Five AIM growth shares for your ISA

Award-winning AIM writer Andrew Hore names the smaller companies with growth potential that investors might consider for ISA portfolios.

15th March 2024 14:55

by Andrew Hore from interactive investor

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This week’s ISA portfolio is focused on AIM companies with long-term growth prospects and includes five shares to buy. None of these companies currently pay dividends, but they all have cash in the bank and are generally reaching, or getting near to, a point where they will be highly cash generative. That should help to propel the share prices.

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It’s also worth issuing an update on wealth management firm Mattioli Woods (LSE:MTW) (MTW), which was included in my recent ISA income portfolio. Two weeks later, Pollen Street Capital announced it is bidding 804p/share for the company. So, there will be no income, but there is a significant 41% gain on the 570p recommendation price.

IQGeo (IQG)

Price: 368p

Utility infrastructure software platform IQGeo Group (LSE:IQG) has an excellent track record and a share price that reflects this. Even though the valuation is relatively high, the cash generative nature of the business and the consistent beating of forecasts makes this warranted.

IQGeo is a geospatial software and services provider, and the core customer base is utilities and telecoms. The software enables collaboration between the various parts of these large businesses in order to create the information and geospatial data required to build up a visualisation of all assets. This improves productivity and planning.

Once IQGeo passed breakeven, profit started to rise sharply. There has been a combination of organic growth and acquisitions. Recent contract wins with large telecoms companies underpin the current expectations. Existing customers are also spending more with IQGeo.

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We were told in January that annualised recurring revenues were 50% higher in 2023 at £21.1 million. The addressable market is worth £2.5 billion. The trading statement sparked an upgrade of 2024 estimates by Cavendish to revenues of £49.8 million and pre-tax profit of £5.5 million. The initial 2025 forecast pre-tax profit is £8 million. Results are pencilled in for 20 March.

Non-executive director Robert Sansom sold 1.065 million shares at 303p each following the January trading statement. That has not hampered the share price. The 2024 multiple is 45, falling to 37 in 2025. Given the record of forecast upgrades, these multiples could reduce over the year.

There appears to be little short-term upside, but the track record points to continued share price growth over the longer-term.

Windward (WNWD)

Price: 109p

Windward Ltd (LSE:WNWD) has developed marine tracking technology that is in demand in a time of sanctions and concerns about security. Organic growth has accelerated. The current problems in the Red Sea will provide further opportunities for Windward’s module covering ocean freight.

Israel-based Windward easily beat the conservative expectations for 2023 and the numbers for 2024 and 2025 have been upgraded. Annual recurring revenues of $34.5 million at the end of 2023 cover expectations for 2024.

Windward has developed artificial intelligence (AI)-based services for the maritime sector. The software enables clients to monitor and assess the compliance with sanctions and track cargo. Customers include governments, BP, Shell and HSBC. Additional services are being added to the platform.

The most recently announced customer is INTERPOL, which is using the services to address illegal activities at sea. The AI technology will identify, track and prevent criminal activities.

The 2023 results were trailed in the recent trading statement, and the full figures will be published on 27 March. There should be no surprises. Revenues were $28.3 million (£22.2 million) compared with estimates of $26 million, and the operating loss was $5.8 million compared with previous expectations of $8.6 million.

Cavendish upgraded its 2024 revenues from $31.2 million to the annualised recurring revenues figure and expects a rise to $41.4 million in 2025. The 2024 operating loss estimate has been cut from $4.1 million to $2.6 million. Windward could be near to breakeven in 2025.

There is net cash of $17.4 million. That will reduce this year, but the reduction should be small with cash likely to be generated in 2025. There is limited requirement for capital spending, with development written off. Once Windward passes breakeven it could become highly cash generative because of the fixed cost base.

Gaming Realms (GMR)

Price: 35p

Online gaming firm Gaming Realms (LSE:GMR) moved into profit in 2021 and it has been accelerating ever since. The easing of online gaming regulation in the US has provided much of the momentum for growth. A limited number of states have legalised online gaming and there could be others that follow suit over the long-term.

