How our AIM tips for 2018 smashed the market

by from interactive investor |

So far, the overall performance of our AIM 2018 tips has been good. Three have performed well and two have edged downwards but are barely changed. 

The overall performance is a rise of just over one-fifth, much better than for the AIM index, or even the FTSE Fledgling, which has risen by 6.2% this year.

As Chamberlin showed last year, there is no guarantee that gains will be maintained at the end of the year, but all five of the companies have potential for even higher share prices at the end of 2018 and remain buys. 

Parity (PTY)

Original recommendation: 9p

Current price: 14.15p

IT recruitment and consultancy business Parity Group appeared set for a continued recovery this year, combined with the growth potential of the higher margin consultancy operations that help government and private organisations to maximise efficiency and reduce costs. Parity has not disappointed and it is by far the best performer of the five share prices. 

The IT recruitment side was hit by changes in tax treatment for freelancers working for government departments in 2017, but the effect lessened in the second half and underlying pre-tax profit still improved from £1.4 million to £1.7 million. Cash generation was better than expected with net debt falling from £4.4 million to £1.6 million.

Contracts continue to be won, including the first managed service provider contract for the recruitment business with Primark Stores. That contract could be worth up to £25 million over three years. 

The non-core Inition social media business has been sold and is no longer a distraction. I did suggest that the book value of £1.8 million might not be achieved and that proved true. Following further losses, Inition was sold for £200,000 and an initial £100,000 has been paid with a further £100,000 payable in another five months.

The company's AGM statement confirmed that trading continues to go well, and Parity should have net cash by the end of the year. There is even the possibility of a dividend in a couple of years. 

WH Ireland still predicts a 2018 pre-tax profit of £1.9 million, which puts the shares on less than nine times prospective earnings. That is after a share price rise of more than 50% and there still seems scope for further improvement given that Parity generates around £2 million of cash each year. 

Next Fifteen Communications (NFC)

Original recommendation: 423p

Current price: 511p

The share price of international PR and marketing services group Next Fifteen Communications Group had already risen sharply between 2014 and 2017 and there might have been a concern that it had had its run. However, the share price has continued its upward trajectory.

In the year to January 2018, revenues were 15% ahead at £196.8 million and underlying pre-tax profit was 21% higher at £29.3 million. Acquisitions played a part in that growth, but Asia Pacific was the only region where there was no organic growth with the fastest organic growth rate in the UK. The US remains the largest contributor and its organic growth rate was 5.1%. 

Net debt was barely changed at £11.6m, even though £15 million was spent on acquisitions and contingent consideration. The dividend was increased by one-fifth to 6.3p a share. 

At its AGM, Next Fifteen says it is achieving high single digit organic growth this year, supplemented by contributions from acquisitions. The prospective multiple for 2018-19 is just over 15. The dividend could rise to 7.5p a share this year. 

There has been some share selling by directors. The chairman sold one-third of his shareholding at 452.5p a share, leaving him with 100,000 shares. Chief executive Tim Dyson sold the 150,000 shares he received from a long-term incentive plan, he still owns 6.5% of the company, the and finance director sold 50,000 of the 150,000 shares he received from the incentive scheme to pay his tax bill.

Next Fifteen provides a good international spread and exposure to the growing technology sector.

Diurnal Group (DNL) 

Original recommendation: 146.5p

Current price: 146.5p

Diurnal Group, which focuses on hormonal diseases, received European paediatric use marketing authorisation for its Alkindi treatment for children between birth and 18 years with adrenal insufficiency at the beginning of the year. Alkindi was launched in Germany during May with other European countries to follow. 

The pricing of Alkindi in Germany was in line with managements' expectations. There is no other treatment specifically for children and the initial focus will be on up to six year olds. This is a limited market with around 4,000 potential patients in Europe, but it is still a lucrative market for a company the size of Diurnal.

