'Pick of AIMS' - Growth Company Investor - 29 September 2009

James Crux

Screening for value anomalies, buying into sector trends or simply following proven entrepreneurs are all valuable tools. If you want to add another string to your investment bow, noting performances of companies on the books of various brokers and advisers can do no harm.

Emerging from September’s frenetic results season, I was struck by the number of growing, profitable companies. Many previous Growth Company Investor tips, for which Brewin Dolphin acts as broker and ‘nomad’, including specialist social care provider CareTech, support services group Hargreaves Services, touch-screen technology counter Zytronic and frequent forecast-beater Education Development International.

Brewin Dolphin is upping its game in the small-cap space, hungry to take on ‘growth companies with ambition’ where its team can add value. Accordingly, in recent months, Brewin has been appointed as broker to sizeable serviced offices venture MWB Business Exchange, valued on AIM at £55 million and performing creditably in a tough market, Immunodiagnostic Systems, the fast-growing lab testing kit maker, as well as growing IT services buy-and-build Xploite.

Vertu’s virtues

A couple of others on its corporate roster are worth a second look. One is Vertu Motors, which, with a savvy management team and an ambitious acquisitive strategy in place, has broken into the top ten motor retailers in the UK through a timely acquisition spree.

Trading under the Bristol Street Motors brand and looking to build a business of scale in this under-fire sector, the company, steered by CEO Robert Forrester, recently announced that overall profits were ‘significantly’ ahead of management’s expectations in the four months to June.

Furthermore, Vertu recently strengthened its balance sheet by offloading a surplus freehold property, boosting net cash further following a successful £30 million fundraising priced at 30p earlier this year. This funding has given Vertu the financial firepower to pick off quality, though perhaps financially distressed, dealerships, in a car sector ripe for consolidation.

Up from their 10p 52-week low, the shares have motored in recent weeks to 42p, though this is still some way off a previous AIM peak north of £1. For February 2010, analysts are looking for profits of £3.85 million and earnings of 1.6p, which means the shares are anything but cheap, trading on more than 25 times this year’s earnings.

But my argument is that Forrester knows the sector and is determined to deliver value. So long as the car market can emerge from the doldrums, the share price should accelerate down the longer-term stretch.

Quadnetics – increasingly secure

Also on Brewin’s books is surveillance specialist Quadnetics, now 160.5p, up from a 52-week trough of 91.5p. Under John Shepherd, who took over as CEO last November, the group has been restructured and focused on ‘defendable higher-margin market niches’.

Annual results to May bore the scars of patchy trading conditions in its various security and surveillance markets, with sales reduced to £70.7 million (2008: £79.2 million) and even the more benign ‘adjusted’ pre-tax profit figure dipping to £1.8 million (2008: £3.7 million).

However, Shepherd tells us profits were pegged back by savvy investment in new products, which he describes as ‘the lifeblood of future growth’, the second half was much better and the board confidently held the dividend at 7p.

Moreover, I like the fact that Quadnetics’ repeat revenue base is building, up to £16.3 million (2008: £14.1 million) last year. Its £8.1 million of net cash lends added security, and based on this year’s 15.8p earnings forecast, the shares sell for an undemanding 10.1 times forward earnings with a 4.4 per cent yield. Quadnetics is well worth stashing away.