Interactive Investor

A trio of AIM income shares for your ISA

24th February 2017 15:39

Andrew Hore from interactive investor

It is coming up to the end of the tax year and if you have not fully utilised your ISA allowance for 2016-17 it is time to make sure you do. Also, it is a good time to think about where to invest next year's ISA allowance, which is rising to £20,000.

This week I am looking at potential AIM investments that combine the potential for growth with strong cash generation and an attractive yield.

The strength of many of the larger, profitable AIM companies means that it is more difficult to get a high yield, but all three of these companies have a prospective yield of more than 3% - although one of these companies is enhancing its dividends for the next year or so - and the potential to grow the dividend.

Park Group (PKG)

81.88p

Park Group was originally known for its Christmas hampers business, but it has evolved into a much wider consumer and corporate business. It not only holds a huge amount of cash for its Christmas savers - which is kept separate from company assets - but it also has its own significant cash pile. This enables Park to pay dividends that are less than twice covered by earnings while still increasing the company's cash resources.

The Christmas hampers business, which has always effectively been a regular savings scheme, has been transformed into a gift voucher-based business, and this is where Park has its expertise.

There is growth in the consumer side, but there are even better prospects in the corporate division, which is overtaking the consumer division in importance. Both sides of the business use Park's Love2Shop vouchers, which can be redeemed in a wide range of retail outlets.

The shares now trade on 15 times prospective earnings and the prospective yield is still 3.5%

The vouchers are used as incentives for both staff and customers by corporate customers. The corporate division has managed to continue to grow even though business from the consumer credit sector has slumped. This business has dwindled away and will no longer act as a dampener on overall growth. The acquisition of Fisher Moy last year widens the group's expertise in events and targeted incentive schemes.

Park is also investing in technology and online offerings. This includes Evolve, where clients, such as EDF and Coral, can offer instant rewards via a digital platform. Investment in technology is also helping Park to target smaller businesses, thereby increasing the potential customer base.

Park has launched the Anywhere prepaid card and it is building up its customer base. Park's prepaid card business has been enhanced by the award of licenced issuer status for Mastercard, which means that it no longer needs to go through third parties.

Interim figures do not give a good indication of progress for the year, with the business still skewed towards the second half, which includes Christmas, but a halved loss of £700,000 is an excellent performance.

The full-year figures are expected to show growth in underlying pre-tax profit from £11.9 million to £12.7 million and a rise in total dividend from 2.75p a share to 2.9p a share. Dividend growth is set to continue to be steady rather than dramatic.

The share price has been strong since the interims were published at the end of November, and the shares now trade on 15 times prospective earnings. The prospective yield is still 3.5%. The expected net cash figure of £32.5 million at the end of March 2017 underpins more than one-fifth of the company's market capitalisation.

Netcall (NET)

65p

Business process and customer interaction software and systems provider Netcall has a cash-rich balance sheet, and it is using its cash pile to pay enhanced dividends while also growing the underlying dividend.

Although the origins of the business were in call centres and telephony, customer engagement has become a more wide ranging thing than just the telephone, encompassing the internet and social media.

Netcall has developed a platform called Liberty that can be installed on a client's premises and/or be accessed via the cloud. The largest cloud-based contract is worth at least £1.4 million over five years.

If enhanced dividends end next year, the yield would fall to 2%, but that could prove conservative

Annualised recurring revenues improved 8% to £11.3 million by the end of 2016, while contracted future minimum revenues were 14% higher at £16.6 million. Clients tend to initially sign a limited contract that covers one part of their business and/or a module of the software and over time additional services are taken across more of the business.

Overall, revenues have not grown because lower margin MovieLine revenues are reducing. Core revenues are growing, though. Recent growth is organic, but Netcall is assessing potential acquisitions, although there is no certainty a suitable deal will be identified.

It can continue to grow without acquisitions. The prospective multiple of around 30 appears high, but there is potential to grow strongly.

Netcall continues to invest in its technology but that is not making a dent in the cash pile, so management decided to pay enhanced dividends to reduce the cash pile to £10 million.

The prospective 2016-17 yield is 5.8%. Admittedly, that yield is flattered by the enhanced dividends which will last until the cash target is achieved. That could happen by the end of June 2018. Management will need to decide whether to continue to pay enhanced dividends after that, but there is a continuing and growing underlying dividend.

The underlying dividend was 1.1p a share last year - out of a total of 3p a share. This year it is expected to be 1.16p a share out of 3.76p a share. The underlying dividend is twice covered by earnings, but the enhanced dividend is higher than earnings.

Based on the assumption that the enhanced dividends end next year, the yield would fall to around 2% but that could prove a conservative forecast.

Stadium (SDM)

90p

Electronics products manufacturer Stadium has a patchy record and it issued a profits warning last June. That explains the low rating. However, its underlying strategy is a good one and it should prosper longer-term.

The problem was the loss of a customer in the wireless telematics sector. Stadium has changed its structure and it has established regional design centres. This should help to retain customers. The overall order book was still £30.7 million at the end of June 2016, up from £19 million at the end of 2015.

The dividend should rise from 2.7p to 2.9p a share, providing a 2016 yield of 3.2%

Stadium used to be a contract electronics manufacturer, but it has increasingly moved into supplying its own components and products, thereby improving margins. Management has put together via acquisition companies that supply power systems, wireless and other components so that Stadium can offer a full range of parts for electronic equipment. The acquisition of cable and accessories manufacturer Cable Power further broadens the range of products that the group can offer.

The technology division accounts for three-fifths of revenues and is likely to continue to grow, while the contract electronics manufacturing division is expected to be flat at best. Once components are designed-in to clients' products they should provide income over a number of years.

Last June's trading statement sparked a downgrade in the 2016 profit forecast from £5.5 million and £4.25 million on lower revenues of £52 million, and Stadium has reassured investors' that trading was broadly in line with expectations last year.

Cash generation remains strong with more than enough cash generated from operations to cover capital expenditure and dividends. Net debt was lower than expected at £3.5 million. The 2016 figures will be published on 14 March.

A capital reduction has ensured that there are distributable reserves so that dividends can continue to be paid. The dividend is expected to rise from 2.7p a share to 2.9p a share, which provides a 2016 yield of 3.2%.

The shares trade on 10 times estimated 2016 earnings, which is expected to fall to eight for 2017. Although it has not been a smooth path, Stadium is moving in the right direction with potential to make further add-on acquisitions.

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.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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.

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