Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Sam Barton, manager of the Unicorn UK Smaller Companies fund
Unicorn’s team has been investing on Aim since its launch in 1995 and manages more than £150m in Aim-quoted assets. Given our experience of the junior market, we felt that it might be worth highlighting a few of its hidden gems.
Maxima Holdings (MXM) is an IT managed-services and systems integration firm that continues to expand through both organic and acquisitive growth. Maxima floated on Aim in November 2004 and has since completed ten acquisitions. Turnover has risen from around £10m to more than £30m a year, while pre-tax profits have grown from £1m to £4.2m as at 31 May 2007. The business has funded acquisition costs through its strong cash generation. Net debt at the year-end stood at £6.6m, giving a gearing ratio of 21% and the business is expected to be debt free by the end of this financial year. The share price has risen by more than 90% in the past 12 months, but further strong profit growth is likely.
Maxima now has more than 1,000 clients and continues to win new business at a healthy rate. The business is modestly rated on ten-times prospective earnings and has adopted a progressive dividend policy. Maxima is a rare example of a small, conservatively managed, consistently profitable and cash-generative business, which offers the twin attractions of income and growth.
We also like Opsec Security Group (OSG), which supplies anti-counterfeiting technology. Opsec specialises in optical and materials sciences used to protect banknotes, high-security documents, brands, identity papers and optical disks. It also supplies software to help firms protect their brands. It fulfils all of our criteria for investment. Firstly, it operates in a growth market: the anti-counterfeiting market is growing as governments and businesses tackle fake products and documents. Secondly, it has high barriers to entry: its hi-tech suite of products has been built up since the business was founded in 1984. The intellectual property in the business also makes it attractive to potential suitors. Thirdly, it has an experienced management team who hold a meaningful (3.6%) stake in the company. Finally, it generates substantial cash flows (around 9p a share before capital expenditure last year).
At 68p a share, Opsec trades on eleven-times prospective earnings. With interim results on 26 November expected to confirm further progress, we believe this represents good value.
Despite being a minnow in market terms, PHSC (PHSC) is a leading provider of health and safety advice to the public and private sectors. The core business offers services such as environmental management, food hygiene and provides environmental health officers in local authorities. Client retention is high and rolling contracts give good earnings visibility. It has also moved into asbestos surveying and air monitoring, thanks to the acquisition of ALS. Legislation has proved a major driver for PHSC, with many clients using its services to adhere to strict Government guidelines.
Earlier this year the group raised £1m via a placing that brought new institutional investors on board. Two potential acquisitions are on the table: In-House cleans work surfaces for restaurants and hospitals and Guardian Water is an air and water hygiene specialist. Both should be immediately earnings accretive. A recent update confirmed trading is strong, so we expect further progress at the interims later this month. On just ten-times 2008 earnings, the shares are attractive.
The stocks Sam Barton likes
Stock, 12mth high, 12mth low, Now
Maxima Holdings, 329.5p, 181.5p, 307.5p
Opsec Security Group, 105p, 62p, 68p
PHSC, 56p, 42.5p, 55.5p