The undervalued AIM companies savvy investors should consider

by Andrew Hore from interactive investor |

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Many currently poor-performing stocks with previously high ratings may look like a bargain. Our AIM writer lays out which ones.

There have been some major winners on AIM this year. Many, such as Novacyt (LSE:NCYT), Synairgen (LSE:SNG) and Avacta (LSE:AVCT), have soared on the back of Covid-19 tests and treatments. There are other AIM companies that have share prices that are still well below the level they were at the beginning of the year. 

Some of those share prices have not bounced back in the way that others have. In the case of airline and tour operator Jet2 (LSE:JET2)and linen hire services provider Johnson Service Group (LSE:JSG), that is not surprising because of the continued uncertainty. There are some companies, though, that have not been as hard hit by Covid-19 – if at all – and are undervalued. 

The drop in their share prices provides a good chance to invest at a lower rating than previously. 

Iodine producer Iofina (LSE:IOF) has transformed its finances and expanded production this year. However, there was not a smooth progression over the period. The refinancing deal took a longer than expected to finalise and there were initial problems with its IO#8 iodine well. 

US-based Iofina operates five iodine extraction plants using its own Wellhead Extraction Technology. It also has a facility manufacturing chemical products using the iodine it produces. Covid-19 has not hampered production. 

The new IO#8 well was on track earlier this year and the plant is more efficient than the others. The problem was the decline in the oil price led to a shortage of brine water, a by-product of oil production that is used in iodine extraction. After production commenced in April, IO#8 was shut for most of May and June. 

This shortfall in production was offset by strong iodine prices, although they have slipped back in the third quarter. 

There was a delay in refinancing the debt repayable at the beginning of July, but it was achieved in September. Iofina has replaced two debt facilities totalling $15.5 million (£11.9 million), one of which was provided by major shareholder Southern Rock, with one new facility providing up to $18 million ($10 million, seven-year term loan and up to $8 million revolving line of credit) at a lower interest charge.

Interim profit was $1.3 million, which is more than for the whole of 2019, and the full year outcome is expected to be $3.9 million. The business is highly cash generative. Net debt was $20.7 million at the end of 2018 and there should be a net cash position by the end of 2021. Some of this cash may be used for a sixth iodine production plant. 

The share price has halved this year. It has failed to recover from the production shutdown and delays to the refinancing. These are in the past, and, at 14p, the shares are trading on nine times prospective 2020 earnings, falling to less than six next year. 

Credit hire and legal services firm Anexo (LSE:ANX) has coped well with this year’s trading conditions. Anexo provides replacement vehicles to cash-strapped motorists in non-fault road traffic accidents. There was less traffic on the roads for a couple of months and this meant there were fewer accidents. Demand has returned to previous levels in recent months. 

Anexo has a good track record in its core business and it appears back on the growth track. There is also upside from cases against car manufacturer VW. 

As a result of a recent High Court ruling concerning VW’s manipulation of air pollution tests, Anexo could generate at least £5 million in cash from successful litigation for its clients against VW – and possibly much more. However, VW is set to appeal the judgment in the UK so there will be no revenues in the near future, although all the costs have been charged to operating expenses.

The share price has fallen by one-quarter. At 127p, the shares are trading on less than 12 times prospective earnings for 2020, a period that has not been ideal. A return to previous trading levels would reduce the multiple to eight. That is without any contribution from the VW litigation. 

Pharmaceutical services provider Clinigen (LSE:CLIN) has a good track record as an AIM company. It used to be on a heady rating, but there has been a declining trend in the share price for two years and it has fallen by 30%. 

Covid-19 has affected demand for some treatments supplied by Clinigen and this has led to forecast downgrades. Clinigen is still getting the benefits from integrating acquisitions. The launch of a generic version of antiviral drug Foscavir will hamper progress this year, while an in-licensing agreement for Acute Lymphoblastic Leukaemia treatment Erwinase will boost next year. 

Clinigen has signed a managed access agreement with Synairgen for its potential treatment for Covid-19 patients. 

Earnings per share continue to improve, albeit likely to be modestly this year. At 645.5p, the shares are trading on ten times prospective 2020-21 earnings. Accelerated earnings growth should reduce the multiple to eight next year. The dividend continues to increase, and it is well-covered by earnings. 

Clinigen has a strong position in its core drug supply markets and it has its own drugs with potential for substantial growth. Substantial share issues related to acquisitions have probably held back the share price in the past couple of years, but it is due a re-rating.

Document management services provider Restore (LSE:RST) has shown the resilience of its core business. Overall, group revenues are running at 80% of last year’s level, thanks to the recurring nature of document storage revenues.

Shredding operations have been weak, but third quarter group revenues were 16% ahead of the weak second quarter figure and profit was 50% ahead. Restore has done well because it is not dependent on central London.

Full year pre-tax profit is expected to decline from £35.6 million to around £24 million. Profit could recover to 2019 levels next year. Net debt, excluding leases, could fall to £69 million at the end of 2020, with cash generation reducing the figure to below £45 million.

The Restore share price has fallen by 40% since the beginning of the year. At 330p, the shares are trading on 14 times Peel Hunt’s estimate for 2021. Given the underlying strength of the recurring revenues that looks attractive. There could also be a return to dividend payments next year. 

The Real Estate Investors (LSE:RLE) share price has halved this year. Property companies are out of favour because of fears about how Covid-19 will affect rent collection, longer-term demand and valuations. 

Real Estate Investors is focused on the Midlands, where management has expertise. Offices account for 30% of income, key services and food stores 24% and traditional retail 20%. Restaurants and leisure account for around 11% of income, while government is 8%. 

So far, 87% of second quarter rents have been collected. At 44%, loan-to-value was comfortable and the proposed sale of two properties should bring in £6.5 million. 

Chief executive Paul Bassi says that there is increasing interest in offices outside of the main town centres that require less travel time. Potential changes to regulations could also provide opportunities to switch some offices to residential use. 

There will eventually be properties coming onto the market that could be bought for attractive prices. Further disposals are likely to be made to put the company in a strong position to take advantage. 

At 27p, the shares are trading at a near three-fifths discount to current net asset value (NAV), which fell 5% in the first half. Even assuming a further dip in asset value, the discount will be large. If the company were involved with central London offices, then that would be more understandable, but the Midlands is more resilient. 

As a real estate investment trust the company has to pay out most of its earnings in dividend. The forecast yield – on a reduced dividend - is 13%. Some people will be cautious about any property company and this will not be attractive to some – as the yield indicates. Even so, the discount appears too pessimistic. 

Advanced surface coatings provider Hardide (LSE:HDD) recently reassured investors about its trading, but the share price has still fallen by three-fifths this year. Hardide continues to lose money, but it has invested in increasing capacity and relocated to a new facility. 

Weak oil and gas demand held back progress in the year to September 2020, but production continued throughout the period. Tests are being undertaken by new customers ahead of orders and they will help to improve revenues over the next two years. 

At 23.5p, Hardide is valued at less than £12 million. There is cash in the bank, following a placing at 63p a share at the beginning of 2020, and no need for additional funds. As capacity is utilised Hardide should move into profit. This is an opportunity to buy ahead of positive contract news. 

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

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.

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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.

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