The good news was mainly lack of bad news. The increase in US average wages to 3.1% and a nine-year high is inflationary but was overshadowed by rumours of an imminent US /Chinese Trade agreement which was subsequently denied.
A quiet week for the UK although we are interested in Retail Sales on Tuesday, which could be down 0.2%, and the House Price Index which could ease back. On Thursday there is a FED speech and interest rate decision which could imply a reduced time frame to the next rate rise or maybe not due to the US mid-term elections.
Markets remain uneasy, here is our preview.
CARR – 150p –Good value with a likely improved rating after Brexit
ALU – 128.5p – Focus on core
LOK – 415.5p – Defensive investment
ULS – 85p – Weak housing market
PHD – 126.5p – Better second half
Reviews
150p (150p-156p)
Mkt Cap: £137m
Results: Finals Monday, Nov 12th
Carr’s has, over time evolved from being a mini-conglomerate into and international Agriculture and Engineering business. As part of its stated strategy of investing in growing agriculture markets in the UK and internationally, it recently acquired an animal health products business for £8.25m. This acquisition fits the focusing on manufacturing value-added products and solutions, with market-leading brands and robust market positions, supplying customers in over 50 countries.
The interims recorded a 13.2% increase in revenue to £200m with a 22% increase in PBT to £10.9m and the dividend was increased by 13.2%. This included a better than expected recovery in the Engineering division, which designs and manufactures bespoke equipment and provides technical engineering services into the nuclear, petrochemical, oil and gas, pharmaceutical, process and renewable energy industries, including robotic and remote handling equipment. Its Agriculture division manufactures and supplies feed blocks and supplementation products for livestock distribute farm machinery and runs a UK network of rural stores, providing a one-stop shop for the farming community. Brexit is impacting on the UK Agriculture in relation to direct payments to farmers and with the uncertainty of trade agreements both within the EU and the rest of the world.
The July Trading statement, ahead of the finals for the Year-end September 2018 which are reported next Monday, stated that the performance had remained strong due to the breadth of product offering, investments in acquisitions and research, and the US businesses performing well. There is a strong recovery on 2017’s profits of £9.3m as the full year forecast is for £16.6m on turnover of £380m which gives a prospective P/E of 11.5x on and Eps of 12.7p while the 4.3p dividend gives a yield of 2.9%.
Financials
Although cash generation improved the net debt increased to £16.1m from £14.1m relating to an acquisition. The current asset ratio is a manageable but tight 1.2x and supported by a £96m NAV.
Trading Strategy
The shares are off the year’s high of 165p and make a medium-term investment and there could be a Brexit relief rally.
Reviews
128.5p (126p/131p)
Mkt Cap: £46.3m
Next results: Interims, February
Building products supplier Alumasc (LSE: ALU) has sold its underperforming facades business. Alumasc still intends to move to AIM and luckily it seems that the disposal is not large enough for a Main Market company to have to seek shareholder approval at a general meeting.
The initial consideration is £4.5m in cash with potential for a further £1.5m deferred for one year. This disposal is dilutive, but it means that Alumasc can focus on its better performing businesses with greater growth prospects.
Alumasc pre-tax profit was expected to recover from £6.7m to £8.3m this year, but the effect of the disposal means that the forecast has been cut to £7.7m, with a further recovery to £8.7m next year. The shares are trading on less than eight times prospective 2018-19 earnings. A small increase in dividend would provide a yield of 5.9%.
The attractions of Alumasc have been ignored in recent times but this will eventually change.
Trading strategy
Good value.
Original recommendation: 124p/128p
Reviews
415.5p (411p/420p)
Mkt Cap: £122.2m
Next results: Interims, April
Self-storage sites operator Lok’nStore (LSE: LOK) is one AIM company that is not disappointing investors. The shares are trading at a 14% discount to NAV of 480p a share, whereas rivals, such as Big Yellow, are trading at a premium to NAV.
Growth is coming from increasing occupancy rates with a small contribution from price increases. Revenues increased from £16.7m to £17.8m in the year to July 2018.
Lok’nStore has increased its dividend by a further 1p a share, to 11p a share, for the year to July 2018 – there was cash available for distribution of 19.4p a share – and it is on course for the same increase this year.
Lok’nStore can afford to do this even though it is stepping up investment in new sites. Capital investment was £18.1m last year and this pushed net debt up to £32.5m – still well within existing bank facilities of £50m. Another £10m will be invested this year.
Capacity will be increased by nearly one-third over the next couple of years. Demand still outstrips supply.
There is more to come as the newer sites mature. Lok’nStore provides a solid investment with growth prospects at a time when uncertainty and profit warnings are hitting the share prices of many other AIM companies. NAV is forecast to increase to 569p a share over the next five years.
Trading strategy
Buy.
Original recommendation: 395p/415p
Reviews
85p (84p/86p)
Mkt Cap: £55.8m
Next results: Interims, 3 December
Online conveyancing intermediary ULS Technology (LSE: ULS) is the latest AIM company to be hit hard by the market after a weak trading statement.
First-half trading is in line with expectations but it is getting increasingly difficult to generate growth in a stagnant housing market. Revenues were 3% ahead at the interim stage, even though the market was 4% lower. A 10% decline in transactions is expected in the second half.
ULS has made small gains in market share and it is controlling costs.
Full-year profit could edge down from £5.5m to £5.3m, originally £5.8m was expected, with a recovery next year to the level originally expected for this year. The dividend is expected to rise from 2.3p a share to 2.4p a share.
Earnings per share are likely to fall this year but the 2018-19 prospective multiple is down to 14 following the share price fall. Given the company’s track record this is an attractive multiple, but there may not be a recovery in the short-term.
Trading strategy
Good value.
Original recommendation: 88p/89p
Reviews
126.5p (125p/128p)
Mkt Cap: £117.8m
Next results: Interims, April
The worries about the full year performance of Proactis (LSE: PHD) were not warranted. The spend control software supplier lost two large customers in the first half but the second half was good enough to enable the, albeit downgraded, full-year forecast to be beaten.
In the year to July 2018, underlying pre-tax profit more than doubled from £5.1m to £12m, following the merger with Perfect Commerce last year, and, more importantly, earnings per share grew by more than one-fifth to 10.4p a share. New contracts added annual revenues of £8.7m and upselling contracts added £3.4m.
The dividend was edged up from 1.4p a share to 1.5p a share. Net cash was £29.3m at the end of July 2018 and further acquisition payments are likely to increase that figure this year. Even so, the business is cash generative.
The 2018-19 profit forecast of £13.1m has been shaved slightly but it appears conservatively set so it should be achievable given the level of new business won last year.
The shares are trading on eleven times prospective 2018-19 earnings. Further reassurance that this forecast can be met will make investors more comfortable and eventually lead to a re-rating.
Trading strategy
Buy for further recovery.
Original recommendation: 78p/82p
By Andrew Hore & Jon Levinson
Andrew has been writing about small companies for 25 years, following the fortunes of many companies, both successful and unsuccessful. He worked at the Investors Chronicle for 12 years, ending up as smaller companies editor. He then went on to write AIM Bulletin and he is currently editor of AIM Journal and AimMicro.com. He is a former AIM journalist of the year and was on the shortlist for the journalist of the year at the Small Cap Awards.
Jon has been an analyst, a journalist, a fund manager and is currently a corporate broker. He will strictly never write on corporate clients. His MBA dissertation was on filling the Smaller Companies Equity Gap. When writing the Penny Share Focus he learned that not all that glitters is gold.
