AIM tips review 2019: Big gains and some pain

All five tips were in the money at some stage, one almost doubled. Here’s how they finished.

The strategy for the 2019 AIM recommendations was less successful than planned. They have fallen by 5.8% on average over the 12 months, whereas AIM recovered near the end of the year to sit 9.6% ahead. The AIM 50 performed even better with a 17.2% gain. 

Here are updates for the five recommendations I made at the end of 2018. I’ll start with the good news!

Pressure Technologies (PRES)

% change at year-end:                                              +25.7
% change from tip price to year high (in June):    +48

Management has reorganised the business and offloaded its non-core activity, but the Pressure Technologies (LSE:PRES) share price was hit by the engineer being found guilty in a court case relating to the death of an employee. The level of the fine will be announced by the judge early in 2020 and the uncertainty overshadowed the progress in the full-year figures. 

In the year to September 2019, revenues from continuing operations were one-third higher at £28.3 million, with both precision machined components and the cylinders businesses increasing revenues.

The latter is diversifying its revenues and growing in services, defence and industrial gases sectors, although both divisions are benefiting from improving market conditions in the oil and gas sector. 

Net debt increased to £8.6 million and there was also £2.8 million of lease finance. The business was cash generative, but this was offset by cash outflows from discontinued operations and capital investment. 

The current focus is organic growth and improving cash generation. The precision machined components order book increased by 70% last year and the group order book provides a strong base for the future.

Gresham House Strategic has built up a stake in Pressure Technologies and is supportive of the company’s strategy. It is a medium-to-long-term investor and is attracted to the recovery potential. 

The size of the fine is still a worry and it could use up the headroom in the bank facilities of £3.7 million. Even so, Pressure Technologies was the best performer of the five recommendations. At its peak in June, the shares were up over 47% on my tip price.

The capital investment programme is past its peak, so capital spending is likely to fall this year and cash generation from operations should improve. There is more profit recovery to come thanks to the operational gearing. 

TP Group (TPG)

% change at year-end:                                         +11.0
% change from tip price to year high (May):    +33

The basis of the original recommendation was that TP Group (LSE:TPG) was growing and investing the cash pile would boost earnings per share.

Two investments were made during the period. In May, €10 million in cash and €1.5 million in shares was paid for Netherlands-based Sapienza Consulting, which provides space and defence sector software and services. A further €700,000 was invested by a subsidiary of Sapienza in artificial intelligence systems developer Lift BV. That more than doubled the stake in Lift to 69%.

The interim revenues increased by 63% to £26 million, while underlying pre-tax profit £2.3 million, up from £800,000.

There was £9 million in cash at the end of June, and that could increase by a small amount by the end of the year. 

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TPG wants to set up more partnerships that enable it to expand outside of Europe or bring overseas technology to Europe. 

TPG has increased its order book by 63% since the end of 2018 to £78.9 million at the end of June 2019. The Sapienza acquisition contributed £15.5 million. This helps to cover 94% of the revenues forecast of £55.1 million for 2019. That still leaves more than £50 million in the order book.

Since then, contracts have been won as part of a consortium for a military satellite communications project and a £1 million contract for oxygen generating devices for the MoD. 

A full year pre-tax profit increase from £2.8 million to £4.7 million is forecast, with a rise to £5.8 million next year with a full, earnings enhancing contribution from Sapienza. The shares are trading on ten times prospective 2020 earnings. Good value. 

Location Sciences (LSAI)

% change at year-end:                                        -40.2
% change from tip price to year high (July):    +94

Location Sciences (LSE:LSAI) had a good first half in share price terms, and the share price had almost doubled by mid-July, but the rest of the second half was a disappointment for the location data and services provider. 

Management thought that they had been cautious in their expectations for the uptake of the Verify product. This did not prove to be the case. The US is an important market and revenues were not building up as quickly as hoped.

This meant that Location Sciences required more cash – it had £1.5 million at the end of June 2019, down £1.1 million over six months – and during September it raised £600,000 at 2.25p a share. The cash will enable more people to be hired in Chicago and provide funds for marketing.

Verify helps to assure that mobile location data is accurate, and any fraudulent data is spotted. Interim revenues of Verify were still modest at £114,000. Management had signed up 49 brands to the Verify service by the early autumn, against a full year target of 50.

Converting these brands into more significant revenue generators is taking longer than the three-to-nine months expected. It could take up to 18 months to achieve this. 

Contracts have been signed with location data firm Blis Media and African location data network Vicinity Media.

Location Sciences is no longer expected to make a profit in 2020. Even after the placing, cash will be used up next year and there could be net debt of more than £700,000 at the end of 2020. If Verify revenues increase faster than anticipated, then this will boost profit and cash generation. 

Hargreave Hale has reduced its stake in recent weeks. The measure of success in the second half will be whether the company can convert clients that are trialling Verify to an ongoing contract. This was always the more risky of the five recommendations and there is still a good chance that Verify will be successful. 

Driver Group (DRV)

% change at year-end:                                        -15.0
% change from tip price to year high (Feb):    +3.3

Construction dispute and expert witness services provider Driver Group (LSE:DRV) had a tough first half to its financial year and was the worst performer of the five companies by the middle of 2019. Second-half trading was better, but there was a limited recovery in the share price. Stakebuilding may provide a boost for the share price, though.

In the year to September 2019, revenues decreased by 7% to £58.5 million, while underlying pre-tax profit fell by 22% to £3 million. Second half profit increased but not enough to offset the first half decline. There was more than one downgrade during the year. The pre-tax profit forecast at the beginning of the year was £4.4 million.

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There was a near-one-third increase in profit from Europe and America, but Asia Pacific and the Middle East were weaker with cost cutting helping the second half.

Driver had net cash of £5.4 million at the end of September 2019. That is expected to increase to £6.6 million in one year’s time.

Sweden-based AB Traction has taken a 14.2% stake in Driver. It has built up stakes in WYG and Waterman, both of which were providers of property and construction services, in the past and both were taken over. Still a buy.

Frontier IP (FIPP) 

% change:                                                             -10.4 
% change from tip price to year high (Feb):    +24 

University intellectual property commercialisation company Frontier IP Group (LSE:FIPP) raised additional cash during the autumn and this cash call hit the share price. The placing raised £3.8 million at 50p a share. This will help to develop and commercialise investee companies.

The placing price was below the previous year’s level of 65p a share and 10% below the market price. That cash was expected to last until 2020. There was still £1.47 million in the bank at the end of June 2019, but management wanted more cash to take advantage of the opportunities available.

In the year to June 2019, Frontier IP made an unrealised profit of £3.85 million on its investee company portfolio, up from £2.06 million last year. Reported pre-tax profit increased by 160% to £2.35 million. 

The main uplifts in value came from artificial intelligence-based drug discovery technology developer Exscientia and The Vaccine Group. Exscientia raised $26 million in a Series B round and signed up to additional collaborations. The Vaccine Group is an important partner in a $9.67 million project to protect US military from Ebola, Lassa fever and other diseases and gained grants for other projects.

Net asset value (NAV) was £17.6 million at the end of June 2019. That is 41.4p a share. Since then, Frontier IP has taken a 43% stake in Elute Intelligence, which is developing software tools for complicated document searches. No cash was paid for the stake.

The long-term prospects of the core investment portfolio are still good, but it is taking longer than hoped for the benefits to show through and the cost base is being increased by taking on additional experienced management. Still a long-term buy. 

Andrew Hore is a freelance contributor and not a direct employee of interactive investor.