Six AIM growth stocks to keep an eye on

Sector expert Andrew Hore looks at AIM companies with strong earnings per share growth and how they are achieving it.

AIM is focused on growth companies, although they do not all manage to grow. Some increase their profit but issuing additional shares has held back any growth in earnings per share. 

Continuing growth in earnings per share is important. Looking at the earnings growth expected for the next financial year to be reported and the one after that helps to identify companies that can produce attractive growth rates year after year rather than a one-off boost. 

Some of the most spectacular percentage increases are due to a recovery in performance after a disappointing period of trading, though.

An example of this is sports footwear retailer Footasylum, which has been quoted for less than one year. It has disappointed the market and is trading at less than 50% of the 164p a share flotation price. The forecast earnings per share for this year are more than 20 times the stated figure for earnings last year, but it is lower than the adjusted figure. 

The broker estimates are likely to be adjusted earnings figures so the comparison with the stated figure is not necessarily always like-for-like. Adjusting for this, there are still plenty of attractive companies growing their earnings at rates well into double figures. 

Here are six examples of companies that have strong earnings per share growth and how they are achieving it. 

Consolidating growth

Xpediator (XPD)

78p

Earnings growth

2018: +37.6%

2019: +13.3%

International transport and logistics firm Xpediator floated on AIM in order to be a consolidator in its sector and it is already trading at more than treble the 24p a share placing price when it joined AIM 12 months ago. 

There are three main business areas: freight forwarding, logistics and warehousing and transport. Although some of these markets are mature there are growth areas, such as fulfilment for online retailers. 

The latest acquisition is Southampton-based contract logistics and warehousing business Import Services Ltd, which fits well with Xpediator's existing business at the port and the Import Services management will manage the expanded operation. The initial cost is £9m and that could rise to £12m, depending on results. This is partly funded by a £7m placing, but even with the additional shares in issue the acquisition prompted a 9% increase in the 2018 earnings forecast and an 11% increase for 2019. 

The shares are trading on just over 16 times prospective 2019 earnings. The earnings growth for 2019 is relatively modest compared to the other examples. Management has shown that it can make earnings enhancing acquisitions so there is potential upside in that forecast. 

Turning around an acquisition

Avingtrans (AVG)

215p

Earnings growth

2017-18: +263.6%

2018-19: +150%

Engineer Avingtrans acquired Hayward Tyler at the beginning of September 2017, which means that it will not be in the 2017-18 figures for a full 12 months. This was an all share bid with Avingtrans’ surplus cash being used to partly pay off the debt inherited with the acquisition. 

Avingtrans reported a small, underlying interim loss for the six months to November 2017, although it was profitable in the previous financial year. The interims included three months from Hayward Tyler where the integration was proceeding well. Organic revenue growth was 15%. 

Hayward Tyler is focused on the energy and generation sector and it was hit by weak demand from the oil and gas industry following the fall in the oil price. One of the attractions of the business is that the large installed base of pumps and other equipment means that there is a good aftermarket for spares and maintenance.

The latest full year figures will be published on 3 October and management has confirmed that they will be in line with expectations. The shares are trading on a prospective 2018-19 multiple of 21 times. They also offer a prospective yield of 1.8%. 

Avingtrans has historically identified business where performance can be improved and, in some cases, sold them. The company returned cash generated from a sale through a tender offer in 2016. 

Capital investment paying off

Gear4Music (G4M)

668p

Earnings growth

2018-19: +59.7%

2019-20: +52.3%

Musical instruments retailer Gear4music (Holdings) has been investing in its European distribution infrastructure. That held back earnings per share in the short-term because of higher costs and the issuing of additional shares to finance the investment diluting the figure. 

In the year to February 2018, earnings per share fell from 11.4p to 6.7p as admin expenses rose faster than revenues. 

The retailer has built up a significant market share over the past 15 years but the potential is even greater. Gear4Music is already the largest online musical instruments retailer in the UK and there is scope to add to market share in Europe and further afield. Capacity is being increased at the York head office and a distribution centre opened in Sweden, which is being expanded, and a showroom opened in Germany. 

Earnings per share are set to grow at nearly double the rate of growth of revenues.

This effectively means that over a three-year period earnings per share will have risen from 11.4p to 16.3p. That is a 43% increase over the three years. 
It should also be noted that development spending on the website is capitalised and the amortisation figure is lower, thereby boosting reported profit. 
There will be a trading update in early September. The shares already price in the expected growth with a prospective 2019-20 multiple of 41. 

International growth

Warpaint London (W7L)

220p

Earnings growth

2018: +41.7%

2019: +22.8%

Cosmetics appears a crowded market with major international brands dominating, but Warpaint London has shown that a brand targeted at a niche that the management understands can still be successful. 

High-quality cosmetics are sold for affordable prices under the W7 brand. The ability to come up with new products and launch them within five months is part of the company’s success. An example of Warpaint’s innovation is the Very Vegan brand. The acquisition of Retra at the end of 2017 added to the brand portfolio and new retail customers. It also made the business more skewed to the Christmas gifting trade. 

The UK remains an important market but international sales have overtaken those in the home market. The two largest customers are in Australia and the US. Only one of the top five customers is in the UK. Warpaint has acquired its US distributor for $2.16m.

This is a debt free, cash generative business. The shares are trading on less than 14 times prospective 2019 earnings and that is before any adjustment for the purchase of the US distributor. Stockdale will review its forecasts when the interims are reported in September. 

Consistent growth

DotDigital (DOTD)

93.5p

Earnings growth

2017-18: +25%

2018-19: +30%

Email marketing services provider dotDigital Group has a strong track record of growing its earnings over the past decade. That growth has predominantly been organic but last year it made a significant acquisition. Acquisitions can dilute earnings but this acquisition was paid for by cash that was not earning much interest income.

Messaging and cloud communications business Comapi, which was acquired last year, has been fully integrated into the dotmailer platform. 

Last year's revenues were 35% higher at £43.1m, helped by the acquisition - although the full 2017-18 figures have yet to be released. The US grew revenues by 43% and Australia grew revenues by 85%, although the UK still dominates group revenues. Profit will be in line with expectations. ARPU grew by 18% to £845/month as the company focused on larger clients. The momentum has continued into the new financial year.

The business is cash generative and the cash balance was £15.1m at the end of April 2018.

The shares are trading on 24 times 2018-19 prospective earnings. In this case that is only one year away. 

Building a bank

PCF Group (PCF)

36p

Earnings growth

2017-18: +26.7%

2018-19: +68.4%

Last year, PCF Group reported a fall in earnings per share from 1.7p to 1.5p because of a £1.4m investment in establishing the company’s new bank. It took a number of years, but PCF finally obtained a banking licence and the funding that can be obtained from the bank will reduce the cost of providing small business finance and car finance.

Customer deposits have already reached £108m. The company’s loan receivables portfolio is worth £179m. The target is £350m by 2020. 

There will be a recovery in earnings per share this year, but the real growth will be in the year to September 2019. 

The shares are trading on 11 times prospective 2018-19 earnings. The share price has drifted back in recent weeks, following the interim figures. One director added to his shareholding last month. 

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