4 AIM companies to buy and hold

Some companies appear undervalued based on their current performance, while others have the potential to be highly profitable but are still a few years away from that point in their evolution. While some of these companies with enormous potential can defy gravity others have fallen back, which means that investors can get involved at a much more attractive share price.

There is, of course, an element of trust that the companies can achieve what they believe they can in the coming years.

An example of how long-term loss-making business can move into profit and grow that profit is woundcare company Advanced Medical Solutions. AMS was quoted for around a decade before it made a modest profit in 2005. Since then, profit has grown significantly - both organically and via acquisition - as revenues have improved.

Here are four companies that do not make money at the moment, but if things go to plan they could be significant revenue generators or have at least built up a valuable asset base in two or three years' time.

Atlantis Resources 

28.5p

The Atlantis Resources (ARL) share price has fallen by more than two-thirds since it joined AIM one year ago. Yet, the tidal power projects and turbine technology company has made good progress with the MeyGen project in Scotland, which is the largest consented tidal stream power project in Europe. Tidal energy is an underutilised resource and the cost of the energy produced is falling. The flagship MeyGen project will also provide a showcase for the Atlantis turbine technology.

A £51 million project finance package was secured last September and Atlantis still owns 86.5% of MeyGen. That financing values MeyGen at £71.9 million and the Atlantis share at £62 million - more than twice the company's current market value. Construction has started on phase 1a of the project, involving four 1.5megawatt (MW) turbines, and this could start generating power by the end of 2016. When fully up and running phase 1a is expected to generate £7 million of revenues a year, helped by government incentives providing a tariff of £305/MWh for initial capacity.

The current market value of little more than £25 million appears modest"

The full project will be 398MW and, although the price paid for most of the electricity will be lower than the initial phase, it is estimated that annual revenues could be £160 million at £155/MWh - although that is some way away. There are other potential projects in Canada and India and on top of that there is the turbine business, where more than £48 million has been invested. This makes the current market value of little more than £25 million appear modest.

Last February, Atlantis raised £12 million at 94p a share. Morgan Stanley, which sold its tidal energy business to Atlantis, owns 42.4% of the company and its 12-month lock-in is about to end with an orderly market agreement for a further 12 months. However, Morgan Stanley is unlikely to want to sell at such a depressed share price.

There is always concern about the political risk of these types of cleantech projects, but the Scottish government is an enthusiastic backer and it does not seem likely that there will be any major changes in the UK government view after the next election.

Kromek

37.5p

Kromek has made progress since it floated, but it has also failed to meet some forecasts. That is not good for the investors in the flotation but it means that new investors can buy shares in a more advanced business at a lower price.

Kromek has developed products based on Cadmium Zinc Telluride (CZT) semiconductor technology. This technology is reactive to x-rays and gamma rays and enables detailed images that cannot be generated by other technologies. The problems have been the cost and production efficiency. Kromek has made progress and the detector yield has improved by more than 14 times in two years and cost has fallen by 94%.

Kromek is focused on three main areas - medical, nuclear and security. It has been winning contracts in all of these areas. Kromek supplies subsystems to other manufacturers as well as its own branded products directly to users. The medical imaging market is estimated to be worth $1.1 billion, while nuclear detection is worth $1.2 billion. The addressable market for the security screening sector is smaller at $370 million, but the screening of liquids has the highest potential for revenue generation in the short-term.

There is plenty of scope to generate much higher revenues than the £10 million forecast for 2014-15. Kromek has enormous potential"

One of the key potential markets is CT scanners. There are a limited number of major players in this market and Kromek is already partnered with one of these companies, which is developing its next generation colour CT. The addressable market is valued at $920 million and a new generation product tends to last more than ten years. If Kromek’s technology is included in the new product it should secure a significant chunk of the addressable market and there is nothing stopping it from signing up the other companies in the CT sector.

In October 2013, Kromek raised £15 million at 51p a share and net cash is expected to be £1.9 million by the end of April 2015. Kromek is set to continue to lose money as it increases its sales and marketing costs, but revenue growth is set to accelerate, although initially it will be mainly from customer-funded development projects. Capacity has been doubled at the Sedgefield factory so there is plenty of scope to generate much higher revenues than the £10 million forecast for 2014-15. Kromek has enormous potential.

ANGLE

89.75p

Medical diagnostics technology developer ANGLE has reached a point where it can indicate how long it may take to generate commercial revenues from its Parsortix cancer diagnostics technology. The potential global market for the technology is estimated to be worth $8 billion and, longer term, there could be applications in non-cancer areas.

The Parsortix technology can be used to test blood for cancer cells. Any circulating tumour cells are captured in a cassette while the rest of the blood is able to flow through. The test can be used to diagnose and monitor cancers.

The potential global market for the [firm's] technology is estimated to be worth $8 billion"

ANGLE is still awaiting FDA authorisation, but has already achieved the CE mark in Europe. ANGLE hopes to be selling Parsortix systems for use with clinical trials by the middle of this year. The equipment for the tests could be sold for £40,000 a time and the consumable cassette could be sold for £150 each. Securing 5% of phase II and phase III trials undertaken each year could yield Parsortix revenues of £8 million a year. That is a fraction of the potential market for clinical diagnostics.

There is a worry that ANGLE may need to raise more cash. There was £2.27 million left in the balance sheet at the end of October 2014, a £1.6 million decline in six months, but there is still more than £600,000 to come from the deferred consideration for Geomerics. The cash will not last long if the company cannot generate additional revenues.

Once regulatory authorisation is obtained then revenues can be generated from clinical diagnostic applications and that could happen as soon as next year. In the meantime, there could be upfront milestone payments on corporate deals in the next year. If these deals can be made then there should be a re-rating of the shares.

CityFibre

69p

CityFibre Infrastructure (CFHL) invests in cable infrastructure, a business strategy that has historically led to enormous losses. CityFibre's strategy is different. It does not build its fibre optic cable network in a mid-sized city unless it has an anchor customer, normally from the public sector. These deals normally last for up to 20 years thereby covering between 50% and 100% of the capital investment in the fibre infrastructure, but they may only account for 5% of the capacity. This leaves plenty for CityFibre to sell to other customers. The initial focus is on business customers, but mobile and consumer broadband are other potential revenue generators.

CityFibre has announced a joint venture with Sky and TalkTalk which will sell broadband services to consumers in York from next year with plans for other cities. This was followed by a national framework agreement with mobile operators EE and Three UK, along with their infrastructure joint venture Mobile Broadband Network Ltd. This will connect CityFibre’s network with mobile masts, which will improve the network performance of the two mobile operators. There may be some short-term uncertainty about this deal because of the takeover of EE by BT.

CityFibre has announced a joint venture with Sky and TalkTalk which will sell broadband services to consumers in York from next year with plans for other cities"

One year ago CityFibre joined AIM and raised £15 million, after expenses, at 60p a share and four months later raised a further £30 million at 70p a share. This means that CityFibre has a strong balance sheet as well as access to debt funding.

The four main projects are in York, Peterborough, Coventry and Aberdeen. CityFibre recently secured a deal alongside Logicalis to build a fibre network in Newport, Wales, covering information and security applications. CityFibre is still a long way from making a profit, but it is building up a valuable asset base, which could generate large revenues in the future.