Here's our AIM tip for 2017 that already made 137%
21st July 2017 15:35
AIM had a strong start to the year, but it has drifted back since the end of May and my AIM tips for 2017 have also retreated in the past couple of months. AIM has risen by 14% so far this year and the tips are ahead by a similar percentage.
A great deal of the performance is due to a spectacular rally at foundries operator , which at one stage in May had delivered us a profit of 137%!
Other than Chamberlin, there has been a mixed performance, but all five share prices have potential to increase in the second half of 2017.
Chamberlin (CMH)
Foundries operator Chamberlin published complicated full-year figures because of all the one-off and exceptional charges and the difficulty in matching the figures to the forecast in the market. Last year was always going to be one where the decks would be cleared to ensure a new year unencumbered by write-offs. This year, the turbo charger castings contracts that have already been announced will start to contribute.
There are high barriers to entry and the weakening of sterling has provided an additional boost because the majority of sales are exported. The closure of the Leicester foundry enables Chamberlin to focus on its core activities and the business can ride the cyclical upturn. The new machining facility has opened in Walsall and production is building up. This makes Chamberlin the only fully integrated supplier of grey iron bearing housings in Europe.
Emergency exit hardware supplier Exidor and hazardous area lighting equipment supplier improved their profit contribution, despite weak oil and gas sector demand, and they are also building their exports.
An underlying pre-tax profit of around £2 million is forecast for 2017-18, and profit could rise to £2.5 million the following year. Despite the large rise in the share price the 2017-18 prospective multiple is eight. Given the additional potential as demand builds up for turbo charger castings, and the investment in the machining facility pays back, this is a modest rating.
Thomas Charlton has taken his stake above 3% and he obviously appreciates that the shares are undervalued.
Fulcrum Utility Services Ltd (FCRM)
has turned round its fortunes in the past three years. The multi-utility services provider is making a significant profit from its installations business and building up a valuable portfolio of owned-pipeline assets.
The gas and electricity installation markets are worth £800 million a year. In the year to March 2017, revenues improved from £36.1 million to £37.7 million, but careful choice of new business meant that margins improved and pre-tax profit jumped from £4.6 million to £6.7 million. There is unlikely to be further dramatic improvement in margins, but they could edge higher. The dividend has increased from 0.9p a share to 1.9p a share.
Income from the company’s own gas pipeline assets is also helping to improve margins and Fulcrum can start to build up electricity assets as well. The order book is worth £30.3 million, including a £4.2 million gas pipeline installation contract with a food manufacturer, which begins during the summer.
This year the pre-tax profit is expected to be £7.4 million. The prospective 2017-18 multiple is 13 but tax losses are running out so future earnings growth will be held back. The prospective yield is 3.7%. This is the best quality company of all five tips and, even if share price growth is modest this year, it can grow significantly over the long-term.
| Company | Ticker | Recommendation price (p) | Current price (p) | Change (%) |
|---|---|---|---|---|
| Chamberlin | CMH | 76 | 125 | 65 |
| Fulcrum Utility Services | FCRM | 50.75 | 54.75 | 8 |
| Gresham House Strategic | GHS | 775 | 920 | 19 |
| Satellite Solutions | SAT | 7.75 | 7.5 | -3 |
| Stride Gaming | STR | 223 | 213 | -10 |
| Average | 14.2 |
Gresham House Strategic (GHS)
is an activist investor in smaller quoted companies and its funds are managed by fellow AIM company Gresham House, which was appointed two years ago.
There is a mixture of growth and recovery potential in the portfolio and its value has been growing. The first pre-IPO investment has been made in alternative asset management adviser MJ Hudson and this should provide a 20% annualised return.
The asset manager believes this is the time to switch from highly valued growth stocks to value stocks that have been overlooked. There are particular opportunities in sub-£100 million market capitalisations. The company has recently made small, initial investments in two unnamed software companies.
The Gresham House Strategic shares are relatively illiquid and this may have helped the share price keep its level much nearer its high than the other tips. There has also been a 15p a share dividend paid since the beginning of the year.
Gresham House Strategic trades at a 14% discount to the March 2017 net asset value (NAV) of 1,072p a share, including £13 million in cash. The discount had widened to 21.6% by 14 July 2017 when the NAV was 1,119p a share.
Mobile telecoms software provider continues to dominate the portfolio, but the share price remains strong and part of the shareholding has been sold to another Gresham House managed fund.
House broker finnCap talked in its recent research about Gresham House Strategic trading at a premium to its NAV, but that appears unlikely at the moment with the stockmarket falling back from recent highs. Even so, the discount should come down alongside further potential growth in NAV as the remaining cash is invested.
Satellite Solutions Worldwide (SAT)
has continued to make add-on acquisitions to its broadband supply business, but failing to bring out full-year results on the day they were due does not inspire total confidence. The results were published the next day, but it is never good to create uncertainty. More positive news should help this to be forgotten.
Satellite Solutions is on course to reach 100,000 customers by November. The latest trading statement for the six months to May 2017 shows it nearly quadrupled recurring revenues of £19.4 million out of a total of £20.6 million. Like-for-like revenue growth was 13%. Net debt as £13.2m at the end of May 2017.
The company has new supporters. and Harwood Capital, which are both run by Christopher Mills, have taken a 10.6% stake in Satellite Solutions. These shares were sold by Candy Ventures.
New broker Numis has recently initiated research on Satellite Solutions. There appears to have been a forecast downgrade when compared with the former Arden forecasts. Further acquisitions have been made since the Arden forecast, but the Numis profit estimate is lower, whether in terms of EBITDA or pre-tax profit. A pre-tax profit of £400,000 is forecast for this year, rising to £1.3 million next year.
The company has built up strong market positions in the UK, France, Norway and Australia. This is a business where the long-term recurring revenues are the key and these are growing strongly.
Stride Gaming (STR)
Online gaming operator is the one of the five tips that never went significantly higher than the original recommendation price, and it has declined by nearly 10%. The problem with Stride is its social gaming business, which has been an enormous disappointment.
Social gaming revenues fell by one-quarter at the interim stage. A £10.2 million goodwill write-off was taken at that time. There are signs of a recovery but it is tempting to think that this is an unnecessary distraction.
This should not mask the fact that the online bingo operations are the core business and they generate most of the revenues. There was a like-for-like increase of 21% in interim revenues to £44 million in the first half.
Full-year underlying pre-tax profit is forecast to improve from £11.3 million to £17.5 million. Higher gaming tax levels mean that pre-tax profit could edge lower in the year to August 2018, although cost reductions from fully integrating the acquired businesses after the earn-out periods are completed could reduce the decline. That means that the shares are trading on eleven times prospective 2017-18 earnings. A 3p a share dividend is forecast for the same year.
On the plus side, there is the newly launched B2B software licensing business, which has signed its first deal with casinos operator Aspers. There is no significant contribution from this business included in the current forecasts. Further licence deals should boost profit.
Net cash was £11.3 million at the end of February 2017 and there should be further potential acquisitions to boost earnings.
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