Interactive Investor is the web's biggest community for discussing UK investments and companies. Compare strategies, share knowledge and validate decisions (or not) on our discussion boards.
Three AIM growth shares for your ISA
By Andrew Hore | Fri, 26th February 2016 - 16:18
This week, I'm making suggestions for three long-term growth stocks to tuck away in your ISA. Two pay dividends and the third is expected to do so in the medium-term.
I almost made cloud-based mobile software and services provider Crimson Tide (TIDE) one of my tips of the year, but I thought that the share price was too high at the end of 2015. The price fell back early in the year, but a positive trading statement has sent it back up.
It has not returned to its peak, though and, despite the rise, the confirmation of continued improvement in prospects means that Crimson Tide is still an attractive long-term investment. The current rating is high, but it is set to fall rapidly over the next couple of years.
This is the kind of business where, once it covers its fixed costs, the profit can start to ramp-up substantially. There are a dozen employees and costs have been kept under control. It took nearly a decade to make a significant profit, but those fixed costs are already covered so Crimson Tide is in the rapid profit growth phase.
Crimson Tide does not pay a dividend at the moment, but has restructured such that it can do in the future Crimson Tide's mpro software enables employees that work outside a company's premises to collect information and schedule tasks using their mobile devices.
Any device can be used and the software is easy to adapt for specific uses. These services can be used by both small and large companies due to the monthly subscription-based "Software as a Service" (SaaS) revenue model. Agreements tend to be for more than one year, so recurring revenues are strong.
Crimson Tide sells both directly and through larger businesses, such as Microsoft (MSFT) and Vodafone (VOD). The main sectors that Crimson Tide focuses on include healthcare, retail, health and safety, logistics and facilities management. Clients include Barclays (BARC), Odeon (0NEO), Fitness First, Next (NXT) and Rentokil Initial (RTO).
The recurring revenues make the business cash generative and, although capital investment is increasing, it will continue to have net cash, which could be £400,000 by the end of 2017. That could depend on the rate of growth, though.
Crimson Tide does not pay a dividend at the moment, but it has restructured its reserves so that it can do so in the future. A dividend of 0.02p a share is forecast for 2016.
A trading statement from Crimson Tide said that 2015 profit will be better than expected, and this is likely to end up at around £300,000, even though revenues were in line with expectations. House broker WH Ireland expects profit to rise to £500,000 in 2016 and then double to £1 million in 2017.
This is a cash generative growth story, but liquidity can be limited so the share price should not be chased upNew contracts coming on stream in the coming months will not make a full contribution until next year, because of the nature of the recurring income stream. Tax losses mean that no tax is likely to be payable in the next couple of years.
Last year, Helium Special Situations increased its stake to 21.1%. It is a long-term supporter of the business and the board also owns nearly one-third of the company. The shares are trading on just under 32 times prospective 2016 earnings, but that could fall to 16 for 2017. There is also potential for further upgrades.
This is a cash generative growth story, but liquidity can be limited so the share price should not be chased up. There may even be a chance to pick up shares at a lower price between now and the results announcement, which will probably be in May or June.
Procurement software and services provider Proactis (PHD) has a good track record of combining organic growth with earnings enhancing acquisitions. The latest acquisition is Due North, which is primarily focused on the local authority procurement market. Proactis paid £4.5 million to AIM-quoted Access Intelligence (ACC) for the company and it should be earnings enhancing even before cross-selling benefits.
Proactis develops software that enables private and public sector organisations to monitor and control their spending. The selling point is the cost savings the client can make from investing in the software. There has been a move away from selling perpetual licences, where the money comes in one large chunk, to SaaS - where revenues take longer to come through, but they are more predictable.
Proactis has started to roll-out Activate, which is a global trading network that will enable Proactis to generate revenues from suppliers as well as the buyers that have always been its clients. Activate offers e-invoicing, which will help reduce trading costs and the model is that suppliers should pay a nominal annual fee, all of which is additional revenues. It can cost more than £5 to handle an invoice in the public sector and Activate could lower that cost. There is also an opportunity to offer invoice discounting to the suppliers in partnership with a finance provider. There is little in the forecasts for this.
