post

AIM big guns falter; buying opportunity or better value elsewhere?

The shares of several of AIM’s largest, highest profile, companies have tumbled over the past few months. In this Blog, Fundamental’s Chris Boxall gives his thoughts on the lacklustre performance of some of AIM’s previous high-flyers. Could now be an excellent buying opportunity or were the share prices simply far too over-heated before.

While the fall from grace of Burford Capital (LON:BUR) has stolen the AIM headlines, several of AIM’s other £billion companies have also experienced material share price falls over the past 12 months.

Fevertree Drinks (LON: FEVR), the world’s leading supplier of premium carbonated mixers, has seen its share price slump 45% from the highs reached in August 2018 when it was basking in the perfect environment of a UK heatwave, World Cup and royal wedding. However, despite the share price falls, the shares still trade at a rather punchy 36x forecast earnings estimates for the year ending December 2019 which assume 16% growth in sales.

There is no doubting the appeal of Fevertree’s excellent products and it is a simple business to understand, however, the sky-high valuation has always left little room for error and much depends on growth outside its home UK market, which is starting to appear somewhat saturated.

Group sales in the first half of 2019 only rose 12%, which is decidedly underwhelming for a business on such a rich rating. However, 31% growth from the key US market was more encouraging with the launch of Spiced Orange and Smoky Ginger Ales set to tantalise American’s taste buds. With Fevertree already dominating its home G&T market, we remain wary that the valuation as it stands still hangs on an acceleration of growth in the US and Europe. Without the help of the mania for craft gins which helped drive growth in the UK, this looks a far trickier proposition. A cracking business and huge AIM success story nonetheless, but we are not imbibing yet.

Keywords Studios (LOMN:KWS), the technical services provider to the global video games industry, has been another soaring success on AIM, although it’s acquisition led business model is very different to that of Fevertree, whose stratospheric growth was all of its own internal making. Having acquired a large number of independent studios and underpinned by a booming sector, KWS has turned itself into a significant external development partner to leading video content creators and publishers. Sales have soared over the past few years from only €37m in 2014 to €250m in 2018, with forecasts of €319m for 2020 buoyed by acquisitions and organic growth. Much like Fevertree the shares are 45% off August 2018 highs and currently trade at a more modest 26x forecast adjusted earnings for 2019. Keyword’s acquisition led model results in plenty of adjustments to its financial statements, to the extent that it is hard for us to determine what is the likely norm going forward. We prefer companies like Fevertree where organic growth is the primary driver and have yet to be tempted by Keyword’s model.

Online fashion pioneer ASOS (LON:ASC) long held the crown as AIM’s largest company. Having slipped down to 4th place at the end of September the shares have risen 46% in October following full year results which offered much needed encouragement, pushing the market capitalisation back to £3bn moving ASOS back into second place on AIM, close behind rival Boohoo Group (LON:BOO). While the shares are more than 50% off the highs reached in January 2018 the valuation continues to challenge investors like us. With international retail sales now representing just over 60% of the group total and plenty of investment made to beef up their international operations, ASOS looks well placed to supercharge international growth. However, mass market fashion retail is hard for us to understand and we aren’t tempted to jump onboard yet.

Blue Prism Group (LON:PRSM) is a pioneer in the field of Robotic Process Automation (RPA), an emerging form of business process automation technology where a virtual workforce powered by software robots are trained to automate routine back-office clerical tasks such as form-filling and invoice generation.

Having joined in AIM in March 2016 at a share price of 78p and market capitalisation of only £48m, the shares of this much hyped, loss-making business, with revenues of only £55m in 2018, reached a high of 2635p by September 2018, pushing the market capitalisation over £1.5bn.

While revenue has grown significantly since listing, losses have also escalated as the group has increased its spending on sales and marketing in support of international growth. Revenue for the 6 months ending 30 April 2019 rose 82% to £42m, but operating losses ballooned over 500% to £35m, following material growth in sales and marketing headcount. Thankfully the business had over £100m of cash in the bank available to support this international expansion, having raised £100m in January 2019 at a price of 1100p per share.

We found it somewhat disconcerting that shortly after the material fund raise the Group’s Chief Revenue Officer decided to sell 100,000 shares (the majority of his shareholding), retaining a stake of only 50,000 shares. The subsequent sale in July 2019 of 424,000 shares by the Chief Technology Officer, netting him £6.2m, didn’t offer much comfort either.

