Four AIM shares for a post-election world

Weakening retail figures and the post-election uncertainty are not a great backdrop for UK-focused companies.

The Conservatives have, at the moment, not completed a deal with the Democratic Unionist Party - which probably wants extra cash for Northern Ireland, particularly to cover the hefty bills for the Renewable Heat Incentive (RHI) keeping chickens warm in their barns and farmers in the money - although the state opening of Parliament and Queen's speech are set for next Wednesday.

It will take some time for things to settle down even assuming a deal is done and, with a US interest rate rise, it is likely that sterling will remain weak.

On top of this there is the continued uncertainty about Brexit and the form it may take. This could make company boards hold back when it comes to capital investment decisions.

The FTSE 100 index has a greater proportion of international-focused companies with high levels of overseas earnings than is normal for smaller companies. That means the movement in the FTSE 100 is not likely to reflect how smaller companies will perform.

This is not to say that there are not smaller companies focused on the UK that will not continue to prosper. An example is multi-utility installation services provider Fulcrum Utility Services Ltd, which is one of my tips of the year.

It continues to benefit from improved efficiency and a widening of its operations to include electricity and water as well as the core gas pipeline installation business.

Here are four other companies that provide exposure to overseas earnings or have a predictable UK business with attractive dividend growth.

International earnings

Escher Group Holdings (ESCH)

200p

Postal automation and point of sale software supplier Escher has more than 35 customers around the world and most of them are national postal services. However, the company's Riposte software can also be used in the retail, logistics and financial services sectors, providing a much bigger potential market.

The newer RiposteTrEx software enables licences and permits to be issued digitally. This is already being used in Ireland and there is significant potential for the software in the US. Local and state government clients are assessing the software and contract news could provide an opportunity for a forecast upgrade.

The latest contract is for an in-store mobile point of sale (mPOS) system with an existing large postal operator customer. The system enables customers to be served using a mobile device without waiting in line.

In 2016, revenues were flat at $22.4 million (£17.5 million), but underlying pre-tax profit more than doubled to $2.7 million. More than 50% of revenues are recurring. This is important because a few years ago a large contract with the US Postal Service boosted revenues in the short-term, but they subsequently fell back.

There is strong cash generation from operations. Net cash was $55,000 at the end of 2016 and it could rise to $2.3 million by the end of 2017.

The share price has already jumped ahead in the past few weeks. A pre-tax profit of $2.8 million is forecast for this year, which puts the shares on 22 times prospective earnings. Escher has invested money in developing its software and it has widened the potential customer base.

US growth

Eckoh (ECK)

47.5p

Secure payments and contact centre services provider Eckoh generated two-thirds of its revenues from the UK last year, but it is the US that is the engine of growth. Most of the new US contracts have been SaaS-based so little of the new revenues was recognised in the recent figures.

Secure payments technology enables contact centres to take payments and reduce the risk of fraud and security breaches. Sales gained momentum in the US last year. There is still enormous potential in this market and Eckoh is barely scratching the surface. US gross margins are lower than those in the UK, but they should build up as more secure payments contracts are won.

The UK has an almost 100% customer retention rate, so it should continue to do well even if the economic climate gets tougher.

In the year to March 2017, revenues were 30% ahead at £29.1 million, with 76% recurring. Underlying pre-tax profit edged up to £4.15 million. Monthly recurring revenues are running at nearly £2 million.

Net cash was £233,000, although there is also contingent consideration of £975,000. Cash generation is expected to boost the net cash position to more than £4 million at the end of March 2018.

A pre-tax profit of £5 million is forecast for 2017-18. Much of that improvement will come from the cessation of losses from a discontinued operation. The shares are trading on 29 times prospective earnings. The strong recurring revenues and potential US contracts mean that this multiple could be reduced faster than currently expected.

Independent of economic movements

Summit Therapeutics (SUMM)

172.5p

Summit Therapeutics has two potential treatments, both well down the road to becoming proven and commercial products. They are Ezutromid for Duchenne Muscular Dystrophy (DMD) and Ridinilazole for C.difficile infection.

Summit has a collaboration agreement with DMD specialist Sarepta for Ezutromid, which is based on utrophin modulation. They are jointly financing the phase II proof of concept trial, where results are expected in the first quarter of 2018.This will be followed by complete 48-week data in the third quarter.

The market is limited with around 50,000 patients in the US, EU and Japan, but a successful treatment would sell for thousands of pounds a year. Patents last until 2027-2029.

Hospital-based infections are a big concern and C.difficile is one of the worst. Summit has not signed up a partner for Ridinilazole, which maintains a healthy microbiome in the gut unlike other antibiotics which damage the microbiome, but it is moving ahead with a phase III trial. The trial should start in the first half of 2018. The phase II trial showed that Ridinilazole was far more successful than existing treatment Vancomycin. Patents last until 2029.

Cash is not a problem for Summit. There was $19.4 million in cash in the bank at the end of January 2017. Once the final patient in the DMD phase II trial receives their first dose of Ezutromid, Sarepta will pay Summit a $22 million milestone payment. This will provide Summit with enough cash until the end of 2018.

Positive news from the Ezutromid phase II trial or the commencement of the phase III trial for Ridinilazole could provide upward momentum for the Summit share price over the next 9-12 months.

Safe dividend payer

Watkin Jones (WJG)

188.75p

Strong demand for student accommodation has been behind the success of Watkin Jones,and management intends to supplement this through a move into the private residential rental market. The dividend is set to grow by around 10% a year and even after the strong share price performance the prospective yield is 3.5%.

The first private rental development has been completed and more are planned. There is a shortage of housing and institutional money is pouring into this area.

Watkin Jones has just forward sold six student accommodation developments to an institutional investor for £165 million - five to be completed in September 2018 and one for September 2019. This is an example of the predictability of the student accommodation development business.

In the six months to March 2017, revenues dipped from £145.9 million to £133.7 million but that was because the corresponding period included sales of residential apartments which had been built in the previous year and were sold at breakeven. Revenues from student accommodation improved and there was a more significant contribution from the management operations, which have a gross margin of 63.2%.

The interim pre-tax profit rose 27% to £21.1 million. A pre-tax profit of £42.7 million is forecast for the year to September 2017, putting the shares on 14 times forecast 2016-17 earnings. The profit is expected to rise to £47.8 million in 2017-18 with much of that already locked-in.