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Contrary to perceptions there are plenty of durable businesses on the junior market
Thursday 20 Jan 2022 Author: Ian Conway

AIM probably isn’t the first place investors would look for stocks offering growth at a reasonable price, given it is home to many pre-profit companies where most of the valuation depends on cash flows which will take many years to materialise.

Yet it is also home to plenty of established, durable businesses with sustainable cash flows and earnings which are worth investigating. Here we pick three companies which we think the market is undervaluing given their growth potential.

Anexo (ANX:AIM) 156p

Anexo (ANX:AIM) is unique as a listed company in terms of its business model, which is providing integrated credit hire and legal services to non-fault motorists who are involved in accidents.

Founded in 2006 by qualified barrister Alan Sellers, who still heads the group today as executive chairman, the firm has a claims handling department which assesses the validity of each claim before passing it on to the in-house legal division while the credit hire division arranges a replacement vehicle which is charged to the at-fault motorist’s insurers.

When the courts ruled in favour of a cooling off period on credit hire in 2012, many firms found themselves over-stretched and ceased trading, but those that were left prospered, including Anexo. Further, the competition review of 2014 ruled there should be no cap on credit hire charges in cases involving impecunious clients, in other words those without the means to afford a replacement vehicle after an accident.

Admittedly Anexo’s business suffered during the various lockdowns and restrictions in 2020 as fewer drivers were on the road, but in in its latest trading update (18 Jan) the company revealed revenue growth ahead of expectations and pointed to profit significantly ahead of expectations in the year to 31 December 2021, driving upgrades to forecasts for future years too.

The firm is now in an ideal situation as the number of vehicles on the road continues to grow, the value of second-hand cars and motorcycles continues to soar which means claim values are rising, courts have re-opened meaning the number of cases settled is growing and cash collections are improving.

More accidents mean more of its hire fleet is on the road, meaning more fees, which is good for margins and for the legal teams who chase down the claims.

In June last year major shareholder DBAY Advisers offered 150p per share to take the company private, but shareholders saw off the approach, which is to the benefit of new investors.

The company also has a nice little earner on the side as it is handling claims for some 15,000 former VW customers in a class action. If the courts rule in its favour it would have ‘a significant positive impact on the group’s expectations for profits’, which isn’t included in analysts’ forecasts.

Argentex (AGFX:AIM) 86p

Specialist foreign exchange provider Argentex (AGFX:AIM) has grown its revenue and profit every year since it floated a decade ago, which is almost the definition of a sustainable business.

The firm makes and receives payments on behalf of institutions, businesses and high net worth individuals and has traded more than £75 billion in over 70 different currencies since it floated. Even during times of economic turmoil like the pandemic its customers need the company’s services.

Operating as a riskless principal for non-speculative and commercial currency dealing, the firm takes no positions for itself but offers superior analysis and execution for its clients to generate its income. Not only is it profitable, it is debt free with £23 million of net cash at the end of September.

Revenue for the first half of the year to March 2022 was up 33% on the same period a year earlier to a record £15.7 million, while underlying operating profits were up 27% to £4.7 million. Due to the nature of the business, nearly 80% of revenue converts to cash after three months or less so the payback is quick.

The firm added 271 new corporate clients during the first half to take its roster to 1,241 clients, and client acquisition is likely to be even stronger in the second half.

Argentex also increased staff numbers by 28 to 69 full time employees across its London and Amsterdam offices, and as analysts at Numis point out the revenue generation potential of new sales staff gets increasingly stronger over a five to seven year period so there is ‘a material amount of inbuilt revenue growth’ which the market isn’t factoring in.

As business confidence continues to improve, the firm sees ‘significant growth opportunities’ ahead in the UK and it is in the process of adding an Australian office to service the Far East market.

Consensus forecasts are for earnings to grow more than 35% this year and next year, for which investors are being asked to pay a multiple of just 11 times. Adding in the ability to grow revenue at low cost and finance its expansion from internal resources, we think the shares are considerably undervalued here.

Sanderson Design Group (SDG:AIM) 180p

Luxury interior furnishings firm Sanderson Design (SDG:AIM) may be a household name to a few lucky readers but for most investors it has flown under the radar. Its relative anonymity may be lost after an extremely strong update on 18 January, revealing a much better than expected performance for the 12 months to 31 January 2022.

The group brings together quintessentially English brands Sanderson, founded in 1860, and Morris & Co, founded by William Morris in 1861, with several other brands including relative newcomers Scion and Clarke & Clarke under one roof in order ‘to bring the beautiful into peoples’ homes and lives’.

The firm manufactures its own wallpapers and fabrics in the UK and sells them globally both through retailers and direct to the consumer. High street retailer Next (NXT) is an important partner, with the Morris & Co clothing range performing well.

Earnings for the six months to the end of July were ahead of the previous year and ahead of management expectations thanks to pent-up demand for its upmarket interior furnishings, strong demand for British-made designs due to issues with overseas supply chains and ‘a sustained trend towards decorative styles’ according to the company.

In addition, demand in the US was ‘exceptional’ thanks to renewed consumer confidence since the change in administration. Just after the end of the half the firm signed its first major licensing deal for Morris & Co in the US, expanding its range into cookware and tableware.

Chairman Dianne Thompson said the first half ‘continued the strong recovery of the business, with particularly impressive performances from North America, manufacturing and the Morris & Co. brand’.

With a net cash balance of £15.4 million at the end of half, the firm returned to the dividend list with an first half payout of 0.75p per share distributed to shareholders in November.

Over the coming year the group is targeting growth in all regions and brands through bigger average order sizes, with double-digit licensing revenue growth and return on investment per product improving as it focuses on its core fabrics and wallpapers.

Within two years it expects homewares to be a significant part of revenues and to have established new direct to consumer income streams to complement its retail business making it the dominant force in high-end interior furnishings.

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