Encouraging news from AIM
While the prior week closed with stock markets buoyed by promising news of a potential Covid-19 treatment from Gilead Sciences (US: GILD) this week was different story, with trial results casting doubt on the effectiveness of its drug remdesivir.
The quest to find a test, treatment or vaccine for coronavirus is certainly heating up. Academics and companies have shifted resources away from traditional operations to fight the Covid-19 battle and identify solutions which could make a big difference to how the UK deals with the illness. Successful companies are likely to enjoy an enormous boost amid the demand of a population under siege.
The challenges posed by Covid-19 could also provide a big turning point for the UK’s small pharma industry which has languished for several years as the plethora of companies which listed around 2015 have struggled to commercialise treatments. Now money is flowing freely into these early stage businesses as the world tries to battle the pandemic.
Abcam (AIM: ABC), the global leader in the supply of life science research tools and one of our AIM portfolio companies, issued a reassuring update this week. Many of Abcam’s customers are directly engaged in the effort to develop diagnostic tests, vaccines and treatments for Covid-19.
Many companies are continuing to struggle in the lockdown. Staff furloughs and equity raises are helping them scrape through the challenges. Although some will not come through the carnage unscathed many others remain cash generative and their operations are in high demand, meaning dividends can still be paid.
AB Dynamics (LON: ABDP), the specialist provider of advanced testing systems and measurement products to the global automotive sector, announced excellent interim results this week. Founded in 1982 as a vehicle engineering consultancy, the group arrived on AIM in 2013 at a share price of 86p and market capitalisation of only £14m. Despite recent steep falls, the shares are still up over 1600% since IPO and the business looks in great shape with plenty of cash and a new manufacturing facility to support its growth. Fundamental AIM portfolios hold shares in AB Dynamics.
Fevertree Drinks (LON:FEVR), the world’s leading supplier of premium carbonated mixers, reassured with its full year results, reporting strong growth in overseas markets and encouraging signs of progress outside the key tonic category. It is hard not to be impressed with Fevertree’s constant product innovation and slick marketing, which encourages customers and consumers to keep coming back for more. Fundamental started acquiring shares in the company for client portfolios towards the end of January 2020 and it has certainly been a tricky period. Covid-19 has severely impacted Fevertree’s On-Trade business although Off-Trade has been doing very nicely as consumers stock-up at home. This has always has always been a terrific business, generating high margins and returns on equity and heaps of cash. Our primary concern surrounded the high valuation for what was essentially a single product, UK-centric business. It is now much more than this and if it starts to deliver in the US and other overseas markets, we believe the shares could deliver handsomely over the coming years. While our entry point wasn’t ideal, it was certainly much better than a year or so previously when the share price was more than double current levels. You can read Investor’s Champion’s in-depth of review of the results here (Fundamental clients have free access to Investor’s Champion’s premium content).
The timing of our investment in Dart Group (LON:DTG) was far from ideal. A few months later and the operator of the Jet2.com airline and Jet2holidays leisure travel business was the vanguard of the coronavirus with the majority of its business is on hold and fleet grounded. The good news is that management now anticipates pre-tax profit for the financial year ending 31 March 2020 will be as high as £270m, 49% up on the prior year, although that’s reflective of the past and the short term outlook is clearly very different. Surprisingly, given the current economic climate, they are seeing customers making bookings for late summer 20 and winter 20/21 programmes, with encouraging numbers choosing to rebook rather than cancel. With a decent balance sheet, carrying £1.5bn of cash at 18 March 2020 the group should come through the current crisis in reasonable shape.
The week was dominated by news of the tumbling oil price due to falling demand as much of the world remains at home and fears that storage facilities will soon be full to capacity. Fundamental portfolios thankfully have no exposure to oil and gas markets.
Fundamental AIM portfolio holding Smart Metering Systems (LON: SMS), which installs and manages smart meters and carbon reduction assets, confirmed the completion of its asset disposal for £282m. The group now has the luxury of £45m cash at bank, access to a fully undrawn £300m revolving credit facility and importantly a portfolio of assets which will continue to generate lots of cash, whatever the economic climate. SMS announced the deal on 12 March 2020 as markets were in turmoil, thereby benefiting from some impeccable timing. The 4% dividend yield looks relatively assured and we remain happy holders.
A first quarter trading statement from Unilever (LON:ULVR) showed how even the most defensive companies are struggling to maintain any semblance of growth in the current environment. The blue chip saw increased sales of hygiene (Eg Domestos; Lifebuoy) and in-home food products (Flora; Hellmann’s; Marmite; Pot Noodle and plenty of tea) which benefited from the rush to stock-up. However, non-existent out of home consumption is affecting its food service and ice cream business (Ben & Jerrys; Wall’s). This well-diversified giant will be impacted less than many and is still able to maintain its quarterly dividend which will be paid on 4 June. Fundamental general portfolios hold shares in Unilever.
To keep up to date with the coronavirus impact on these and many other companies please visit our associates Investor’s Champion.