5 AIM share tips for 2017

AIM has had a good year, but you can still find profitable, growing companies at reasonable prices. Former AIM writer of the year Andrew Hore names his five picks for 2017.

Satellite Solutions Worldwide

7.75p

Satellite broadband services consolidator Satellite Solutions Worldwide has wasted little time in building up its market share via acquisitions. European governments are encouraging people in areas not fully covered by existing infrastructure to take up satellite broadband. Satellite is the only way that the EU can fulfil its broadband access commitment and it provides subsidies for customers.

Satellite Solutions is benefiting from this policy and it is already the largest supplier in the EU. The potential market is more than 19 million homes across Europe with internet connections that have speeds below 2Mbps. Satellite Solutions purchases bandwidth from satellite operators and sells it on to customers on multi-year contracts generating revenues of around £40/month.

Earlier this year, Satellite Solutions secured £12 million of funding from the Business Growth Fund (BGF) and raised £12.1 million at 6p a share to finance recent acquisitions, which included an Australian business. BGF's funding includes £2.4 million of notes convertible at 9p a share and an option to take an 18% stake in Satellite Solutions at 7.5p a share.

The acquisition in Australia was a surprise, but customers are growing at a rate of 1,000 a month. The company is on course to exceed its target of 100,000 customers by the end of November 2017.

Satellite Solutions says that the 2015-16 figures are ahead of expectations. Figures for the year to November 2017 are more significant, though, because there will be full contributions from all the acquisitions.

Former house broker Arden forecasts a 2016-17 profit of £3.4 million, which would put the shares on 13 times prospective earnings. There is scope for that forecast to be upgraded and there are likely to be further acquisitions any way.

Stride Gaming

223p

Stride Gaming floated 19 months ago with a strategy of consolidating the online bingo market. This is a part of the online gaming market that is not as attractive to the major companies as casino and sports gaming but it is still a highly cash generative business.

Stride has wasted little time in making acquisitions and the most recent purchases were partly financed by a £27 million placing at 225p a share - above the current share price.

Tax changes have led to smaller market participants wanting to exit and larger operators not wanting to be involved in areas where their market share is low. Stride is taking advantage of this.

The full year profit is expected to rise from £11.3 million to £18.3 million, even without full contributions from the most recent acquisitions - more importantly, earnings per share (EPS) will grow by 11%. The dividend is expected to rise by 12% to 2.8p a share. There are still more cost savings to come through next year.

The shares, having risen from their flotation price of 132p, are trading on 10 times prospective 2016-17 earnings, but there is more to come. The management is experienced and it has shown it can secure good deals.

If no more acquisitions are made then the cash pile will rapidly build up. It could reach more than £20 million by the end of August 2018. In reality further deals will be done and they should be earnings enhancing. There is also a growing dividend, although the prospective yield is currently relatively modest at 1.2%.

Gresham House Strategic

775p

Gresham House Strategic was formerly known as Spark Ventures until it appointed Gresham House as its investment adviser in August 2015. The deal included an injection of share stakes into the company, which had sold its investments other than its stake in mobile software developer IMImobile, by Gresham House.

The strategy is to use the company as a vehicle to invest in undervalued quoted businesses and the normal timeframe for these investments is three-to-five years. The focus is profitable and cash generative businesses and a large amount of research and due diligence is undertaken before making an investment. The investment manager works with the investee companies to enhance their prospects.

Investments include investment manager Miton, oil sector equipment rental business Northbridge, publisher Quarto and recently floated cosmetics firm Warpaint. There is still plenty of cash to invest in additional companies.

In November, the NAV was estimated at 1025p a share so the shares are trading at a 24% discount to that valuation. The fact that the portfolio is made up of large stakes in small quoted companies means that it might be difficult to realise their full value if they are all sold at once so a significant NAV discount is warranted. Even so, this is an attractive share price at which to climb aboard.

Gresham House Strategic is illiquid so beware of chasing up the share price. However, it is a good way to gain exposure to a portfolio of growing small companies and the management expertise of Gresham House.

Chamberlin

76p

Foundries operator Chamberlin has had a poor couple of years but it is on the verge of an upturn in its fortunes. The commencement of previously announced large turbo charger component contracts early next year means that profit should bounce back in 2017-18.

Turbo charged cars are forecast to substantially increase their share of the overall car market by the end of the decade. A two litre turbo-charged petrol engine can do the job of a three litre petrol engine and this means that less fuel is needed and emissions will be lower.

Chamberlin is closing its Leicester foundry and concentrating on the Walsall site, where the turbo charger components will be made and machined, and Scunthorpe, where larger castings are made.

Turbo charger housing volumes will increase significantly in 2017 and the new finishing facility will be up and running in a couple of months. Investment in new machines has led to a rise in net debt to £5.3 million.

There is also potential to grow the engineering division, which includes emergency exit hardware supplier Exidor and hazardous area lighting equipment supplier Petrel, where new products have been launched.

Underlying full year profit, before Leicester closure costs, is expected to be flat at £700,000 but the forecast for next year has been upgraded to £2 million, which would put the shares on five times prospective earnings.

There is a level of uncertainty because of the UK exit from the EU and the lack of clarity on what will happen. Europe is an important market for Chamberlin, particularly for the turbo charger housings business.

There have been disappointments in the recent past, but even if the recovery is not as strong as forecast it will be significant.

Fulcrum Utility Services Ltd

50.75p

Gas and electricity infrastructure services provider Fulcrum's fortunes have been successfully turned around in the past couple of years and the share price has recovered strongly but growth prospects in both the core gas market and the electricity market mean that the shares are still attractive.

Gas work still accounts for around three-quarters of revenues and Fulcrum has 12% of a market estimated to be worth around £300 million.

Greater efficiency is helping Fulcrum to make more profit from its revenues and investing in its own pipeline assets provides recurring revenues at high margins - the current annualised revenues are £1.1 million, with most feeding through to profit.

Fulcrum has gained approval to own metering assets and it is applying for permission to own electricity cabling.

Fulcrum has won a £4 million gas pipeline contract with a south-west England-based food manufacturer where it will end up owning the pipeline. The deal is different because the client is being allowed to spread the payment over a five year period, enabling it to afford such a large investment. Fulcrum's strong cash position means that it can afford to make this arrangement.

The board says that from now on Fulcrum will pay 50% of post-tax earnings in dividends. The latest interim is 0.6p a share and a total dividend of 1.8p a share is forecast. Even so, net cash will remain around £12 million without further large capital investment. House broker Cenkos forecasts a full year profit of £6.4 million, rising to £7.4 million next year. There are still tax losses to be used up.

The prospective multiple is 15 and that could fall to 13 next year. Fulcrum offers steady growth in earnings and dividends at a time of economic uncertainty. The yield of 3.5% is an added attraction.

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.