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Five AIM shares with hidden gems
By Andrew Hore | Fri, 17th February 2017 - 14:38
Some AIM companies have parts of their business that are hidden stars, or new parts of their business that have potential to become highly valuable. However, this is not necessarily fully reflected in the share price. This can provide a great opportunity for investors to become involved when the existing business itself is attractively valued, even without that potential upside.
Here are five examples of companies where parts of their businesses that make a small, or no, contribution could become significant. However, there is no guarantee that they will.
Market research and marketing services provider Cello (CLL) has a strong position in the healthcare market, in particular, and it can continue to build these operations. The possible additional upside comes from the technology products that Cello has developed to enhance its services and productivity.
Cello Pulsar is a social media analytics product which is different to anything that rival marketing services groups can offer. The product enables social media data to be collected so marketing campaigns can be optimised. It is still early days but Cello did highlight Pulsar's progress in its January trading statement. Pulsar is making a profit contribution and it is being offered in the US. It has only scratched the surface of the potential market.
An online community of physicians, patients and other health sector participants developed by Cello is called eVilliage. It has been in operation since 2011, but it has become available on a wider range of devices. The eVillage service can be used by researchers to build up a wider understanding when making clinical decisions.
Cello also has a customer relationship management tool called TriggerHub. This enables the client to use data it has obtained to develop and target clients in a number of different targeted ways, rather than one identical email/mailshot to everyone.
A recent fundraising has diluted Cello's earnings per share, but the cash is expected to be used on acquisitions in the near-future. These will enhance earnings and possibly provide further avenues for growing the technology products.
As a standalone business the technology products of Cello could expect a significant valuation, but there is nothing in Cello's valuation for this area of the business.
Mortice (MORT) is known as a manned guarding and facilities management services provider, originally focused on the Indian market but is expanding into other countries including the UK. By its nature, this type of business does not have high margins. In contrast, security surveillance business Soteria has the potential to become highly profitable once its fixed costs are covered by revenues.
Soteria was launched in the middle of 2014 and the business is still being built up. The control centre uses IBM technology and offers real-time surveillance, and the predictive capability of the technology can highlight any unusual activity helping to stop or prevent unwanted events.
Mortice invested $1 million in the first control centre in Gurgaon, India and the existing building could house two other control centres, but it will not cost as much to set them up. One of the attractions of this business is that it does not have to be sited in the part of the world that is being monitored.
Soteria is part of the guarding division and its figures are not split out. Revenues are generated by charging a monthly fee based on the number of monitors included in the surveillance. Soteria is expected to move into profit in 2018.
The recent £2.3 million at 75p a share was partly for cash to finance the marketing of Soteria in the UK. There are already clients in the UK and US, and Soteria could become a high-margin, high-growth international business.
Private & Commercial Finance
It took small business and car finance provider Private & Commercial Finance (PCF) two years to get a banking licence, and it finally got confirmation of its success at the end of 2016. It cost around £550,000 in the two years to September 2016 to obtain the licence and it will cost more to build up the governance and technology infrastructure this year.
The banking licence enables Private & Commercial to take deposits and this will finance further expansion of its core business. The first deposits are likely to be taken in the third quarter of this year. Meanwhile, there are plenty of spare bank facilities to cope with growth until then.
It could cost £1.5 million in this financial year to set up the bank and the benefits will not really show through until 2018-19. The group has a strong position because it is already profitable and it can cope with these additional costs. Private & Commercial made a pre-tax profit of £4 million in the year to September 2016 and, even with the increased cost base, this year's profit could be similar.
Private & Commercial will need to raise additional funds to make sure that it has the required regulatory capital. This could be between £10 million and £20 million and could be dilutive, given the current capitalisation of the finance provider.
The cost of the funding provided via the bank deposits will be lower than the costs of the current bank facilities. This will enhance margins and/or enable the company to go after business that might not have provided sufficient margin in the past.
Once the bank is up and running, the profit could rise to £5.2 million next year with the real benefits showing through in 2018-19 when a profit of £8 million is forecast. Longer-term, this new source of finance could help Private & Commercial move into new finance areas.
Proactis (PHD) makes its money from selling spend control and e-procurement software to businesses and government. Proactis is trying to further develop its recurring revenues by offering a supplier network service. This means that trading can be done on a paperless basis via an online portal, making transactions more transparent.
Proactis has around 800 purchasing clients and they have more than one million suppliers so the supplier network is a way of generating revenues from the suppliers.
The company is also offering an accelerated payment facility where the client can offer suppliers faster payments if they offer a discount. This faster payment is offered via a third party finance provider and Proactis would earn a share of fees.
Flintshire County Council, P&O Ferrymasters and Screwfix have signed up to the supplier network service. Flintshire is the first to start signing up suppliers to the service. These suppliers pay a fixed annual fee to become members – possibly around £50/year.
Acquisitions, such as the recently purchased public sector tender services business Millstream Associates, provide additional services that can be offered via the service network as well as providing additional cross-selling opportunities. It also adds clients with thousands of suppliers.
Proactis has capacity for multi-currencies and languages so the supplier network service can be offered outside of the UK.
The forecasts for this year assume supplier network revenues of £1 million (possibly 20,000 suppliers) out of group revenues of £26 million. House broker finnCap believes that there could be 10 large customers by the end of July 2018. They will not all be fully up and running, but this customer base would provide significant future revenues and make the supplier network service an increasing part of the business.
The current share price barely reflects the prospects for the core business and does not take any account of the growth for the supplier network service.
Venture capital investor Draper Esprit (GROW) does not really have hidden gems as such because the portfolio is obtainable and investors' can assess the constituents. However, Draper Esprit offers exposure to potential upside from individual companies with a reduced risk because of the portfolio.
One of the larger investments is global review community business TrustPilot, where Draper Esprit has invested £11 million in three tranches, including £5.5 million in January. The previous investment had almost doubled in value to £9.4 million by September 2016 and it represented 9% of the portfolio at that time.
TrustPilot was formed in 2007 and Draper Esprit became involved in 2011. Although it operates in 65 countries the current focus is building up a presence in the US.
Healthy snacks provider Graze is another high profile investee company. The focus is companies that could become significant global businesses rather than those focused on local markets.
Draper Esprit has grown over more than one decade and it has portfolio with companies at a range of levels of development. This enables it to sell maturing investments and reinvest in newer ones. The shares are trading at around NAV at the end of September 2016.
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.