Interactive Investor

Five outperforming AIM shares that could keep rising

Despite a tough couple of years, some small-cap shares have done incredibly well. Award-wining AIM writer Andrew Hore highlights the ones he thinks have further to go.

24th November 2023 14:13

Andrew Hore from interactive investor

Despite the decline in the AIM market this year, there have been plenty of companies that have prospered. AIM has fallen by 13.6% so far in 2023, while the FTSE AIM 100 has not done much better with a 13.2% decline. Even so, there are 34 constituents of the AIM 100 index that are in positive territory this year.

The low ratings of some companies have led to bidders spotting attractive opportunities. Parcel and freight delivery company DX (Group) (LSE:DX.) and asset manager Gresham House (LSE:GHE), have risen by 70.3% and 45% respectively because they are the subjects of recommended bids that should complete in the coming weeks. Numis Corporation is a former constituent taken over at a significant premium, while forex company Equals Group (LSE:EQLS) is in bid talks, which has boosted its share price.

Aggregates supplier Breedon Group (LSE:BREE) switched to the Main Market, or it would have been one of the gainers on the AIM 100. It would also have had one of the higher weightings in the index.

The best performer is cosmetic supplier Warpaint London (LSE:W7L) with an 83.1% gain, thanks to multiple forecast upgrades during the year. Renew Holdings (LSE:RNWH), which is in the AIM 100, and ActiveOps (LSE:AOM) are two of my 2023 AIM recommendations in positive territory this year.

Just because there are AIM 100 companies that have substantially outperformed, it does not mean that many do not have further to go. Here are five shares that still have long-term attractions. All share prices and performance data as at end of business on Thursday 23 November.

Vertu Motors (VTU)

82.2p

Rise in 2023: 52.2%

Takeover activity in the vehicle distribution sector has left Vertu Motors (LSE:VTU) as the only significant quoted company focused on selling cars and other vehicles. Lookers is being acquired and Pendragon is selling its motor dealer business, following a bidding war, and concentrating on its software operations.

This has turned attention to Vertu Motors and helped the share price improvement. Trading is recovering as well and share buybacks have helped. False changes to Companies House records have not harmed the share price and these have been corrected and an injunction obtained against the person that made them.

In the six months to August 2023, revenues were 21% ahead at £2.42 billion as new cars became easier to obtain. There was a small dip in gross margin to 11%, but operating profit was one-third higher at £41.4 million.

Acquisitions pushed Vertu Motors net debt to £90.7 million, and that meant that the interest charge was higher, so the pre-tax profit grew 12% to £31.5 million. The interim dividend was raised by 21% to 0.85p/share. Net tangible assets are 70.9p/share and it is more than £1/share if goodwill is included.

A 2023-24 pre-tax profit estimate of £47.2 million puts the shares on less than nine times prospective earnings. Following the interim figures, analysts at Zeus estimated a value of 108p/share. Cinch recently increased its stake from 3.1% to 4.2% and there could be future bid interest in the company.

Johnson Service Group (JSG)

132p

Rise in 2023: 36.2%

Johnson Service Group (LSE:JSG) was hard hit by Covid lockdowns because of its exposure to the hotel and catering linen market, and trading levels are only just getting back to those before 2020. Workwear business held up better. Positive trading statements sparking upgrades helped the share price to recover this year.

Acquisitions are adding to organic growth. JSG recently acquired Republic of Ireland-based healthcare and catering line hirer Celtic Linen. This diversifies the customer base by increasing exposure to the healthcare linen market. Investment in new capacity is also making the operations more efficient.

Organic growth was 20% in the first half. Interim revenues were 22% ahead at £215 million and pre-tax profit jumped from £11.2 million to £16.4 million as margins continue to recover. Even so, there is some way to go to rebuild margins to past levels.

Full-year pre-tax profit could rise to £43.4 million this year. That is higher than the 2019 figure, although a share issue in 2020 to boost the balance sheet means that the earnings are still lower. The shares are trading on 17 times prospective 2023 earnings, falling to less than 15 the following year.

