Five AIM share tips for 2025

Award-winning AIM writer Andrew Hore beat the wider AIM market in 2024. He hopes his recovery picks for the year ahead will do the same.

3rd January 2025 13:57

by Andrew Hore from interactive investor

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This year’s five AIM recommendations are to some extent recovery buys.

Trading and share price performances have been poor over the past year or so. They have generally been able to remain profitable, albeit at lower levels, and they have a strong base from which to bounce back when economic conditions improve – assuming they do in 2025. Prices are correct as at 24 December.

Kinovo

64p

Kinovo (LSE:KINO) provides electrical, gas and building maintenance and compliance services to local authorities and housing associations. Historically, the focus has been London and the South East, but there has been expansion into neighbouring regions.

Kinovo was lumbered with problems relating to former subsidiary DCB that was sold to a company that went into administration. Guarantees provided at the time of the disposal meant that Kinovo had to finance the completion of contracts. This has masked the underlying growth in the core business and its strong cash generation.

The cash relating to DCB has been paid or provided for and that chapter is almost complete. Management can concentrate on the core operations. Lower margin work has been shed and the performance of the business is improving.

Three-year visible revenues total £175.2 million, and that is before any contribution from framework deals.

Interim revenues were slightly lower at £29.6 million, but full-year revenues are set to grow as delayed contracts commence. For example, a £12 million 18-month decarbonisation contract with Hackney did not start when expected. Adjusted interim pre-tax profit rose 10% to £2.9 million.

Like many labour-intensive businesses, Kinovo will be hit by the National Insurance rate rise. This is an estimated annualised cost increase of £400,000, some of which can be offset by efficiency improvements.

After the interims, Canaccord Genuity upgraded its full year pre-tax profit forecast by 3% to £6.8 million, with a further rise to £6.9 million next year after the additional costs. More importantly, net cash is forecast to rise from £1 million at the end of March 2025 to £7 million one year later.

Compliance requirements of the new Building Safety Act will provide opportunities for growth. The shares are trading on just over eight times prospective earnings, which reflects the past problems rather than potential.

Gooch & Housego

505.5p

Photonics products supplier Gooch & Housego (LSE:GHH) disappointed in 2024. Destocking hit parts of the business. Although the year-end order book was weaker at £104.5 million, there is an upward trend.

There are three divisions: industrial, aerospace and defence, and life sciences. Industrial remains the main revenue generator with strong demand for subsea data networks, but industrial laser business has been weaker. Lower-margin products are being outsourced to Asia and there is a focus on increasing sales of systems rather than individual components.

Aerospace and defence is still loss making. A non-core business has been sold and military and commercial demand is recovering. Life sciences is involved with medical lasers and diagnostics.

In the year to September 2024, revenues were 1% ahead at £136 million. There was a fall in industrial revenues, partly due to weak sales for semiconductor manufacturing, and this was offset by higher aerospace and defence, and life sciences revenues. Underlying pre-tax profit slipped 22% to £8.1 million.

Net debt was reduced from £20.9 million to £16 million at the end of September 2024. That was before the acquisition of Phoenix Optical, where £3.4 million was paid in cash and up to £3.35 million is payable based on performance in the three years to June 2027. Net debt is still expected to fall to £15 million by next September. Further bolt-on acquisitions are possible.

A recovery in pre-tax profit to £13.3 million is forecast for 2024-25, rising to £17.8 million next year. The share price has begun to recover, and the prospective multiple is 13, falling to 11 next year. That is a lower rating than in the past. Buy for recovery.

TPXimpact

43p

Digital transformation services provider TPXimpact Holdings Ordinary Shares (LSE:TPX) grew rapidly on the back of acquisitions, but this caused problems. A new management team has restructured and slimmed down the business and the number of sites it operates from.

Two-thirds of revenues come from central government with local government the other major customer base. TPXimpact has won high profile multi-year deals with His Majesty’s Land Registry and the Department of Education. Those are worth £76 million in total.

There will be more spending by the government on digitisation over the coming years, and TPXimpact is well-placed to take advantage.