Proactis is mainly UK-focused, but there is potential to grow the business internationallyIn the year to July 2015, revenues increased from £10.2 million to £17.2 million. Acquisitions made up a significant proportion of this growth, but there was organic growth of 13% for the original business and 10% for the acquired businesses.
Pre-tax profit more than doubled from £1.1 million to £2.9 million. Development spending of £1.99 million was capitalised, but the amortisation charge was £2.29 million. This underpins the positive cash flow.
Net debt is expected to be £1.6 million at the end of July 2016. The dividend is relatively modest - a forecast dividend of 1.3p a share is covered by earnings more than five times - but it will continue to grow.
The order book of contracted revenues, which covers more than one year, was worth £19.7 million at the end of July 2015. Due North adds £1.6 million of annual recurring income to the £14.3 million generated by Proactis last year. Proactis is predominantly focused on the UK, but there is potential to grow the business internationally.
There will be a small enhancement to this year's profit from the Due North deal and a much larger one the following year when earnings have been upgraded from 7.6p to 8.2p. The prospective 2016-17 multiple is less than 15, which is attractive given the potential for earnings growth - both organic and acquired.
Specialist pumps and motors supplier Hayward Tyler (HAYT) has performed well despite being exposed to the oil and gas sector. Acquisitions and a large installed base that generates strong aftermarket revenues will help the company to grow.
Hayward Tyler has a strong brand and good relationships with major customers in the power generation and oil and gas sectors. In power generation there are organic growth opportunities. Management expects a much stronger second half after reporting lower revenues and flat profit in the six months to September 2015, largely due to the timing of new orders and reduced demand from oil and gas customers.
Hayward Tyler supplies boiler circulating pumps (BCPs) for power stations and subsea motors for the offshore oil and gas sector. Although the company is small relative to larger rivals, such as KSB (KSB), because it has been trading for two centuries it has the largest installed base of BCPs in the world. That provides strong aftermarket income. Hayward Tyler also supplies subsea motors that enable more oil to be extracted from offshore fields.
The product range has been widened through the acquisition of Peter Brotherhood, formerly a subsidiary of Siemens (SIE), which makes steam turbines, gas compressors and Combined Heat and Power units, and has an installed base of 1,500 units in total. This is an earnings enhancing deal.
The business's longer-term growth should be supplemented by recovery in oil and gas sector demandAt the end of 2015, Hayward Tyler raised £8.4 million at 90p a share in order to reduce borrowings following the Peter Brotherhood acquisition and investment in the Luton facility.
The placing will dilute earnings but strengthen the balance sheet, with pro forma net debt expected to be £14.3 million at the end of March 2016. There is potential to sell and lease back the acquired company's 11.5 acre Peterborough site for around £6 million.
Oil and gas is around 5% of total revenues so it is unlikely to go much lower when maintenance spending is taken into account. In the full-year, underlying pre-tax profit is forecast to increase from £4.4 million to £5.1 million with an additional boost from a lower tax charge. A dividend of 1.4p a share is forecast.
Next year, the acquisition of Peter Brotherhood will boost profit. There is also a new deal with Ebara Corp of Japan which will help Hayward Tyler to access the Japanese market. A forecast 2016-17 profit of £6.8 million will put the shares on less than 10 times prospective earnings.
The business has a strong base and longer-term growth should be supplemented by recovery in oil and gas sector demand.
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.
|ODEON FILM AG ODEON FILM OR...||€0.85||0.00%|
|HAYWARD TYLER GROUP||0.00||0.00%|
|SIEMENS N ORD SIEMENS ORD SHS||0.00||0.00%|
|KSB SE & CO KGAA||€477.00||0.42%|
|All data 15min delayed as of: 19:58:04 23/02/18|