Interactive Investor

AIM sell-off throws up bargains

17th October 2014 16:43

Lee Wild from interactive investor

After hitting a purple patch last year, the Alternative Investment Market (AIM) has struggled in 2014, and has seen much of those gains wiped out. August was full of promise, but the latest sell-off, which began in earnest mid-September, caused another lurch lower. The selling has been pretty indiscriminate, and a lot of good companies have been savaged in the chaos. We've identified some of those which should rebound sharply when normal business resumes.

First, we picked those AIM companies that had fallen by more than 10% since 19 September. We also targeted any expected to grow earnings per share (EPS) significantly over the next two years, and favoured those trading on modest price/earnings multiples.

The initial screen threw up 73 companies, but we then weeded out any that had already been on a prolonged and significant downward trend. It is also important to exclude profits warnings, given that these muddy the results. We want companies that have been unfairly punished in the rout, not those that were in trouble anyway.

Cheap and cheerful:

Character Group is the company behind kids' toys from massive hits like Peppa Pig, Minecraft, Teletubbies and Scooby Doo. It lost money in the first half of 2013, but business improved and the share price subsequently surged by 60%. It managed to make a small annual profit last year, but the shares have been hit hard since the September sell-off began.

However, a trading update last month revealed full-year UK sales had been "encouraging." International sales have done well, too, with Peppa Pig toys flying off the shelves in Europe and Australia and Doctor Who has gone down well in the US. Results for the year ended 31 August 2014 should match forecasts.

Online casino operator 32Red's share price grew six-fold between 2010 and early this year, so when it said in March that revenue growth had slowed during the first few weeks of the New Year, investors took that as their cue to bank profits. Tougher regulation and taxes are headwinds, too.

Still, earnings are expected to grow fast, and 32red is moving into new markets, which spreads the geographical risk. Recent half-year results revealed gross gaming revenue up 195 to £22.6 million and the core casino business up a fifth to £20.4 million. Pre-tax profit rose 12% to £2.3 million. Broker Daniel Stewart thinks the shares are worth 95p.

In 2010, shares in The Mission Marketing Group were worth less than 9p each. In July this year it was 56p. The price dipped as it has done in the past after a good run, but losses accelerated last month. That was before results showed revenue up 4% in the first half to £26.3 million and pre-tax profit up 9% to £1.8 million.

And just a few weeks ago, the company bought 70% of Asia-focused digital marketing agency Splash Interactive for £0.3 million. It also has an option to buy the rest for £2 million. A placing at 42p raised £2.4 million.

Fairpoint has recovered steadily since a problematic 2011, and the debt advisor and legal services firm's share price peaked at 157p in April. Despite edging back, the shares looked to have found a comfortable level. But then, inexplicably, the selling began.

Just weeks earlier, Fairpoint had reported a 4% increase in adjusted pre-tax profit to £3.4 million, and buy two big debt management plan (DMP) portfolios continues the diversification process, which throw up new growth and acquisition opportunities, says broker Shore Capital, especially in the legal services market where further consolidation is anticipated by management.

Non-executive director David Harrel has just bought 50,000 shares at 135.5p each, and clearly thinks a forward price/earnings (P/E) ratio of just 6.3 based on Shore Cap's estimate for 2015, is too cheap.

More expensive but attractive:

Telit Communications is a bona fide ten-bagger. Just 16p five years ago and 55p as recently as last year, its share price topped out at 276p a month ago. But Telit, a provider of so-called machine-to-machine (M2M) technology and services - "the chief enabler technology area for the Internet of Things," it says - grew half-year revenue by 27% and almost doubled adjusted pre-tax profit to $11.1 million (£6.9 million).

Now, it's just announced nine-month revenue rose by a fifth to $205 million and the business is trading in line with expectations. That rapid growth in sales and forecast earnings justifies a higher rating.

Company Name

Ticker

% Price Change *

Est annual EPS growth over two years (%)

Forward P/E - next 12 months

Share price (p)

iomart Group

IOM

    (24.3) 

18

14

185

Telit Communications

TCM

    (22.7) 

38

17

207

The Mission Marketing Group

TMMG

    (20.2) 

15

8

42

Fairpoint 

FRP

    (18.0) 

10

7

113

32Red

TTR

    (17.9) 

61

7

49

Caretech Holdings

CTH

    (17.5) 

11

6

197

Trakm8

TRAK

    (14.9) 

48

12

66

Utilitywise

UTW

    (14.3) 

49

21

261

James Cropper

CRPR

    (13.5) 

66

11

361

Solid State

SOLI

    (11.3) 

47

18

530

Character Group

CCT

    (11.1) 

486

8

185

Northbridge Industrial Services

NBI

    (10.6) 

15

16

535

Source: S&P Capital IQ   *between 09/19/2014 and 10/16/2014

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.