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Top 10 small-cap share tips for 2017
By Harriet Mann | Mon, 9th January 2017 - 15:09
Prime Minister Theresa May will trigger Article 50 within three months, followed by two years of negotiations. Crucial elections in France, Germany and possibly Italy could also threaten the future of the EU.
In America, Trump's presidency becomes official next week. As new leader of the free world, will he be as protectionist as feared, or far more conciliatory in practice?
Despite known unknowns, equity portfolios could still do well, as evidenced by the rally since Trump's election.
"Even in tough economic circumstances, companies with good ideas, innovative technology, clever business models and strong management can generate their own luck and continue to thrive," says Raymond Greaves, head of research at finnCap.
That's the basis for the small-cap broker's stock ideas for 2017. Here are finnCap's 10 for 2017.
With a quarter of the UK suffering from hayfever at some point in their lives and 10-30% of the global population afflicted, the European allergy immunotherapy market (AIT) is worth $0.8 billion (£0.66 billion). In the US it is worth more than double that, at $1.7 billion.
Look at the potential addressable market and its value surges to around $9 billion. This backdrop is perfect for pharmaceuticals business Allergy Therapeutics (AGY).
The allergy vaccination group's profitable European operation is busy gobbling up market share as it gathers financial momentum. Revenue is expected to grow 23% in 2017 thanks to foreign exchange tailwinds, and gross margin should climb 260 basis points to 73.6% as volumes grow on a fixed cost base.
Before crucial research and development costs and general operational spend, profit should jump by a third to £19 million, finnCap analysts reckon.
Outside the flagship European business, Allergy also houses a US division that is trialling the Pollinex Quattro treatment. While the group continues these studies finnCap thinks it will remain loss-making.
Trading at a chunky 45% discount to its peers, with a profitable business and healthy pipeline, the valuation looks unjustified. finnCap believes the shares are worth nearly double at 40p, which would give them a market value of £235 million.
Using the downturn wisely by increasing capacity in its rig fleet, Capital Drilling (CAPD) is well prepared for the next phase of its cyclical story. Despite low activity levels, it's managed to stay profitable and has used its cash pot to pay out above-average dividends. Further contract wins should drop straight to the bottom line.
Largely exposed to African gold mining contracts, the swing in sentiment towards the yellow metal underpinned the group's share price turnaround, further supported by the bounce in other minerals like copper and iron ore.
Not only are 80% of its revenues multi-year contracts - so there is turnover visibility - but nearly half its customers are cash generative mining giants with strong balance sheets.
Capital shares surged by nearly 200% last year from their low of 20p in January 2016, but are still changing hands for less-than half their previous peak.
Luckily for Capital, geopolitical risk is unlikely to ease in 2017, so gold should benefit from its safe-haven status, although a rise in US interest rates could weaken the price somewhat. An 85p target price gives the shares 42% potential upside from their 60p share price.
It's been six months since finnCap initiated coverage on utility company Fulcrum (FCRM), and the analysts have already upgraded forecasts twice thanks to meaty margins.
Management has both eyes on costs, so this momentum should continue, but there's also scope for revenue growth following entry into the electrical connections market.
The group is the only independent national provider of gas and electricity connections services in an £800 million market typically characterised by poor service levels. Its focus on quality of service should set it apart.
FinnCap reckon the shares are worth 22% more at 69p, underpinned by high return on capital, improving margins, strong cash flow and solid balance sheet. With £12.5 million net cash, the group could look at investing in its pipeline to further support its income.
For now, the dividend policy has been changed to a cover of 2 times earnings, while the interim payout doubled.
A high-quality, cash generative provider of ID data solutions, GB Group (GBG) is a sitting duck for bigger global industry players. Managed by an experienced team, GB can show off long-term double-digit organic revenue growth from recurring sources, further supported by careful acquisitions.
There is no denying that data is the key economic resource of the 21st century, so with the global market for online ID data intelligence services expanding rapidly and as GB Group has excellent margins, high cash conversion ratios and a 1% yield, finnCap is certain the group will do well in 2017.
There will be a leadership change in April as chief executive Richard Law retires after 14 years, but there is little concern over his successor's ability.
It's not a cheap, undervalued stock by any means - at 283p GB still trades on around 30 times forward earnings. But analysts are confident in the high security and the quality of the provider's earnings, and believe the shares are worth nearly a quarter more at 350p.