Gaming Realms develops and licences games for mobile, and major gaming firms are clients. The main brand is Slingo. There is a brand licensing deal with Tetris Inc, the holder of the rights to the eponymous falling blocks game, to produce Tetris Slingo mobile. There is also a social gaming operation that does not involve cash betting, but this is becoming less important to the group.

Games developed can be launched in different markets around the world, and the number of countries that the company is involved in is rising.

In 2023, revenues were at a record level of £23 million. Underlying EBITDA was at least £10 million, which means that pre-tax profit could nearly double to around £6.4 million.

Net cash was £7.5 million at the end of 2023. That figure could double this year, which shows the cash generative potential of the business.

Growth is coming from adding additional partners and moving into new countries. West Virginia is the seventh state where Gaming Realms has licensees. Variable costs are 20% of revenues. A 2024 pre-tax profit of £9.2 million is forecast. The shares are trading on less than 14 times estimated 2024 earnings.

Frontier IP (FIPP)

Price: 42p

Technology investment company Frontier IP Group (LSE:FIPP) is different to the other companies because if it makes a profit it tends to be because of gains in its portfolio company valuations or those realised via disposals. Management’s relationships with a number of universities in the UK and Portugal provide it with opportunities. There are parts of the portfolio that are starting to mature and provide exits.

The model is that Frontier IP earns stakes in technology spin-outs in return for providing advice and services and not from investing cash directly. In the six months to December 2023, the net asset value (NAV) increased from 81.8p/share to 84.2p/share thanks to higher portfolio valuations and a sale of Exscientia shares.

Nasdaq listed investee company Exscientia is an example of the potential for gains, although not all early-stage portfolio investments will do well. Exscientia is a spin-out from the University of Dundee and uses artificial intelligence to help drug discovery. Frontier IP has raised £14 million from share sales, whereas the cost of the investment was less than £2,000.

Another investee company Alusid, a spin-out from the University of Central Lancashire, produces sustainable tiles and could be on course for a flotation. Other investee companies are making progress with Heriot Watt University spin-out Nandi Proteins singing a commercial licence with a global food ingredients company.

There was cash of £2.7 million at the end of 2023, while a further £1.7 million was subsequently raised from selling the remaining Exscientia shares.

There has been a sharp recovery in the share price this year, but it is still 45% lower than at the end of 2022. The 50% discount to NAV partially reflects the fact that the portfolio is predominantly unquoted. Even so, this discount is too high and should narrow, while positive news on Alucid could provide further upside.

Intelligent Ultrasound Group (IUG)

Price: 9.5p

The key to Intelligent Ultrasound Group (LSE:IUG) is the potential growth in artificial intelligence revenues. These are starting to build up, although it has been frustratingly slow.

Intelligent Ultrasound has developed and sells ultrasound simulation training equipment. This provides a strong base for the group while it seeks to generate a return on the investment in AI. GE is the licensee of ScanNav Assist, which is used for automated image analysis. It is a standard feature on the SonoLystlive equipment, which will provide annuity revenues.

Intelligent Ultrasound has disappointed investors at times, most recently announcing 2023 revenues will be £11.2 million, which was below expectations of £12.5 million. AI revenues nearly trebled to £2 million. Revenues could rise to £15.6 million in 2024 and the loss may reduce from £3.1 million to near breakeven.

Cash could fall from £3 million to £2.5 million, but that should be enough for the immediate requirements. The outflow is down to capitalised development spending, with research & development tax credits adding to cash likely to be generated from operations this year. Fundraisings have hampered the share price in the past, but there should be no need for one in the foreseeable future, unless demand is so strong that working capital is required.

The company is valued at £31.1 million. The share price reflects investor caution about the company delivering on expectations. This is probably the most risky of the five companies, but the AI development investment may finally be about to pay off.

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

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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