Mytrah Energy Ltd (MYT)

 

AIM's fastest growing companies

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AIM's fastest growing companies
There are hundreds of companies on AIM. Some are tiny and lose lots of money; others like ASOS (ASC) are worth over £2 billion and make substantial profits. But the junior market is the home of the growth stock, and some businesses have been growing earnings at breakneck speed. After screening the entire small-cap sector, we've uncovered the fastest-growing companies and give our take on prospects.

Of course, it's no surprise to hear about growth on AIM. That's typically reflected in high price/earnings (P/E) ratios and very little by way of income generation (see table). Yet many of the top five growth companies we've identified appear not to be trading on vastly overinflated valuation multiples despite the potential growth on offer.

Clearly, there is always risk associated with this type of company. Growth assumptions are baked into valuations and any earnings-miss will certainly be punished. However, hard work done improving margins and repairing balance sheets after the financial crisis laid the foundation for a profits recovery, and improving economic conditions generate an obvious benefit.

True, 2014 has not been quite the cakewalk many experts had predicted. Europe, the UK's biggest trading partner, remains a basket case and growth elsewhere, especially in China, has been more pedestrian than anticipated. "Despite setbacks, an uneven global recovery continues," said the International Monetary Fund (IMF) recently. It's why the organisation has just revised down global growth forecasts to 3.3%.

Yet, while geopolitical risk remains, and stockmarkets look certain to remain volatile, economists predict 3.8% growth in 2015. Even the eurozone should improve. Highly accommodative monetary policy, including historically low interest rates, should underpin a recovery.

So, which of AIM's high-flyers stand to benefit from this improved prognosis and have, perhaps, been overlooked by growth-hungry investors?

Michelmersh Brick Holdings

Earnings fell at Michelmersh Brick (MBH) in 2013, but first-half results this year were better-than-expected and forced Cenkos Securities to upgrade forecasts. Higher brick prices mean adjusted earnings per share (EPS) are now tipped to rocket by 1,000% in 2014, up from 0.2p to 2.2p. That’s more than double the 2012 figure, too. Next year, it's back down to earth, although forecast growth of 25% is not to be sniffed at, and average forecast growth for the two years is a stunning 511%.

CompanyTickerPrice (p)Mkt Cap (£m)Est EPS growth (Year 1)Est EPS growth (Year 2)Est EPS growth (Year 3)Forward PE ratio% price change (3 months)% price change (1 year)Dividend yield (%)
Michelmersh Brick HoldingsMBH61491,00023-28-613-
GreenkoGKO14914921756-22-14-3-
Havelock EuropaHVE1919158412310-172-
Mytrah Energy MYT7373141693912-17-10-
GemfieldsGEM50501361043820529-
Source: S&P Capital IQ, Investec Securities, Numis, Cenkos, finnCap, Oriel, Westhouse

MBH's share price is underpinned by investment land valued at 26p per share. Strip that out and Michelmersh shares trade on just 16 times current-year forecast earnings, dropping to 13 in 2015. That's a discount to the Construction & Materials sector. Unfair, says Cenkos:

We would argue that MBH should trade at a premium to this operating in an industry impacted by a supply demand deficit with high barriers to entry preventing significant additions to supply capacity. There is scope for a sustained recovery underpinned by political pressure to resolve the UK housing shortage and the minor £3,000 cost of bricks for the average UK house is indicative that there is scope for sustained price increases.

Gemfields

Precious stones miner Gemfields (GEM) is the only company in the list of super-growth firms expected to double earnings for the next two years. Look for EPS growth of 136% in the year to June 2015, a further 104% surge in 2016, and 38% the following year, says Investec Securities.

At its recent auction in Lusaka, Zambia, the company auctioned 0.598 million carats of higher quality emeralds from its Kagem mine. That generated revenue of $34.9 million, the second highest achieved at higher quality auctions to date. An average value of $65.89 per carat is a record for Kagem stones.

And look out for another ruby auction next month. A maiden sale in August of stones from the Montepuez mine raised $15.5 million. That more than covered all investment in the asset, said Investec. We know Gemfields has ramped up production since, so there are high hopes. A strong dollar means the broker thinks the shares are worth 61.1p.