JSG has launched a share buyback of up to £10 million. That, along with the continued growth of the business, should help the share price.

Volex (VLX)

313.5p

Rise in 2023: 25.1%

Electrical connections and accessories supplier Volex (LSE:VLX) has been transformed over the past five years with revenues and margins improving. It has a wide spread of activities, broadened by the recent acquisition of Turkey-based off-highway business Murat Ticaret, and an international customer base.

Electric vehicles have been a growth area, but destocking hit the interim figures – this is a temporary downturn in a fast-growing sector. Consumer electricals was also weaker, but better performances in medical and complex industrial technology have offset this decline. Supply chains are improving.

In the six months to September 2023, revenues were 11% ahead at $397.5 million (£316.5). There was a one-month contribution from the new acquisition. Pre-tax profit was 2% ahead at $22 million. The interim dividend is 8% higher at 1.4p/share.

The changing sector mix is set to improve operating margins. As well as acquisitions, capital investment in manufacturing facilities is enabling faster growth. Net debt is expected to be $164 million at the end of March 2024, but this could fall to $118 million two years later.

Analysts at HSBC forecast an improvement in annual pre-tax profit from $59 million to $74 million. This could jump to $90 million next year when there is a full contribution from Murat Ticaret. The prospective multiple is 12, falling to 10 next year. Some other forecasts are more conservative, but the trend is the same. Volex is involved in growing markets and holds a strong position in them.

Tatton Asset Management (TAM)

500p

Rise in 2023: 9.3%

Tatton Asset Management (LSE:TAM) has a strong record of attracting new money via Independent Financial Advisors (IFAs) for its asset management business. The tougher stock market conditions have not hampered progress. The business is benefiting from the growth in managed portfolio services.

This year Tatton Asset Management is continuing its impressive growth in assets under management, which have passed £15 billion this month. There was a small performance gain in the first half, but the growth has come from net inflows of around £150 million/month.

Interim revenues were 10% ahead at £17.5 million, while underlying pre-tax profit improved from £7.7 million to £8.8 million. The dividend is being rebased with a 78% increase in the interim to 8p/share. The shares went ex-dividend on Thursday.

The growth has led to improving margins in fund management and that more than made up for a dip in profit contribution from the Paradigm mortgage-related business.

Singer forecasts a full-year pre-tax profit of £17.6 million, rising to £20.1 million next year. The rate of funds flowing into the company has been consistent for many months, and an upturn in the market should provide a further boost to help management achieve its goal of doubling assets under management. There is cash in the bank to make add-on acquisitions to accelerate the achievement of that goal.

Judges Scientific (JDG)

£91.20

Rise in 2023: 8.06%

Scientific instruments manufacturer Judges Scientific (LSE:JDG) has been one of the biggest long-term successes on AIM. The share price has risen 8,710% over 20 years and even more over 15 years because of a share price slump at the time of the credit crunch. There has generally been a consistent upward trend. In the past five years, growth is 253%.

Starting out two decades ago as an activist investment company, it pivoted to become a consolidator in the scientific instruments sector. This is an international business supplying a wide range of products, which means that weakness in some markets is offset elsewhere.

The acquisition record is impressive and there barely appears to have been a misstep. The companies acquired tend to be in niche markets with limited competition. Some are dependent on the education sector and there can be delays in capital investment. Even so, Judges Scientific has remained highly profitable even in the tougher times.

In the first half of 2023, revenues increased by one-third to £61.3 million with organic growth of 16.5%. Pre-tax profit was nearly one-third ahead at £12.8 million. The total order book was equivalent to 21 weeks trading by the end of August. The dividend has been raised consistently over the years and should be 89.1p/share this year.

Analysts at Shore forecast a 2023 pre-tax profit of £31.6 million, rising to £34.1 million next year. The shares are trading on 25 times estimated earnings. Strong cash generation will reduce net debt to £44.8 million at the end of 2023 and £26.1 million. Acquisitions could enhance earnings.    

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.

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