20. Victoria
Victoria’s (VCP) delayed annual results last month were completely overshadowed by the qualified opinion given by auditor Grant Thornton over issues at subsidiary Hanover Flooring. The auditor identified “risk factors of fraud” in the division and Victoria’s share price has since collapsed, despite chief executive Geoff Wilding arguing in an AGM statement that “a material step-up in earnings and free cash flow” is on offer.
The group posted record annual revenue of £1.5bn in the year to 1 April after selling more than 200mn square metres of flooring for the first time. Pre-tax losses increased to £111mn, however, on the back of higher operating expenses and finance costs. Analysts expect underlying cash profits to increase by 9 per cent this year.
Audit issues aside, we remain wary of the group’s high net debt, which rose by over £250mn in the latest year. The leverage ratio sits at around 3.4 times, compared with a target of 2.3 times. And margins, for now, remain below historic levels. Sell. CA
19. Uniphar
Ireland-based Uniphar (UPR), a diversified healthcare products, retail and logistics specialist, has been posting stellar growth rates in the four years since the company’s initial public offering. Recent interim results showed revenue growth of 25 per cent, with the firm already close to reaching its target of doubling cash profits in the years since its listing – Ebitda reached €51mn (£45mn) at the interims. Uniphar uses its Irish pharmacy distribution network as the anchor for the pharmaceuticals services business, which specialises in sourcing and delivering unlisted medicines to clinical trials or companies conducting specific research, rather like Clinigen’s delivery business prior to its takeover by private equity.
Broker Numis values Uniphar at a PE of 10 times 2024’s earnings per share forecasts, a discount to its 2019 IPO price despite being well on the way to fulfilling its earnings pledge. The company is at a small premium to the rest of the medical services industry (on a PE ratio of 7.8 times) but well below Clinigen’s buyout price. An interesting business story. Buy. JH
18. Impax
The past quarter was a difficult one for Impax Asset Management (IPX): the specialist asset manager experienced net outflows of £890mn in the three months to 30 September. Part of the reason for the unpopularity of the shares is the ESG focus of the company’s core investment strategies: ESG as an investment idea has had to wrestle with ‘greenwashing’ concerns as well as its emphasis on high-growth out of favour stocks this year. Impax had already noted a split between its retail investor clients, who tend to pull funds quickly, and institutional investors who are prepared to delay investing rather than simply exit.
The intriguing point is that Impax, having experienced serious share price decline this year, is now valued at a slight discount to the wider asset management sector – a PE of 9.5 times. If the company can maintain control of its core costs and continue investing in industries with a potentially high level of return, a value case can be made. Buy. JH
17. Big Technologies
Big Technologies (BIG) produces location tracking tags. Currently, 99 per cent of its revenue comes from the criminal justice system, though the company hopes the tags could one day have use in the care system.
It is profitable and cash generative. The gross margin is 73 per cent, which is impressive for a company that produces its monitors in house. It also turns a lot of these profits into cash, with the £12mn of operating cash flow in the six months to June equivalent to 45 per cent of revenue.
However, growth seems to have slowed recently. For the full year, the board is forecasting just £54mn in revenue, which would mean the second half of the year is expected to be no better than in 2022. In the first half, revenue was up 19 per cent year on year. There were contract wins in Europe but investors might have expected more given the largest contract with the New Zealand Department of Corrections is now paying out its full rate.
A forward price/earnings ratio of 22 demands more growth. Tracking technology isn’t revolutionary and this slowdown suggests it isn’t essential either. Sell. AS
16. James Halstead
James Halstead (JHD) has been in the flooring business for a century, and is still breaking revenue records. Analysts at Panmure Gordon believes it will also continue posting record sales growth in 2024, 2025, and 2026.
But the problem with being a flooring company is that customers aren’t always tripping over themselves to buy new stock. For many, it is an expense they can put off. If a recession hits, as is predicted next year, many businesses and consumers will likely do just that.
Indeed, when inflation first started to rise, James Halstead took the costs on the chin before only belatedly passing them on. It did this to maintain customer relations and volumes, which appears to have been the right decision given the continued rise in sales – a rise that has also helped it reduce the inventory built up during the pandemic when supply chains were under particular pressure.
However, a recession could mean more difficult decisions for a business that evidently has cost-conscious customers.
Thankfully, the company has a habit of keeping cash in reserve. One place where it may well choose to spend is in new markets. Its business is already fairly universal: in 2023 alone, the company "supplied flooring from the Van der Valk Hotel in Sneek, Netherlands, the Hospital de Bosa in Bogota, Colombia [to] innumerable small projects in schools, offices, cafes, care homes, ships, and hospitals across the world". Thanks to this international demand, it has headquarters in 14 different countries. Further expansion could help it overcome weaker prospects in the UK, where it says demand "has been slightly less buoyant".