In the year to March 2024, revenues increased from £69.7 million to £84.3 million, while underlying pre-tax profit improved from £800,000 to £1.8 million. Using fewer contractors has helped margins.

Pre-tax profit should improve to £5.5 million on flat revenues this year, despite the delays to contracts after the general election. Even with £800,000 of additional National Insurance costs next year, the 2025-26 pre-tax profit forecast is £7.3 million.

There is scope for continued improvement in margins, with a management target for EBITDA margins of 10-12%, and the lower level is achievable by 2025-26. There is potential for significant growth in revenues from winning more large government contracts.

The shares are trading on less than 10 times prospective earnings, falling to eight next year. TPXimpact is undervalued with potential for a re-rating.

Sealing a deal with a handshake

Lords Group Trading

33.5p

Builders’ and plumbing merchant business Lords Group Trading (LSE:LORD) has remained profitable despite the unfavourable trading conditions. Profit has slumped over the past two years, though, following the Covid-related growth in home improvement demand, but this year should mark the bottom.

The merchanting division operates from 26 sites and the plumbing division operates from in-store sites and online. The repair and maintenance market accounts for four-fifths of sales. There are signs of recovery, and it should accelerate in 2025. Operational gearing means that a recovery in revenues should mean a sharp recovery in profit.

Lords Group Trading has grown through a combination of acquisitions and organic growth. This is a fragmented market with potential for further consolidation. There may be targets that have not dealt with the downturn as well as Lords Group Trading.

The company raised £7.1 million from the sale and leaseback of a property near Heathrow. This was acquired for £6.3 million as part of the George Lines purchase and £3.1 million of the payment was deferred until completion of this deal. Year-end net debt of £23.8 million is forecast. If there are no acquisitions the debt should start to fall.

In November, newly appointed chief operating officer Steve Durdant-Hollamby acquired 52,605 shares at 37.4p each. He has nearly three decades of experience in the sector and has been brought in to help the chief executive and 32.5% shareholder Shanker Patel grow the business.

In 2024, pre-tax profit is expected to decline from £10.4 million to £6.4 million. Annualised cost savings of £2.6 million have been achieved. A recovery to £8 million on a 3% improvement in revenues is predicted for 2025 and the recovery should then gain momentum. The shares are trading on 12 times estimated 2024 earnings, falling to less than nine in 2025. There is potential for cyclical recovery over the next few years. Buy.

EMV Capital

48.1p

Technology company adviser and investor EMV Capital (LSE:EMVC) recently raised £1.5 million at 50p/share, which was a premium to the then market price, and an additional £567,000 came from a retail offer. The fundraising was also at a sharp discount to net asset value (NAV) of 77p/share.

That NAV will be diluted by the share issue, but it remains well above the share price, with potential for gains on investments as they mature.

Formerly known as Netscientific, EMV Capital advises funds on investments in technology and pharma companies and also invests directly in some of these companies. The original business took larger stakes, so there are some direct investments classed as subsidiaries. The focus is healthcare and other technology.

Total assets under management have reached £106.7 million, including direct investments of £41 million. Increasing assets under management will improve fee income. Management is targeting recurring annual fund management fees of more than £1 million so that it can reach breakeven. There are also one-off advisory revenues.

Deeptech Recycling, which has developed technology to recycle plastic waste, is an example of what can be achieved with informed deals. The valuation increased from nil to £1.8 million after a fundraising.

Remote patient monitoring technology developer Wanda Health, where the latest fundraising increased the value of the 21.9% direct stake to £1.35 million. It cost £62,000 via services provided and that was the value in the June 2024 balance sheet. A new convertible loan investment of £50,000 has been received for additional services. EMV Capital clients own a further 17.3%.

Over the longer term there should be opportunities to exit investments and EMV Capital has already started to work on some potential mergers for investee companies.

The fundraising led Panmure Liberum to reduce its share price target from 157p to 149p, which still provides plenty of upside for the share price. Buy.

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

AIM stocks tend to be volatile high-risk/high-reward investments and are intended for people with an appropriate degree of equity trading knowledge and experience. 

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.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

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