Award-winning AIM writer Andrew Hore explains why some companies can do very well in testing circumstances. Here are some of his best ideas for income and growth in greater detail.
It is going to be a tough time for all businesses, large and small, in the coming months as economic uncertainty and inflation continues to cause volatility in the markets.
Many AIM companies are trading on significantly reduced prospective valuation multiples, but that reflects concerns about how they will be affected by the economy. And some have no earnings to hold up the share price.
Batteries and fuel cell developers have plenty of long-term potential, but the lack of current earnings means that these share prices are slipping, and even good news tends to mean only a short-term brake on their decline.
Consumer-related businesses are going to be a risky short-term investment. Bars and restaurants certainly face uncertain footfall over the autumn and winter.
Any company that depends on the supply of electronic components is going to continue to find things remain difficult going into next year. Many hoped that the shortages would be over by the end of this year, but they appear set to continue into 2023 - at least for some components. Even if they hold the components required, the customer or another supplier may not have what they need, and orders are then delayed.
There are companies that can be resilient in tough times, such as vet practices owner CVS Group (LSE:CVSG). People tend to continue to spend money on their pets whatever the economic conditions.
And there are other companies in areas that have potential to prosper in difficult circumstances.
Companies that have income that is linked to inflation have a good chance of doing well in the current inflationary environment. However, this does depend on keeping costs under control so that they do not completely offset the additional income.
Smart Metering Systems (LSE:SMS) (SMS) has the benefit of index-linked metering contracts. The inflation linked increase in the metering contracts next year is likely to be higher than previously thought.
Smart Metering Systems did better than expected in the first half of 2022 and the battery storage portfolio is building up more rapidly than expected. The 2022 pre-tax profit estimate is £21.7 million, up from £18.3 million in 2021. At 827p, the prospective multiple is 63 and the forecast yield is 3.7%. Investors have already pushed up the share price and, although SMS is an attractive investment, it appears to be fully valued unless a very long-term view is taken.
Renewable electricity generator Greencoat Renewables (LSE:GRP) is one of the largest companies on AIM. Since floating in 2017, it has achieved an annualised return of 8.1%. In the first half of 2022 more cash was generated than in the whole of 2021.
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Irish wind farms get the upside from high power prices, but they are protected by a floor price. Three-quarters of the generation portfolio has contracted tariffs that are inflation-linked until 2032.
The board is asking for shareholder approval to remove the limit on investments outside of Ireland, enabling further diversification in Europe. Earlier this year, €281.5 million was raised at €1.12 a share.
At €1.12, the shares are trading at just above net asset value (NAV). The target full-year dividend of 6.18 cents a share provides a yield of 5.5%. Greencoat Renewables is a steady investment providing an attractive income.
Optimistic about these pawnbrokers
It is a bit of a cliché that pawnbrokers do well in recessions, but the recent fundraising by H&T Group (LSE:HAT) is an indication that it expects to have a bumper time over the next few years. H&T is benefiting from the tough economic climate for individuals because of rising inflation and the reduction in small-sum lenders aimed at the short-term credit market.
H&T has raised £16.9 million at 425p a share to finance the opening of up to 20 stores in 2023. There were 261 stores open at the end of June. It costs up to £300,000 to fit out and stock up a new site. There are regions where H&T has limited exposure. They include Wales, western England, north west England and eastern England. Stores opened or acquired after 2019 are generally the ones growing fastest.
The cash raised will also help to finance the growth of the pledge book, which currently stands at £89.6 million. Management says the cash raising will enhance earnings in the next financial year.
In the first half of 2022, daily average lending volumes were two-fifths ahead of pre-pandemic levels. August was subsequently a record month. On top of the growing pledge book for the pawnbroking operations, retail sales have also been strong during the summer.
The 2022 pre-tax profit is expected to be £19.1 million, rising to £32.6 million next year. At 457p, H&T is near to its all time high and trading on less than 13 times prospective 2022 earnings, falling to eight in 2023. Dividends are also set to grow strongly from 15p a share in 2022 to 23p a share in 2023. The shares are worth buying.
Rival pawnbroker Ramsdens Holdings (LSE:RFX) is also quoted on AIM. It moved back into profit in the first half and should achieve of at least £7 million in the year to September 2022.
There was net cash of more than £9 million at the end of March 2022, so there is plenty of cash to fund expansion if the right sites can be found.
Ramsdens has historically generated a significant proportion of its profit from foreign exchange. That part of the business has been subdued in recent years, but even with weak consumer spending there is potential for further recovery.
At 197.5p, the shares are trading on less than 12 times forecast earnings, falling to 10 in 2022-23. The forecast dividend yield is more than 4%. There could be room for upgrades to expectations. Buy.
Three insolvency businesses worth tracking
Insolvencies have been at low levels in recent years and the administrations market has declined sharply. More complex administrations doubled in August (year-on-year), but they are still one-third below pre-Covid levels. There are increasing numbers of insolvencies following the ending of government assistance to businesses.
Insolvency business Begbies Traynor Group (LSE:BEG) published its latest Red Flag Alert report in August. This showed a 37% rise in businesses suffering critical financial distress in the second quarter of 2022, compared with one year before. There are even bigger increases in the bars and retail sectors. The number of businesses in significant distress was flat at 582,452, though. Numbers are likely to increase.
Begbies Traynor has been benefiting from consolidating the insolvency sector and has prospered even in tougher times. Begbies Traynor recently said that 2021-22 results will be comfortably ahead of previous expectations. Underlying pre-tax profit is 55% ahead at £17.8 million. Acquisitions helped but there is organic growth.
At 136.5p, Begbies Traynor is trading on 14 times estimated earnings and the forecast yield is 2.8%, making them a buy.
FRP Advisory (LSE:FRP) is another insolvency business on AIM with four-fifths of revenues from administrations and liquidations, with the rest from related areas, such as corporate finance and debt advice. Winning larger mandates is helping FRP to grow.
Underlying pre-tax profit is expected to edge up from £23.1 million to £24 million this year, although earnings will grow faster because of a lower tax charge. At 158p, the shares are trading on 20 times prospective earnings and the forecast yield is 2.9%. The shares are not as attractive as those of Begbies Traynor, but they have good potential.
M&A and tax adviser K3 Capital (LSE:K3C) also owns business insolvency company Quantuma, which generated 29% of group profit on the back of 21% organic growth last year. Quantuma is expected to generate 11% organic growth in 2022-23. The tax businesses have steady repeating revenues.
The M&A and tax businesses continue to grow despite the tough economic conditions and there will be increasing demand for K3 Capital’s restructuring business. Investors should get a further significant dividend increase this year on the back of rising profit. A total of 15.5p a share in dividends is forecast for the year to May 2023. At 262.5p, the prospective multiple is 12, while the yield is 5.9%.
This company could be more volatile than the others because of the M&A bias, but it is still highly attractive.
Strong demand and lack of supply
There are areas of the market where demand should not be significantly affected by the economic uncertainty. These are where supply is falling short of demand.
Northcoders Group (LSE:CODE) provides software training and there is a shortage of people with these skills, so demand is likely to remain strong for many years. I wrote about them recently in my article about 2021 AIM new admissions.
At 320p, the shares are trading on 26 times 2022 earnings, falling to less than 10 in 2023. Buy.
Andrew Hore is a freelance contributor and not a direct employee of interactive investor.
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