Interactive Investor

These AIM big boys are going cheap

30th April 2018 13:21

Andrew Hore from interactive investor

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AIM as a whole has come off its high for the year, and the same is true of the FTSE AIM UK 50 index of largest UK-based companies, which is around 5% below its best.

Many of the constituents, such as Fevertree Drinks and ASOS, are still trading on high multiples. However, there are constituents which are growing and throwing off cash but are on much lower multiples.

Alliance Pharma, photonics business Gooch & Housego and linen hire business Johnson Service Group are three constituents that could have been included, but were covered in the previous article. Here are five others.

MP Evans (MPE)

750p

MP Evans has sold non-core operations in order to focus on its oil palm plantations in Indonesia, and also fought off a bid from a Malaysia-based Kuala Lumpur Kepong, which holds a 13% stake. The share price is slightly higher than that 740p a share bid, but significant dividends have been paid since. The share price still fails to reflect the potential long-term growth of the business.

The 2017 profit was boosted by a gain on discontinued operations of $68 million. The underlying dividend improved from 15p a share to 17.75p a share - excluding the latest special dividend of 10p a share - and there should be continued growth as the plantations mature. Cash is also being used to buy back shares.

The palm oil price has recovered following the effects of El Nino in 2015-16, but the price did fall back last year.

MP Evans has 37,100 hectares of oil palm plantation land. There was 154,000 tonnes of crude palm oil produced last year. The focus is planting new oil palms and last year MP Evans planted 2,200 hectares for itself and 1,000 hectares for smallholder co-operatives. The trees take time to mature. Fruit is produced after three years and the most productive time is between 10 and 20 years. The planting that has been done and that is planned will underpin growth over the next decade.

Peel Hunt forecasts that underlying pre-tax could grow from $37.2 million in 2017 to $78 million by 2025. The dividend could rise to 41p a share.

An independent valuation estimates that MP Evans is worth £11 a share.

Iomart (IOM)

390p

Iomart provides managed cloud-based services and is a highly cash generative growth business. Iomart operates eight data centres in the UK and has access to a network of data centres around the world. It offers a range of services including back-up, storage, security and hosted virtual desktops. The share price is 10 times the level it was at the end of 2007.

In the year to March 2018, revenues were 9% higher, suggesting a figure of about £98 million, and underlying pre-tax profit improved from £22.4 million to £23.9 million. The full year figures will be published on 12 June. The dividend could be raised from 6p a share to 6.9p a share, which would be around 2.7 times covered by earnings.

Iomart has made significant investment in its data centres so net debt reached £24.5 million at the end of September 2017. Part of the investment will provide enough network resources capacity for several years.

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

Iomart is in a good position to be a consolidator in the sector. A potential deal to buy Germany-based managed hosting company PlusServer did not go ahead last year. Iomart, itself, has attracted interest from bidders in the past. Cinven-backed Host Europe made an opportunistic, indicative bid of between 275p and 285p a share nearly four years ago. Pre-tax profit has increased by two-thirds in that four-year period and the share price is higher.

Pre-tax profit could approach £28 million this year. That would put the shares on 16 times prospective 2018-19 earnings.

Next Fifteen Communications (NFC)

469p

International PR and marketing services provider Next Fifteen Communications cannot be left out of this article as it is one of my recommendations for 2018.

In the year to January 2018, revenues grew from £171 million to £196.8 million, while underlying pre-tax profit was 21% ahead at £29.3 million. The dividend was one-fifth higher at 6.3p a share. Net debt was flat at £11.6 million at the end of January 2018, even though £15.4 million was spent on acquisitions. The focus of those acquisitions is market research and digital marketing.

Organic growth accounts for around one-third of the growth in revenues last year. Asia Pacific was the only region not to achieve organic growth.

The track record is impressive. Earnings per share have grown by 184% between 2012-13 and 2017-18, and the dividend has risen by 167% over the same period.

Next Fifteen continues to add clients and 44 of them each generated more than $1 million in annual revenues and these accounted for 46% of group revenues. Google Alphabet is the largest client.

Trading continues to be strong with single digit organic growth in February and March. This augurs well for further growth this year, which could cut the prospective multiple to around 15.

Renew (RNWH)

423p

Engineering services provider Renew recently reassured investors that trading is in line with expectations, and this led to a recovery in the share price, which had slumped earlier this year.

Management did admit that the public sector has been slow in paying so work in progress is higher. It appears that this relates to the rail business. This led Numis to halve its net cash prediction to £7 million at the end of September 2018. The following year's net cash forecast has been reduced by a similar amount to £17 million. This still shows the cash generation of the business.

The focus on building up a wide-ranging engineering services business, including rail, nuclear, telecons and water sectors, has helped Renew to construct a good growth track record. Not all acquisitions have gone to plan, though. Renew has got rid of the remaining operations of Forefront Group. Renew had closed the low pressure, small diameter gas pipe replacement business the medium pressure activities have been sold.

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

The engineering order book has edged up to £433 million, but there was a decline in the specialist building order book. The building business is low margin and no longer a large part of the business. A forecast full year profit of £26.7 million means that the shares are trading on less than 13 times prospective earnings and the yield is 2.2%.

Renew has a good track record. The strong balance sheet and growth potential in engineering services make the shares attractive.

Watkin Jones (WJG)

198p

Watkin Jones is growing strongly on the back of demand for student accommodation, and it is beginning to supplement this growth with developing private rental projects. The company finds UK sites, secures planning permission and then the land is forward sold to institutional investors. Watkin Jones will then construct the accommodation. The main growth in revenues over the coming years is expected to be from the build to let developments.

It has not all gone Watkin Jones' way. It has lost some business in its student accommodation management company Fresh Student Living because the properties have been sold to a new owner, which is taking management in house. That will stall the division's revenue growth for one year and then it will restart in 2019-20. There is also uncertainty concerning who will take over from Mark Watkin Jones.

Pre-tax profit is forecast to improve from £41.8 million to £45 million this year. Net cash should rise from £41 million to £50.6 million by the end of September 2018 and Watkin Jones should be able to pay growing dividends and still generate £10 million plus a year of spare cash in each of the next few years. This year's dividend is expected to be 7.5p a share.

The shares are trading on 13 times prospective 2017-18 earnings. The share price has been weak in recent months, although it is still nearly double its flotation price two years ago, and this provides a buying opportunity.

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.

Disclosure

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.

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 to buy or sell any financial instrument or product, or to adopt any investment strategy as it 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.

Disclosure

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.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors 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. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals 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.

Related Categories

    AIM & small cap shares
    Consumer goods and services
    Industrials
    Technology
    Commodities
    Health care
    Telecoms
    Infrastructure

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