Blue chips start the year in bearish mood but AIM continues to deliver
It has proved to be a torrid start to 2016 for equity investors with the Bears out in force and some commentators concluding that now is not a time to be exposed to equities, in any form. While some of these so-called experts are questioning the growth prospects of global equities and, more significantly, the affordability of dividends, several AIM stocks we follow have started the year in strong form, delivering positive trading updates. Many of these companies may also come with compelling inheritance tax reliefs offering another excuse to buy shares in good quality businesses which now trade at more modest valuations. We offer our thoughts below on 10 of the best to kick off 2016.
Majestic Wine (AIM:MJW), one of AIM’s old guard and a business that has seen its share price decline substantially from previous highs, issued its usual Christmas period trading update with like for like sales up an impressive 12.2%. Evidently the efforts of the team from Naked Wines are starting to bear fruit with the core Majestic Retail business delivering like for like sales of 7.3% in the period versus a decline of 1.7% in the prior period.
Global people management business Penna Consulting (AIM:PNA) has attracted a growing following over the past 12 months with its shares rising over 100%. A trading update early in 2016 confirmed that profits for the 9 months to end December 2015 were up 51% and management’s expectations for the full year to 31st March 2016 materially increased. While the shares have had a great run, the forward earnings multiple remains relatively modest and, with cash generative attractions, the shares still look interesting, especially if more indiscriminate selling takes hold.
Another AIM high flyer from 2015, Breedon Aggregates (AIM:BREE), announced that it has been jointly awarded a contract valued at up to £55m to supply and lay asphalt on the £745m Aberdeen Western Peripheral Route/Balmedie-Tipperty project, the longest roads construction project currently under construction in the UK. It’s also the Group’s largest-ever contract award and will provide the backbone of work for their contracting division over the next two years. While shares in Breedon seem richly valued, the nature of its activities and regional positioning means it has the much sought after protective moat to its business.
Hornby (AIM:HRN) is a relative newcomer to AIM, but a business that will have touched many of our lives through one or more its iconic brands, including Hornby model railways, Airfix and Corgi cars. Having disappointed over the past few years the Group is going through somewhat of a transformation with the start of 2016 heralding the launch of a number of new products. With debt much reduced following a refinancing in 2015 and evident value in the Group’s brands it could be an interesting year.
Two of AIM’s leading suppliers of tabletop products, Churchill China and Portmeirion, both based in Stoke on Trent, delivered positive trading updates for the year to 31 December 2015.
Churchill China (AIM:CHH), which was established in 1795, is a leading supplier of tabletop products, primarily to the worldwide hospitality markets. The trading update confirmed that trading in the second half of 2015 was ahead of earlier expectations resulting in operating performance ahead of current market estimates and well ahead of 2014. The news saw the house broker lift 3 year pre-tax profit forecasts by 6%-11% with scope for further outperformance.
Portmeirion Group (AIM:PMP) focuses on higher quality homewares, with its Royal Worcester brand dating back to 1751. Its trading update for the year to 31 December 2015 confirmed that pre-tax profit would be slightly ahead of market expectations on record revenues, being the seventh consecutive year they have achieved record sales.
Both stocks have delivered consistent growth over the past few years and a growing dividend covered more than twice.
UK specialist value footwear retailer Shoe Zone (AIM:SHOE) saw its shares flounder in 2015, with warm weather being one of the causes. Thankfully 2016 started more positively with full year results in line with revised estimates, cash flow attractive and a special dividend of 6.0p per share particularly appealing. With the online offering starting to accelerate, a compelling yield and relatively modest valuation, the shares could attract renewed interest.
Quartix Holdings (AIM:QTX) has excelled since arriving on AIM in November and it’s recent trading update didn’t disappoint with revenue and profits both anticipated to be ahead of market expectations. The high performing Group, which is one of Europe’s leading suppliers of subscription-based vehicle tracking systems, finished the year with more than 73,000 fleet vehicles under subscription with notable increase in the USA and France. Trading at approximately 23x earnings estimates for the year ending December 2016, the shares look fully valued on this over-used measure but this business, with its proven model and efficient capital structure, has got off to a great start in the US and France, and both markets offer huge growth potential.
The announcement of new domestic smart meter contracts for Smart Metering Systems (AIM:SMS) could herald renewed interest in the shares of the highly regarded integrated metering services company. SMS will provide domestic smart meters as part of the UK Government programme, requiring domestic energy supply companies to provide all of their customers with a smart meter in homes and small businesses across the UK by 2020. Energy suppliers will be required by regulation to appoint a MAM (Meter Asset Manager) in respect of these assets, and SMS is one of only four market participants currently performing that role. Delivering annuity like returns and with a huge market opening up in the form of domestic smart meters, this business would appear to have an exciting future.
Flowtech Fluidpower (AIM:FLO), the distributor of technical fluid power products is a another lowly rated AIM stock that found little support in 2015. However, its recent trading for the year ended 31 December 2015 will hopefully dispel the doubters, with trading confirmed to be in line with estimates and a commitment to a final dividend which implies a yield of just over 5% at the current share price, covered more than twice. Net debt is modest and the valuation at just over 7x 2016 earnings estimates looks very modest.
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