Chronocourt, a treatment for congenital adrenal hyperplasia and adrenal insufficiency, is still involved in clinical trials in Europe and the US. Chronocourt could be sold through the same sales force as Alkindi. 

I said that the requirement for further cash to push ahead with clinical trials could hold back the share price in the short-term. During March, Diurnal raised £10.5m at 190p a share to finance the Alkindi launch in Europe plus complete the development of Chronocourt in Europe and start a phase III study in the US. IP Group converted its loan into shares.  The share price has held up.

Revenues will probably be modest in the year to June 2019, but the following year the Alkindi sales will make a more significant contribution. An underlying 2019-20 loss of £2.2 million is forecast and that is after an estimated £7 million expensed on R&D. Cash will have run out by then, but there is no need to worry about a further cash call in the next year. 

SigmaRoc (SRC)

Original price: 41.75p

Current price: 40.5p

Building materials and aggregates sector consolidator SigmaRoc is one of the laggards. The 2017 figures were in line with expectations with revenues of £27.1 million and underlying pre-tax profit of £2.58 million. Net debt was £11.8 million.

There was a 12 month contribution from the Channel Islands-based Ronez and a couple of months from one of the two precast concrete acquisitions made later in 2017. Even so, there was organic growth and there is more to come after the integration is completed. 

The asset base has been strengthened following the revaluation of assets that were acquired with Ronez last year. That reduced the goodwill element of the acquisition cost by £18.5 million to £3.87 million. Topcrete and Poundfield will have their assets revalued during this year. 

SigmaRoc appears to have been relatively inactive so far this year, but in reality management has been assessing further acquisitions and one or more is likely to happen in the second half. They could be in the UK or western Europe. 

The business is cash generative and there are additional debt facilities and the ability to issue shares to fund deals. The shares are trading on just over ten times prospective earnings for 2018. 

SigmaRoc has chosen good acquisitions so far and the lack of activity in the first half of 2018 should be seen as management making sure that they get the next deals right. Further deal activity should boost the profile of SigmaRoc and attract investor interest that will push up the share price. 

Mercia Technologies (MERC)

Original recommendation: 36.25p

Current price: 36p

Technology businesses developer and fund manager Mercia Technologies has held steady around the recommendation price at the beginning of the year. Mercia's investment focus is on software, digital, electronics/engineering and life sciences. The business model means that a significant part of the group overheads is covered by income from asset management mandates. 

The NAV was 41.1p a share at the end of September 2017, including cash of 16p a share. Mercia has been busy investing that cash, although there has also been a cash return from one major investment. Science Warehouse was the largest individual investment at the time of Mercia's flotation. The cloud-based spend management and eMarketplace provider was acquired by Advanced Business Software and Solutions for £16.9 million. Mercia will receive £10.5 million net of expenses, a £600,000 gain on book value and £1.3 million more than the investment cost. 

The most recent major investment was in video analytics platform developer Voxpopme. The initial £1 million investment acquired a 12.3% stake. This follows an investment by funds managed by Mercia, so it has been able to get to know the business. 

The discount to NAV is 12.4%. That NAV was diluted by the £40 million fundraising at the beginning of 2017 and it will take time for the benefits of the investments made to come through.

The board is chaired by Susan Searle who built up Imperial Innovations and the management is experienced in helping technology companies to develop their businesses. Not all investments will succeed but Mercia has a strong record. Full year figures will be published on 2 July. 

    2018 AIM tips    
Company Ticker Recommendation price (p) Current price (p) % change
Diurnal Group DNL 146.5 192.5 +31.4
Mercia Technologies MERC 36.25 36 -0.7
Next Fifteen Communications NFC 423 511 +20.8
Parity PTY 9 14.15 +57.2
SigmaRoc SRC 41.75 40.5 -3
      Average +21.1
      AIM All Share +4.2
      AIM 50 +4.6
      FTSE 100 +0.4
      FTSE Fledgling +6.2
Prices from 21 June.        

Source: interactive investor                           Past performance is not a guide to future performance
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