as Asia Pacific and South America.
The 2019 pre-tax profit forecast of £11.6 million has been set at a deliberately conservative level. Even if growth is modest this year, Empresaria has the ability to grow more rapidly in the next few years as some of its key markets improve.
The yield is relatively modest compared with the other companies, but the shares are particularly cheap at this level.
Manx Telecom (MANX)
Forecast yield: 6.6%
I have written about Manx Telecom (LSE:MANX) relatively recently because of its combination of strong cash flow, dividend and upside from growth in international services and a new hearing loss assistance technology. This is a perfect investment for an ISA, so it is worth repeating.
Manx is the telecoms provider for the Isle of Man, and it has high market shares in fixed line, broadband and mobile. Along with income from data centres and other telecoms services, these operations generate the cash to pay the dividend and invest in the business. Management has confirmed that 2018 trading was in line with expectations. A total 2018 dividend of 12p a share and earnings per share of 13.3p a share is forecast.
Dividend growth is set to continue at around 5% a year.
That provides the income attractions and investee company Goshawk, which is part of the portfolio of Manx subsidiary Vannin Ventures, is the additional upside. Goshawk has developed a hearing loss product - certified as a medical service – which improves the clarity of phone calls and is making progress with its commercialisation.
The UK brand name of the product, which has been launched on the Isle of Man, is Audacious. BT's mobile subsidiary EE in the UK has been signed up as a partner. The British launch is set to be in the summer. There is a potential UK market of up to three million people, plus even more possible users internationally.
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.
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. Members of ii staff may hold shares in companies included in these portfolios, which could create a conflict of interests. Any member of staff 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. We will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, staff 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.