It's not been easy for Gem Diamonds (GEMD), but the miner has navigated weak diamond prices and operating issues at its own facilities well, remaining profitable - before exceptional costs - during the upset, maintaining its dividend. Prices have finally mustered up some energy after slumping in 2015 and trading sideways last year.
Larger diamond recoveries should start coming through at Gem's Letšeng mine in Lesotho, which will hike up average prices, and its Ghaghoo mine in Botswana should be able to operate at cash even until diamond prices improve.
Of course, there is always the risk the market for exceptional diamonds collapses, but finnCap doesn't see this happening any time soon.
The ugly duckling of the diamond miners, Gem fell 13% in 2016 and is loitering near its one-year lows, while Firestone (FDI) surged 176%, Petra Diamonds (PDL) rallied 85%, and Gemfields (GEM) climbed 20%. With a target price of 185p, magpie finnCap reckons the shares have 69% of upside to unlock.
Former pawnbroker H&T (HAT) has spent a good five years consolidating in the oversupplied pawnbroking market and has now reinvented itself as a high street challenger, offering financial services to customers that want face-to-face contact.
These new products have good momentum - the personal loan book grew at an annualised rate of 120% in the third quarter and now represents 17% of the total loan book.
At 260p, the shares trade on an undemanding 11.5 times forward earnings, with a 10.4% return on tangible equity and 1.21 times price/tangible book value.
As most of its peers with a clear growth trajectory would be worth around 50% more, finnCap reckons the shares will climb to 320p as its underlying momentum is unveiled.
Oil explorer Hurricane Energy (HUR) made huge operational progress in 2016, derisking the pilot and horizontal wells and the resource at its Lincoln exploration well in the North Sea.
The industry backdrop has firmed up too, with OPEC's decision to finally cut production setting the scene for a more positive period for oil prices - especially for those companies with fixed balance sheets and reset cost bases.
There's more exploration upside to unlock as we venture through 2017, argues finnCap - the Halifax well resource base could increase by 250 million barrels - and the specifics of its field development plan is to be hashed out: there should be multiple share price catalysts throughout the year.
After a couple of tough years, many smaller oil companies are still undervalued, but, as sentiment returns, finnCap reckons the shares could climb over 80% to 91p.
Providing highly regulated industries with software that specialises in enterprise governance, risk and compliance, Ideagen (IDEA) has a strong record of coupling organic growth with strategic acquisitions, and delivering on its forecasts. There is now another certainty in life in addition to death and taxes, says finnCap: compliance.
With momentum behind the software group, earnings are expected to jump by over 20% this year, which could underpin a leap in its share price to 78p - 16% higher than current levels.
Ideagen's market value has already surged from £11 million in 2012 to over £110 million, which should attract bigger investors.
Unloved for a number of years, education software, services and resources company RM Group (RM.) has struggled as a result of its shift away from OEM hardware and Building Schools for the Future (BSF) government contracts stifling growth. School budget tightening also hit sentiment and the stock is now "extremely cheap", trading on an enterprise value/cash profit multiple of 6 times.
But with data from the Department for Education showing spend per pupil actually rising 2% year-on-year, positive news from peers and the group in line for a small currency tailwind - a fifth of its earnings are generated overseas - finnCap reckons the tide will change in 2017.
Valuing its three divisions, RM Resources, RM Results and RM Education, finnCap reckons the shares are worth a quarter more at 169p.
Operating in a highly fragmented industry, carpet-maker Victoria (VCP) is gearing up for a highly active year of M&A. It's expected to reveal a £40 million budget for such transactions, which will go hand-in-hand with good organic growth, strong cash generation, low risk operations and a compelling valuation. Each one of its seven previous acquisitions have been earnings enhancing.
Of course, Brexit risks to the economy are very real, although management could use sterling's weakness to their advantage to gain pricing power. finnCap reckons the shares could run 22% higher, giving them a price target of 440p.
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.
|PETRA DIAMONDS LTD||81.75p||1.24%|
|GEM DIAMONDS LTD||79.00p||0.96%|
|CAPITAL DRILLING LTD||38.50p||1.32%|
|FULCRUM UTILITY SERVICES LTD||59.50p||-1.65%|
|All data 15min delayed as of: 20:29:43 21/10/17|