The material share sales have been fuel for the bears pushing the share price down 67% to 866p.

While Blue Prism operates in a very exciting growth area it’s also an area which is very hard for an outsider to understand, making it extremely difficult for us to make a credible valuation judgement – just because the shares have declined more than 60% doesn’t mean they are now a bargain!

Of the above AIM heavyweights, we are keeping a close eye on Fevertree. It is highly profitable (operating margins 30%) and cash generative and operates in a sector we can understand, growing organically through its own internal development, slick marketing and expanding distribution. Unlike many of its peers, its financial statements are also mercifully free of accounting adjustments, which goes down well with us.

For further information on Fundamental’s high performing AIM portfolios please email [email protected] or speak to Chris or Stephen by calling 01923 713890.


post

Stunning results from this technology star highlight the potential for investment outperformance on AIM 

dotdigital Group plc (LON:DOTD) has rapidly become one of our small cap favourites and the latest results certainly didn’t disappoint.

Founded in 1999 as a web design agency, dotdigital has developed a globally compelling product suite for email and digital marketing.

Having grown significantly since admission to AIM in 2011, when it’s market capitalisation was only £19m, its marketing automation platform is now used by over 70,000 marketers in 156 countries worldwide, empowering global marketers to achieve outstanding results. Global expansion and an expanding range of products  has seen revenues grow eleven fold over the last 8 years and the market capitalisation hit an historic high of £339m in July 2019, when the share price stood at 114p.

The group’s expansion has been boosted by it partnering with many of the leading ecommerce platforms including Magento (now part of Adobe), Microsoft Dynamics 365, Salesforce and Shopify.

Results for the year ending 30 June 2019 were stunning, with revenues rising 19% to £51.3m, including organic growth of +15%, and adjusted operating profit up 25% to £11.8m.

33% growth in adjusted earnings per share to 3.88p was even more impressive and materially ahead of consensus market expectations of 3.4p.

The group acquired Comapi in November 2017 which specialises in ‘live chat’ and has built a software platform that allows clients to communicate directly with their customers via email, SMS and social messaging apps. The Comapi technology has now been fully integrated with dotdigital’s platform, with 19% of the group’s customers using more than one channel, helping to grow average revenue per user 14% to £966 per month.

The all-important recurring revenue as a percentage of total revenue increased to 86% thereby offering excellent visibility into the future.

The key partnerships have also been strengthened with revenue through Magento up 27% to £11.8m.

Despite the ongoing impact of GDPR, revenue from the EMEA region delivered double digit growth, but more distant overseas markets were the star performers. Having initially struggled to progress in the US, the group now appears to have found its feet with revenue in this key geography rising 27% to $9.0m. The APAC region was even better, reporting revenue growth of 83% to AUS$3.8m.

dotdigital comments how innovation is at the core of everything and they are committed to the continuous evolution of the technology, reflected in the considerable investment in the period. Despite this, excellent operating cash inflow of £12.3m still resulted in free cash flow of £6.3m, boosting year end cash to £19.3m.

The outlook was extremely encouraging with the first quarter of the current 2019/20 financial year starting well.

The house broker commented how “there are few companies we can point to which consistently deliver 15% organic growth, PBT margins over 25%, and reliable cash conversion” reiterating their target price of 135p, 37% above the current share price.

Having held the shares for several years and remaining enthusiastic buyers, we would echo their comments.

To discover other exciting investment opportunities on AIM please contact Chris or Stephen at small cap investment specialists Fundamental Asset Management by calling 01923 713890 or emailing [email protected] 

 

 

 


broadcast

AIM stocks to watch after the recent rout

Three AIM stocks to watch

In this latest interview with Jeremy Naylor of IG markets, Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, discusses the performance of AIM over the last few months and introduces three companies which could present interesting buying opportunities.

While the travails of Burford Capital have dominated the AIM headlines, there has been plenty of other activity on London’s growth market and the companies discussed in the interview are worth a closer look.

You can find out more about Fundamental’s AIM portfolio service, including the latest fact sheets, from the link here.

Fundamental Asset Management has delivered exceptional investment returns investing in AIM for Inheritance Tax planning for more than 15 years.

For further information on Fundamental’s high performing AIM portfolio service, please contact Chris or Stephen on 01923 713893.