AIM's most promising turnaround plays

There are companies that seem to disappoint on a regular basis while others can bury their mistakes in the past and learn from them.

We've identified a selection of companies, some of which appear to know little except for failure, but who may have reached a point where that could change. Others, meanwhile, may have tripped up but have what it takes to get back on the right track.

Undoubtedly some of these companies will continue to disappoint this year, but others could provide investors with an impressive turnaround in their share price.

PhotonStar LED Group (PSL)

3.38p

The one thing that has been consistent about PhotonStar LED in recent years is that it disappoints investors. Late last year the intelligent LED lighting systems developer admitted that 2014 figures would be lower than expected and losses will continue, however, new products have been launched and they should make a more significant contribution in 2015.

The HalcyonPro intelligent wireless lighting system was formally launched last November. The productrange includes intelligent lighting products for schools, offices, hotels, hospitals and homes. The systems use sensors to deliver the right level of light at the correct time using wireless or the cloud.

Older products, such as light engines, have been the problem. They are much lower margin and those margins are coming under even more pressure. No more development resources will be applied in this area. There should still be a small amount of net cash and PhotonStar argues that it has enough debt facilities for its current needs. However, there is a large risk that more cash will need to be raised at some point.

There are no forecasts following the most recent warning from the company. The company should get a significant boost from the sale of higher margin HalcyonPro products so even if revenues do not improve there could still be an improvement in profitability. PhotonStar appears to have developed a good product that gives investors' exposure to growth in the Internet of Things but the timing of sales is difficult to predict.

21st Century Technology (C21)

4.5p

Transport CCTV and monitoring systems technology supplier 21st Century Technology has an up and down record but the management team that came into the business in October 2013 has already had a positive effect. Chief executive Russ Singleton and finance director Glenn Robinson previously worked at AIM-quoted Quadnetics (now known as Synectics), which owns a rival of 21st Century, and they have stabilised the business and successfully renewed contracts with some existing customers. 21st Century has a large market share in the bus market but its customer services was lacking and Go-Ahead, one of its major customers did not renew in 2013.

Subsequently, 21st Century has secured a renewal of a framework agreement with a UK bus operator which is expected to be worth £3 million in the period up to February 2017. Swedish bus company contracts gained in the fourth quarter of 2014 are worth £2.45 million. There is another major UK bus company contract that is coming up for renewal in March and if that is secured then 21st Century will be in a solid position. There are additional opportunities in the rail sector.

There are no public forecasts at the moment, but a small loss is likely in 2014. Longer-term, the strategy is to switch from being an installer of systems to offering managed services that provide recurring revenues. Shareholders have agreed to an incentive scheme that provides Singleton and Robinson with 12% of the upside in the market capitalisation of the company. Last summer, Singleton and Robinson bought shares, initially at 5.75p a share and then at 6.125p each. The share price is currently lower, but the current valuation is underpinned by net cash of £2.6 million (three-fifths of market capitalisation) at the end of June 2014 and positive contract news could spark a recovery.

Bagir Group Ltd (BAGR)

10p

Few companies have managed to disappoint as quickly as Bagir (BAGR) so it is no surprise that investors' have a lack of trust in the company. On the 15 April 2014, the designer and supplier of formalwear joined AIM and raised £20 million (£17.6 million after expenses) at 56p a share. Bagir is currently valued at £5.02 million at 10p a share.

That share price slump is because, exactly one month after flotation, management warned that there had been an unexpected reduction in orders with Marks & Spencer considering changing its purchasing policy. Marks & Spencer and Arcadia are Bagir's two largest clients. This meant that 2014 revenues are unlikely to be much higher than the 2013 figure of $99.5 million and underlying EBITDA's expected to be between $4 million and $5 million, compared with $6.1 million in 2013, but there will be a pre-tax loss. There have been cost savings and further operating efficiencies are planned in order to return Bagir to profit this year.

There was cash of $16.6 million at the end of June 2014, but also $25 million of total debt. Since then, $1.5 million has been spent on a 50% stake in an Ethiopian production facility. The factory will be upgraded so that higher quality clothing can be produced and that will be completed in the first half of this year.

Last July, Artemis increased its stake to 13.3%. Admittedly, Hargreave Hale has trimmed its stake recently but it still owns nearly 17%. The shares are trading on less than twice 2014 EBITDA. There is a business here it is a question of showing that trading has been stabilised. Most importantly, the management has to get back the trust of investors. That could take a long time so the low rating will not change overnight.

Redhall Group (RHL)

11.5p

In 2014, it felt that just as you think trading might be starting to get better Redhall would warn of a further deterioration, but the manufacturing and engineering company has some good businesses which should perform better than they have been. If this management cannot get them to do better someone else will be able to.

There were a number of forecast downgrades during last year and Redhall slumped into loss. Nuclear was the main problem sector and Redhall is refocusing on manufacturing activities in this and other sectors where it has expertise and there is limited competition.

Products include blast doors, steel containers and pipework fabrication. Net debt, which was £16 million at the end of September 2014, remains a concern. Redhall extended its bank facilities with HSBC until the end of November 2016 but earlier this year 27.7% shareholder Henderson purchased £10 million of the company's debt from HSBC. That appears to be positive because Henderson has been supportive during the bad times, but Redhall still needs to keep within its bank facilities or it could get into trouble

Weakness in the oil and gas sector is the latest trial for the Redhall management, but the outlook for the industrial and food sectors is more positive. A small profit is expected for this year and a profit of £1.5 million forecast for 2015-16, which would put the shares on five times prospective 2015-16 earnings. No one is going to pin their hopes on that forecast just yet, but as long as debt does not become even more of a problem the restructuring undertaken at Redhall should at least push it in the right direction.

EKF Diagnostics (EKF)

20.25p

EKF Diagnostics is different to the other companies in this article because it is already profitable and it has a strong management team which has succeeded in the past with other businesses. That does not make the management immune to disappointments, though.

Last year, the specialist diagnostic products supplier was hit by the loss of revenues at the Selah Genomics business acquired earlier in the year because reimbursement payments for Selah's drug metabolism genetic biomarkers in the US have been sharply reduced. Another recent acquisition, DiaSpect, a Swedish manufacturer of point-of-care haemoglobin analysers, has also performed disappointingly. All this has been compounded by adverse currency movements. EBITDA still increased 29% to £6.2 million in 2014.

Underlying diluted earnings, excluding amortisation, per share are estimated by Canaccord Genuity to have improved from 0.32p to 0.57p - although there would be a loss if amortisation is included. Net cash was around £3 million at the end of 2014. A further trading update is due in the next few days.

Chairman David Evans and chief executive Julian Baines have been involved in successful AIM-quoted businesses before, including BBI, which was acquired by Inverness Medical (now known as Alere) and there is no reason to believe that they will not make a success of EKF. Former Alere boss Ron Zwanziger appears to agree because he has built up a shareholding in EKF and is in talks about becoming chairman. The share price is below the level it was three years ago and almost half the 12-month peak, but EKF still needs to show that it can get its recent acquisitions to supplement organic growth.