Five shares for the watchlist

Each month Richard Beddard trawls through annual corporate results for his Watchlist and the Share Sleuth portfolio of companies that satisfy key valuation metrics such as earnings yield and return on capital - and profiles the most interesting candidates.

Watch: AB Dynamics

When AB Dynamics floated on the stockmarket in May 2013, it was about to report revenue of £13 million, £3 million more than the previous year.

After three more years of growth, revenue has reached £20 million in the year to August 2016 - more than double the level four years previously.

AB Dynamics (ABD) manufactures equipment for testing cars. It makes robots that manoeuvre cars on the track, soft crash targets that minimise damage to the test vehicle during crash tests, simulators enabling virtual testing, and large customised machines that test steering and suspension in the laboratory.

The company came to the market to raise funds to extend its manufacturing facility in Bradford-on-Avon, but the work was delayed at the planning stage.

Construction finally started earlier this year, and should be completed next spring. In the meantime, ABD has had to make do by leasing extra production space.

Up until this decade ABD was a tiny unlisted company, making peformance hard to predictDespite the cost of expansion, ABD has maintained return on capital and cash generation at high levels, an impressive performance that has not escaped the attention of traders.

A share price of 520p values the enterprise at over £80 million, about 23 times adjusted profit. The earnings yield is just 4%.

To justify such a high valuation, the company must continue to grow strongly. The problem for investors assessing whether it will is that up until this decade ABD was a tiny unlisted company.

Its sudden growth has raised its profile, but we don't know how it will perform in more difficult times. On the other hand, ABD supplies all of the top 20 car manufacturers.

These businesses are among the heaviest corporate investors in research and development, and while they may make cuts when people buy fewer cars, the lesson of the financial crisis was that they are loath to cut research and development for long.

Watch: Bioventix

Bioventix only employs 13 people, but it punches above its weight. In the year to June 2016, the company lifted revenue 27% to £5.5 million.

It derived a handsome profit, too, by designing and manufacturing sheep monoclonal antibodies. The antibodies identify markers in blood, usually in automated blood-testing machines supplied to hospitals by companies like Roche and Siemens.

Much of Bioventix's growth in recent years is due to an antibody that identifies Vitamin D, which has been widely adopted. As growth in Vitamin D antibody sales slows, the company is shifting its expectations to Troponin, a marker for damaged heart muscle.

Bioventix developed the antibody for Siemens and will profit from increasing sales as Siemens rolls it out across its blood-testing machines.

Some of Bioventix's earlier antibodies have been in use for decades - a reliable source of revenueCrucially though, most of Bioventix's revenue comes from royalties paid each time a hospital takes a blood test. As the technology improves, less blood is required for testing, and fewer antibodies. Royalty payments, therefore, protect Bioventix from decreasing antibody sales.

Due to the quality of Bioventix's antibodies and the length of time it takes to approve antibodies for use in blood-testing, the company says its customers have never substituted one of its antibodies for another.

Some of Bioventix's earlier antibodies have been in use for decades, providing a reliable source of revenue.

The company, which floated on the stockmarket in 2014, is mining a highly profitable niche. A cash-rich balance sheet reflects that, and so does the share price. At 1,330p, the enterprise is valued at over £60 million, about 18 times adjusted profit. The earnings yield is 5%.

The price is high and Bioventix has only been in profit since 2008, but the shares could be worth it. Today, Bioventix is profiting from research done five or more years ago. As it adds new antibodies developed more recently or still in development, shareholders will probably continue to prosper.

Watch: Gattaca

Gattaca changed its name from Matchtech after acquiring Networkers, a recruitment company specialising in telecommunications in April 2015. The two brands remain.

Matchtech still specialises in placing engineers, while its information technology division has combined with Networkers to form an expanded technology division.

The rationale for the acquisition went beyond growing Matchtech's niche. The company also has ambitions to spread globally, to better serve its most important clients.

Due to Networkers, 32% of Gattaca's net fee income (gross profit) was earned overseas in the year to July 2016, compared to just 2% before the acquisition, and Gattaca is now using the overseas offices to sell Matchtech's services.

The logic of combining the two businesses may be impeccable, but the underlying results for the year were flat. Although overseas sales grew strongly, in the UK the company contracted.

Gattaca believes the highly skilled candidates it places will remain in demand despite BrexitNevertheless Gattaca earned a return on capital of 20%, which indicates it is highly profitable. Since Gattaca thinks its prospects are good in the medium term, the company's valuation is a bit of a conundrum.

A share price of 290p values the enterprise at about £140 million, only eight times adjusted profit. The earnings yield is 12%.

Traders may be concerned that profitability in the original Matchtech business, while still more than adequate, has been falling for years, perhaps due to increasing online competition.

In the short term, economic uncertainty is mounting, particularly if Brexit inhibits the mobility of labour or investment in the UK.

Gattaca, though, believes the kind of highly skilled candidates it places will remain in demand, and despite the proliferation of recruitment online, placing skilled candidates will remain a job for specialist recruitment consultants.

Watch: Motorpoint

In its first results statement since it floated in May, car supermarket Motorpoint disappointed its newly acquired shareholders. Operating profit in the half-year to September fell 32%.

Fearing a sharp fall in consumer confidence after the vote to leave the EU, Motorpoint reduced its stock of cars aggressively over the summer while, coincidentally, it was investing in three new sites in Birtley, Castleford and Oldbury.

Revenue increased 11.5% compared to the previous year, but profit margins fell sharply.

The company operates 11 supermarkets and plans to nearly double that number to 20. It specialises in nearly new cars, which it buys from fleet owners.

A PE of 10 may seem a bargain, but profit should be lower in the year to March 2017Judging by the reviews on Feefo, an online feedback platform that solicits reviews for Motorpoint after it makes sales, customers like Motorpoint's friendly, no-nonsense sales approach.

Motorpoint says demand stabilised in the autumn and profit margins have returned to normal levels. A 40% decline in the share price since the company floated gives investors a chance to invest at a substantial discount to the price paid by City firms six months ago.

A share price of 125p values the enterprise at £150 million, about 10 times earnings in the year to March 2016. The earnings yield is 11%.

That may seem like a bargain, but profit should be lower in the year to March 2017. Motorpoint's short track-record as a listed company, its rapid recent growth, and the fact that cars are mostly bought using credit make it a difficult investment to judge.

Watch: Tristel

Tristel's results in the past three years have restored its growth credentials.

The company endured a collapse in profitability around the turn of the decade, when manufacturers of washing machines for medical instruments disrupted the market for Tristel's product, disinfectant, by acquiring and recommending their own disinfectants.

It was an eventuality Tristel had prepared for by developing a range of disinfectants that clean simple instruments, such as the endoscopes used in ear, nose and throat departments, without the need for a washing machine.

The popularity of the company's wipes and foams was already growing rapidly, but it wasn't yet enough to make good the cost of investment in new ranges for veterinary surgeries and laboratories or the sudden loss of income from its machine disinfectants.

Although Tristel dominates its UK market niches, overseas revenue is growing fasterThree or four years on, and the company is reaping the reward of its investment.

Although it's grown to dominate its UK market niches, overseas revenue, now nearly 36% of the total, is growing faster. In the year to June 2016, revenue increased 12%, and profit increased 26%.

Management's confidence in setting financial targets - 10 to 15% revenue growth over the next three years while maintaining profitability - may be a factor in boosting the share price, however.

So too might Tristel's confident assertion of the company's competitive advantages. A price of 175p values the enterprise at £70 million, about 26 times adjusted profit. The earnings yield is 4%.

This article was originally published in our sister magazine Money Observer. Click here to subscribe.

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.