Four AIM strugglers with recovery potential

Our award-winning AIM expert discusses how some of 2019’s worst performers could bounce back this year. 

Some companies that have a bad year can bounce back sharply the following year, while others continue to get worse and the share price continues to slump. The former happens less often, but the poor performers of one year can become attractive investment prospects the next. 

The table of poor performers from 2018 shows those companies whose share price has fallen by at least 70%, then risen by at least 50% in 2018. 
There are other companies where the share price has risen in 2019, but by less. There are 80 AIM companies still traded on AIM where the share price fell by at least 70% in 2018 and there are a similar number of risers and fallers from this sample in 2018. 

The list is dominated by pharmaceuticals and mining companies. These can tend to be the most volatile because the approval or not of a drug or a resources discovery can spark a sharp upturn in a share price. 

A good example is Shield Therapeutics (LSE:STX), which had disappointing results from a clinical trial for iron deficiency treatment Ferracru in 2018. That sparked a 72.9% share price decline for the year. These results turned out to be less of a problem than investors feared and last summer Food & Drug Administration (FDA) approval was gained for oral treatment Ferracru to treat patients with or without anaemia, thanks to its high tolerability.

Ferracru will be marketed as Accrufer in the US. The potential US market for Ferracru is worth more than $1 billion. The European rights had already been sold and in January ASK Pharm acquired Chinese rights, ensuring there is plenty of cash in the bank. 

Shield offers further upside as it makes progress in commercialising Ferracru and developing other treatments. 

Open Orphan (LSE:ORPH) is a company that has changed significantly from its guise as Venn Life Sciences in 2018. It reversed into Venn and became a rare and orphan drugs consulting services provider in June 2019. 

A broader pharma services business is being developed through the all-share acquisition of fellow AIM-quoted contract pharma services provider hVIVO, which was announced at the end of last year. The two companies have complementary skills and sector expertise and there will be cost savings to help the business move into profit. 

Open Orphan is currently seeking to raise at least £5 million (£10 million was originally mentioned) at 6.1p a share to fund investment in the enlarged group. The share price has risen by one-third since the beginning of this year.

Some companies, such as mattress supplier eve Sleep (LSE:EVE) and green cleaning technology developer Xeros Technology Group (LSE:XSG), have fallen sharply in both 2018 and 2019. These are companies that have voraciously eaten through cash and disappointed investors. They still have cash, but it is flowing out of the bank. If this situation can be turned around, then the share prices are so low they could bounce. However, if there is no significant improvement the price could continue to decline.

Recruitment and training firm Staffline (LSE:STAF) had accounting and trading problems last year that led to it slumping from a FTSE AIM UK 50 index constituent to be worth a fraction of its previous market value. It appears to have come through the difficulties, but investors will continue to be cautious for the time being and the share price continues to decline. Longer-term, if there are no other problems, Staffline should have a strong enough base in order to recover. 

There are better bets for share price recovery this year, although they are by their nature risky. 

Will these shares bounce back?

Digitalbox (DBOX) 

Digital media publisher Digitalbox (LSE:DBOX) reversed into an AIM shell during 2019. The share price of the shell fell by two-thirds in 2018 and the price halved in 2019 after the reversal. A strong trading statement has helped to boost the share price this year.

The management team has a background at EMAP, and it has honed its digital skills at the Entertainment Daily website. Revenues are generated from digital advertising and the group overhead is relatively fixed and could cope with additional digital titles.

The Daily Mash was acquired soon after flotation and the Digitalbox management has succeeded in increasing its advertising income. The plan is to grow via acquiring other titles and the success with the Daily Mash suggests that the model should work. 

The shares are trading on less than 10 times prospective 2020 earnings. A further recovery in the share price will start to make it easier to finance the acquisition of more digital titles. The balance sheet is strong and net cash could rise to £1.38 million by the end of 2020, based on the current business before any acquisitions, which is one-fifth of the current market capitalisation.

Maestrano (MNO)

The share price of Maestrano (LSE:MNO) slumped when the main customer for its banking software decided not to go ahead with a project. The share price fell by 82% in 2019. Maestrano floated on AIM the year before. 

A review of strategy led to a move into a new area with the purchase of Airsight, which has developed the Corridor.ai platform that collates and analyses infrastructure geospatial data for rail and other networks. 

The Maestrano share price is still two-thirds of the level it was at the beginning of 2019, despite a jump on the back of positive contract news. Airsight won a contract with Australian Rail Track Corporation, which is the first contract for Corridor.ai, although it is an existing customer for other services.  The second Corridor.ai deployment was not far behind with Japanese rail company Nagoya Railroad (also known as Meitetsu) starting a paid pilot project.

There is enough cash for immediate requirements and further contract news could push the share price up further. 

i3 Energy (I3E)

North Sea-focused oil and gas explorer i3 Energy (LSE:I3E) had a good 2018 with a 64.6% share price rise but it fell back by 69% last year. The share price has fallen by a further one-fifth in 2020.

The weak share price has made it difficult to fund the development of the company’s fields and the subsequent lack of progress meant that it fell further making it even more difficult.

A revised strategy was announced by i3 Energy at the beginning of the year. It still owns 100% working interests in its assets and intends to change to a farm-out strategy. 

The main asset is the Liberator field in the North Sea, where exploration is moving to the west of the initial discovery. This exploration could be funded by a partner. 

This is a high-risk investment, but if i3 Energy can obtain a financially strong partner for one or more of its interests then the share price could bounce back from its current level. In January, Baker Hughes was issued 2.817 million warrants exercisable at 56.85p a share for deferred payment of oilfield services. Things would have to go very well for the share price to get back to that level. 

It should be noted that there is a total of 65.2 million warrants outstanding compared with 107.7 million shares in issue. That is significant potential dilution. 

FireAngel Safety Technology (FA.)

Fire and smoke alarms supplier FireAngel (LSE:FA.) ended 2019 by informing shareholders that the expected loss was going to be much higher. The share price had fallen by 79% in 2018 and then declined 69% in 2019. There has been a recovery in 2020, though.

When it was known as Sprue Aegis, FireAngel was initially a star on AIM, but wrangles concerning its distribution agreement with BRK Brands and other problems led to the share price slide in recent years. Last year, there were problems fulfilling orders and a change in the mix of business which hampered progress.

Management is confident that gross margins can be improved, propelling the company back to profitability.

A return to profit is expected this year with a further sharp improvement in 2021. Fire Angel needs to show that it is moving in the right direction. If it can do that there will be further share price recovery. 

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