Despite recent records, this is not a company predicted to grow astronomically, but steadily over the long term. Recessions, inflation, and trade tension will buffet its growth, but it does have a solid foundation on which to build. And then there is the dividend: it has risen every year for more than four decades in a row, and the dividend yield is currently over 4 per cent. Buy. ML
15. Alpha Group International
International businesses hedging their foreign exchange (forex) risk has been a boon for Alpha Group International (ALPH); the company has developed its range of financial forex products to cater to demand in Europe and the US. It arranges complex currency hedges, as well as standard forex exchange to allow international operations to run smoothly. The last interim results showcased underlying revenue growth of 20 per cent, with higher interest rates from customers’ invested funds also boosting the bottom line.
In a competitive forex market, Alpha bases its business model on close client relationships. These are its only real asset, though the 12 per cent growth in the number of forex client numbers in the latest figures underlines its strengths on this front. From an investment perspective, its main attraction is its ability to generate operational gearing on top of its fixed cost base. The shares aren’t cheap at a consensus forecast of over 20 times earnings for 2024, but the company looks to have a durability that the market values. Buy. JH
14. RWS
RWS (RWS) has developed a habit of disappointing investors. At its capital markets day in 2022, it warned that profits would be at the lower end of expectations. A year later and adjusted profit before tax for 2023 is expected to be at the same end of analyst forecasts, implying a dip in profitability versus 2022. To make matters worse, management recently revealed that revenue would be lower than previously expected due to “ongoing challenges” and “reduced activity” in some markets.
The language services group always has a rationale, be it regulatory changes or slower client decision making. We are getting increasingly nervous about underlying demand, however, and artificial intelligence could make things worse. Management insists that RWS is a “significant beneficiary of developments in AI” but automated translation seems to pose a serious risk to language service providers. RWS’s battered valuation means we will stick with our existing rating for now, but investors should keep a close eye on further company updates. Hold. JS
13. Smart Metering Systems
Energy infrastructure company Smart Metering Systems (SMS) does more than its name suggests.
It still connects smart meters to people’s homes – last year it was responsible for 12 per cent of new connections in the UK. But it also owns, installs and manages other renewable energy assets including solar panel systems, air-sourced heat pumps, battery storage grids and electric vehicle charging infrastructure.
These are helping to build a recurring revenue base that is index-linked – handy in the current inflationary environment. First half pre-tax profit rose by 30 per cent to £8mn but net debt rose by more than £60mn since the year-end, to £96.3mn, as it continued to spend on new installations. Analysts at Liberum forecast a 36 per cent jump in operating profit this year, followed by a 31 per cent increase next year. Even after this, though, SMS shares would still be priced at 36 times earnings. A good business, but not at any price. Hold. MF
12. Yellow Cake
Uranium is on a hot streak. The price of U3O8, or yellow cake, has soared this year to over $70 (£58) a pound (lb), an increase of 50 per cent since the start of January. Yellow Cake (YCA), a vehicle holding physical uranium mostly bought for far less than the current spot price, has seen its share price climb accordingly. The company has recently completed a cash raising to buy a further 1.5mn lbs of uranium. This model, operated by Yellow Cake as well as Sprott Physical Uranium (US:U.UN), has started to influence the uranium market given such high volumes have shifted into their warehouses. It has been the spark the industry has needed, and rising demand and falling inventories have pushed prices up further. There is some risk to the high prices from miners hiking supply, but Yellow Cake is still well-positioned in that scenario. Buy. AH
11. Serica Energy
The idea of Aim is to encourage investors to back early-stage companies, spurred on by generous tax breaks. The question for those companies that make it to the hallowed world of free cash flow and dividends is when to move on. It’s not so simple, given the legwork involved and complications for investors giving up those capital gains and dividend-related tax incentives.
Serica Energy (SQZ) is thinking about this shift now, but will likely wait until another big transaction to get the paperwork out of the way all at once. It has operations in the North Sea, acquired through two significant deals in the past five years. The first of these was the purchase of the Bruce, Keith and Rhum assets; the second was the more recent buyout of Tailwind, which added five North Sea fields to the portfolio. Cash profits minus exploration spending are expected to grow by almost 50 per cent this year to £935mn as a result, as per Stifel forecasts, despite weaker oil and gas prices. This is a margin of over 80 per cent. Buy. AH
