Five AIM share tips for 2019
by Andrew Hore from interactive investor | 31st December 2018 11:00
Former AIM writer of the year Andrew Hore names the AIM companies he believes have strong growth prospects over the next year and beyond.
The performance of the 2018 recommendations was not great, even though they were generally solid companies and traded in line with the market.
This year I am continuing to focus on undervalued and solid businesses, along with one more speculative investment.
Driver Group (DRV)
Construction consultancy Driver Group has gone through a transformation over the past three years and the share price reflects this. However, there should be more to come despite the strong share price performance. The recovery phase is over, and the growth phase has begun.
According to the company’s broker N+1 Singer, since February 2017, it increased its 2017-18 earnings forecast by 56% and the 2018-19 forecast by 53%. This covers a number of upgrades and provides comfort that the current forecasts are realistic and provide possible upgrade opportunities.
Driver is an international business with Europe and the Americas contributing 49% of revenues, the Middle East 35% and the rest coming from Asia Pacific. It provides services that include construction dispute resolution and provision of expert witnesses.
Driver reported a 2017-18 pre-tax profit of £3.8 million, up from £2.5 million, and it is returning to paying dividends with a 0.5p a share payment. The Diales expert witness business is becoming an increasingly important revenue generator and overall utilisation levels have improved. There has also been a focus on better margin work in the Middle East.
Cash generation is impressive. Net cash is £6.9 million, helped by a property disposal, and this could reach more than £10 million by September 2019 even after dividend payments. Add-on acquisitions are a possibility.
The dividend is well covered and is set to be raised to 0.9p a share this year. The shares are trading on 12 times future earnings for 2018-19 – based on a pre-tax profit forecast of £4.4 million. Buy.
TP Group (TPG)
Engineer TP Group raised £20.8 million at 6.5p a share nearly 18 months ago. The strategy was to use the cash to make acquisitions of profitable businesses, but the progress with these acquisitions has been slow. There is an opportunity to buy the shares at a lower price than in the fundraising before any benefit from further acquisitions.
Polaris Consulting was acquired for an initial £1.5 million at the end of 2017. In November, TPG acquired Westek Technology for an initial £3 million. Wiltshire-based Westek supplies rugged, high performance computer servers and it generated revenues of £3.5 million and pre-tax profit of £200,000 in 2017.
Net cash was £16.4 million at the end of June 2018, so most of this cash pile will still be intact. Using the cash to buy a profitable business will boost earnings, because there will be little in the way of interest income lost.
The business has been refocused into two divisions: consulting and programming services – around one-third of interim revenues - and technology and engineering equipment design and manufacturing, which generates two-thirds of revenues and is profitable. The main markets are defence, communications, space and energy. The order book was £56.5 million at the end of June 2018.
TPG has moved sectors from industrial engineering, a reflection of the old Corac business, to aerospace and defence. This is not likely to have much of an effect on the share price, but it does show how the business has changed in the past three or four years.
A 2018 pre-tax profit of £1.5 million is forecast, and that could nearly double in 2019. The shares are trading on 20 times forecast 2019 earnings, which in itself is not cheap. However, more acquisitions should further enhance those earnings. Buy.
Frontier IP (FIPP)
Frontier IP develops businesses and technologies that are spun-out of universities, both in the UK and Portugal. The model is different to its peers in that it gains stakes in return for providing advice and services. This enables Frontier IP to take a significant stake in its investee companies.
One of the consequences of this is that many of the stakes are in the books at low valuations. These valuations can be increased when there are fundraisings, although the percentage stake is likely to be diluted. There are 15 core shareholdings, which are generally stakes between 15% and 40%. The main sector focus is pharma, technology and advanced materials.
In the past year, the net asset value has risen from 30.7p a share to 33.2p a share. The share price is double the NAV, but there is plenty of upside in the existing investments.
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For example, Alusid makes floor tiles from ceramic waste and it is seeking to invest in a new automated facility. This may be funded by a flotation on AIM. Frontier IP chose to invest cash in the September 2018 fundraising and it has a 35.6% stake valued at £1.38 million. This valuation could rise if there is a flotation.
Frontier IP recently raised £2.49 million at 65p a share in order to provide working capital for the business. Allenby reckons the cash will last until the end of June 2020, when it forecasts net debt of £172,000. That assumption does not include any potential realisations.
The timing of any valuation uplifts is difficult to predict s there is no guarantee that they will happen in 2019. Even so, the maturing portfolio makes the shares a long-term buy and there should be progress this year. Buy.
Pressure Technologies (PRES)
Pressure Technologies is selling its underperforming and volatile alternative energy division to a TSX-V quoted shell company and this leaves it with a profitable engineering business which is starting to enjoy an upturn in demand from the oil and gas sector.
Loss-making Greenlane Biogas is being sold to Creation Capital Corp for £11.1 million, which is below the NAV of £11.8 million. Only £5 million will be received in cash, with £4.1 million in the form of a promissory note, which offers an annual interest rate of 7% and matures 24 months after the completion of the deal, and the other £2 million in the form of Creation Capital shares valued at the price of the fundraising required to make the acquisition. There is a 4% advisory fee, which will be paid for out of the share consideration.
Net debt was £6.7 million at the end of September 2018, so this will be significantly reduced by the cash. Of course, this is assuming that the deal is completed.
Pressure Technologies is capitalised at £17.4 million. Even after allowing for the potential loss of value on disposal the pro forma NAV should be at least £32 million, although £10 million is goodwill, which indicates the undervaluation of the company. This is partly due to the cyclically poor performance, but the upturn appears to have gained momentum.
There was a small group operating profit last year as restructuring benefits showed through. International oil and gas companies are investing in capital projects. Even so, last year’s revenues from oil and gas were 50% of the 2015 figure. The manufacturing operations have increased their order books by between 36% and 54% over the previous year.
Greater focus, improving oil and gas demand and a stronger balance sheet makes Pressure Technologies an attractive recovery prospect. Buy.
Location Sciences (LSAI)
Location Sciences has just raised £2.95 million at 2.25p a share to finance the growth of its new Verify product, which was launched during 2018. Advertising fraud is a major problem and Verify can help advertisers combat this problem, which is estimated by the World Federation of Advertisers as potentially costing advertisers more than $50 billion in 2025. The US is going to be a key market for the group.
Location Services was previously known as Proxama and the original digital payments business was sold one year ago. This enabled costs to be reduced but the company had limited funds with which to grow the business. The new focus is providing intelligence and location data for brands so that they can accurately understand their customer base.
Verify provides evidence of advertising effectiveness in terms of locations and it could become the most significant revenue generator. Advertising fraud can take the form of adverts that are not seen by real people or by the target audience in the right locations. Verify can analyse data and identify abnormal patterns of locations. If these false impressions can be identified, then the brand can refuse to pay for them. Verify charges fees based on the number of impressions for an advert.
Stockdale believes that revenues could reach £2.7 million in 2019, but investment in building up Verify means that there will be a significant loss. If Location Sciences can achieve the 2020 forecast revenues of £8 million, then it could make a pre-tax profit of £1.8 million. To put that into perspective the market capitalisation is currently £7.6 million.
Of course, things may not go exactly to plan, but there is enough to be positive about to believe that Location Sciences is progressing in the right direction and it has a potentially lucrative product in the form of Verify.
Investors can still buy shares at around the placing price. This is the more risky of the five recommendations but it is modestly valued - due to past disappointments and following a share consolidation. The upside could be significant. Buy.
Andrew Hore is a freelance contributor and not a direct employee of interactive investor.