Havelock Europa

If Havelock Europa's crucial fourth quarter goes to plan, the interior designer will make a £0.9 million profit in 2014, up from £0.6 million the year before. Half-year results were certainly encouraging. Havelock typically loses money in the first half and broker Oriel Securities thinks it will generate almost two-thirds of sales during the final six months of the year.

In 2015, Oriel reckons Havelock could make £1.3 million. It's diversifying revenues and net debt is falling. Overseas sales are rising, too, and management expects an uptick in demand from the high street banks and retailers, student accommodation and the education sector. Clearly, the weak education market is worrying investors and the share price has fallen since September's results, but Oriel sticks with its 30p target price.

Greenko

Greenko () builds and runs clean energy projects in India, and it’s clearly big business. In a recent first-half update, the company increased power generation by 89% to 1,225 gigawatts (GWh), which, it said, should grow first-half revenue by over 120% cash profit by about 130%.

"As the Indian energy market becomes increasingly favourable towards hydro and wind power, we remain very optimistic about the sustainability of our solid operational and financial performance," said boss Anil Chalamalasetty.

Installed capacity increased by 136 megawatts (MW) to 697 MW, and Greenko says it’s still on track for its operational portfolio to exceed 1,000 MW in 2015. That’s why house broker Arden Partners has pencilled in adjusted EPS growth of 217% for the year to March 2015. The company has also refinanced its Standard Chartered debt on better terms following a $125 million investment from EIG Global Energy Partners. Says Arden:

The back-end loaded structure of the interest payments works well with renewable assets and further de-risks Greenko's finances following last month's bond issue. This and the likely upward pressure on electricity prices from the re-auctioning of coal mines puts Greenko in a strong position that has not been reflected in a relatively flat share price.

Mytrah Energy

Mytrah Energy (MYT), the India-based power company, has raised $70 million of new debt to cover an existing mezzanine facility and to develop new wind power projects currently in the pipeline. Half-year results published in September revealed a slow start to the wind season, although conditions have picked up and, according to Investec, full-year numbers are still achievable.

That keeps Mytrah on track to make a $19 million profit this year and $31 million in 2015. Of course, there are risks here, but "recent political and economic developments play to the advantage of the renewable producers," reckons Investec, which repeats its 165p target price.

One-year wonders

As we pointed out in October, this year has been one of rapid growth for Proactis (PHD). The spend control software firm said last month that earnings rocketed by 53% in the year to July after surging by 120% in 2013. FinnCap predicts the'll grow by 135% in the year to 2015.

Growth slows to a much more modest 8% the year after, but despite tripling already this year, finnCap reckons even its recently-raised target price of 115p may be conservative.

Christie (CTG) is expected to double adjusted pre-tax profit to £2.9 million and EPS to 8.38p in 2014, according to Charles Stanley. After that, it's more modest progress of 6% and 9% respectively.

Plus500 (PLUS) is slated to double profit to $138 million and grow EPS by 94% to 91 US cents, says Numis Securities. In 2015, that slows to 15%, then 13% the year after.

Brady (BRY) will ramp up adjusted pre-tax profit by 96% to £4.9 million, if Panmure Gordon has got its sums right. It’s 16% and 14% in subsequent years.

The finishing line is in sight for hostel operator Safestay (SSTY), spun out of Safeland in May. It's on track to grow EPS by 122% to 4.8p, although there's a pause next year before a resumption of double-digit growth in 2016.

Elsewhere, skin-focused pharma firm Sinclair IS Pharma (SPH) is tipped to grow earnings by 37% in the year to June 2015 and 53% the following year. That's impressive, and a forward PE ratio of less than 17 is an unfair discount to the sector. Directors certainly think so. They've just spent over £200,000 on shares in the company.

And finally, James Cropper (CRPR), the speciality paper firm which provides the material for Remembrance Day poppies, has just doubled half-year adjusted pre-tax profit. New products, cost-cutting and capital investment underpin bullish growth forecasts, says Westhouse. Average annual forecast EPS growth of 28% over the next three years appears not to be reflected in a forward earnings multiple of 12, dropping to just 9.3 in 2015.

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.

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