Five AIM share tips for 2023: a star stock in a mixed first half

One of award-winning AIM writer Andrew Hore’s stocks has surged in value, while overall performance is beating the wider AIM market. Here’s what he thinks of his tips now.

At a time when small-cap shares in general continue to struggle, there has been a mixed performance by my five AIM share recommendations for 2023.

Two have risen and three have fallen in price. Higher interest rates have hampered some of the companies, but they all have good underlying businesses with excellent long-term prospects.

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Lok’nStore

796p

-18.8%

Self-storage sites operator Lok'n Store Group (LSE:LOK) decided to raise money via a share issue even though it has plenty of headroom with its borrowing facility. The £20.5 million was raised at 765p a share. That has hit the short-term price, which has fallen by nearly 10% since the cash call was announced.

Rising interest rates have not helped property valuations which is another reason for the weakness of the share price this year. However, trading improvements have partly offset the decline.

Demand for self-storage space continues to be strong with second-half revenues expected to increase by 10.5% through a combination of improving occupancy and higher prices.

The 2022-23 pre-tax profit is forecast to fall from £13 million to £10.9 million due to the sale of sites last year. Dividends of 19p a share are forecast for this year and there should be 2p a share increases each subsequent year.

A new store in Peterborough has just opened, following one opened in Bedford earlier in the year, which will help to boost net assets as they mature. More recently a freehold site was acquired for £5.5 million in Eastbourne. That will eventually replace a leasehold site. This means that there are eleven stores in the pipeline and three of those are due to open in the next 12 months.

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The recent openings and the pipeline of new stores underpin significant long-term growth in net asset value (NAV). The NAV is expected to fall from 972p per share to 917p at the end of July 2023. To put that in perspective, 18 months ago the July 2023 NAV was expected to be less than that figure. The NAV should recover to 983p by July 2024.

Lok’nStore shares have risen 488% over 10 years and 1,180% over 20 years. The increasing NAV and flow of dividends mean that Lok’nStore is still a buy.

Renew Holdings

740p

+7.4%

Engineering services provider Renew Holdings (LSE:RNWH) concentrates on maintenance work rather than large infrastructure construction projects, which makes it less risky than construction companies. There is a specialist building subsidiary, but this is small, and the growth is coming from the core engineering services provided to rail, water, highways, etc. The contracts are cost plus, so inflationary cost rises are passed on.

Renew Holdings increased interim revenues by 14% to £471.8 million, while organic growth was nearly 12%. November 2022 acquisition Ensica, which provides services in the water sector, made an initial contribution in the period. Earnings were 5% ahead at 27.4p per share. The interim dividend is 6% higher at 6p. Net cash is £17 million. The group order book is worth £890 million.

Full-year pre-tax profit should reach at least £61 million, although like all UK companies, earnings growth is held back by the higher corporation tax rate.

The prospective 2022-23 valuation multiple is just over 12, while the forecast yield is nearly 2.5%. Shore Capital recently pointed out that Renew Holdings has met or beaten expectations each year since 2006, while underlying earnings have grown at a cumulative annual growth rate of 18% since 2011. The share price has risen by more than 600% over the past 10 years. The consistent track record suggests that the rating is too low, and the shares are good value.

ActiveOps

107p

+41.7%

By far the riskiest of the companies, this is the best performer. Management process automation software provider ActiveOps (LSE:AOM) is on course to increase profit over the next few years, although in the short term the growth will be tempered by investment in building the business. The cash pile will also continue to rise.

ActiveOps develops software that helps to improve the efficiency of back-office operations of organisations, particularly in the financial sector. This is attractive at a time when there are inflationary cost rises.

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Organic growth accelerated in the second half of 2022-23. In the year to March 2023, revenues were slightly higher than originally expected at £25.5 million, while the pre-tax profit of £600,000 was a pleasant surprise, although it was helped by foreign exchange movements.

By March, annualised recurring revenues were £22.6 million, which covers 95% of forecast software revenues for this financial year. Growth is coming from new clients and existing customers spending more. Total forecast 2023-24 revenues were upgraded from £26.8 million to £27.4 million and a loss of £200,000 was converted into a forecast pre-tax profit of £700,000.

There has been some profit-taking by existing shareholders. Tellworth Investments has cut its stake from 6.3% to 4.35%. The share price has held up, though.

The profit multiple is high, but the value in the business is the growth in annual recurring revenues. The share price has probably had its run for the time being and could drift back in the short term. Further news of progress later in the year should provide additional share price momentum. Long-term buy.  

DSW Capital

70p

-41.7%

Professional adviser network DSW Capital (LSE:DSW) is the big disappointment of the five companies. Early in the year it warned that M&A business had slowed, and this had a large effect on profitability because of the operational gearing of a network type business. The outcome for the year was a fall in pre-tax profit from £2 million to £1.4 million on flat revenues of £3 million. There were higher costs due to the AIM quotation and corporate governance as well as for building up the business ahead of growth that has not happened yet.

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The lower earnings lead to a lower dividend - the policy is to pay up to 70% of distributable earnings in dividends. A 2p per share final dividend was announced, and the shares go ex-dividend on 14 September. The total dividend was 3.8p and it could fall to 3.4p this year because of flat profit and a higher tax charge.

DSW Capital helped fund the management buy-out of Bridgewood Financial Solutions with loans totalling £880,000. The business recovery company will add ten fee earners to the network and boost licence income.

Even with an extra contribution from that deal, pre-tax profit could be flat as the company invests in attracting fee earners. Shore Capital did not adjust its figures for the potential income from Bridgewood, so there is scope for an upgrade if overall performance does not deteriorate.

The longer-term attractions of the business remain, and the prospective yield is nearly 5%, although it may take longer than six months for any significant recovery in the share price.

Duke Royalty Ltd

34.25p

-4.2%

Duke Royalty Ltd (LSE:DUKE) has accelerated the pace of deals this year after raising additional funds and increasing its bank facility in the past year. Cash generation continues to enable the royalty investor to pay a dividend that provides a yield of 8.2%, and there is asset backing in excess of the share price.

Duke Royalty exited its investment in data centre services provider Instor Solutions and generated cash of $11.2 million. The initial investment was in March 2023 and the gain is $2.4 million after a private equity buyer bid for Instor. This will provide further funds for new investments. That is a quick turnaround and is not typical, but it does show that there is underlying value in the investments.

Duke Royaltyreported cash revenues of £21.9 million in the year to March 2023. Pre-tax profit including gains was £20.4 million. The NAV of 39.3p per share includes the value of investee company Instor at the sale price. The total dividend was 2.8p a share. 

Management is careful to fully investigate potential deals to ensure that the royalties can be paid, and that takes time. It has also been putting additional funds into existing royalty clients, which does not require the additional time because of the knowledge that has been built up of the businesses.

The shares have gone ex-dividend for two dividends totalling 1.4p so far this year. That is similar to the dip in share price. The attractive income combined with some potential for asset growth makes the shares a buy.

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