There are signs of life in the UK’s small cap market. The hopes of lower interest rates later in the year are easing financial conditions and investor sentiment is improving.
The volley of takeover bids for exciting UK growth companies suggests the smart sees value in the space. The number of growth company IPOs is increasing, and recent listings have performed very well in the early days of trade. These are both signs of not only stabilisation but also opportunity for investors in the sector.
In this article, we explore a blend of FTSE Small Cap, AIM and AQUIS companies.
Bloomsbury Publishing (BMY)
Bloomsbury Publishing posted stellar 2024FY results earlier this year. Strong growth in its consumer business helped drive a 30% increase in revenue from £264m to £343m. Profit jumped 57% from £31m to £49m.
When results were released in May, Bloomsbury CEO Nigel Newton said:
“This dramatic increase arises from our entrepreneurial diversification strategy which has forged a portfolio of portfolios combining consumer and academic publishing across formats, territories and subject areas, a resilient model delivering long-term success.”
The company has shaken up its strategy, and investors have been rewarded for sticking with Bloomsbury. A shift in focus to consumer fantasy titles is bearing fruit, with renewed social media campaigns helping to drive sales growth.
The group’s diversification means slower sales in its academic division have been more than offset by strong sales of fantasy titles by authors such as Sarah J. Maas. Harry Potter titles continue to provide a reliable revenue 26 years after the first book was published.
Investors who pay too much attention to the charts and like to seek out perceived bargains may balk at Bloomsbury’s consistent uptrend. However, investors who like a mix of value and growth in a company will find Bloomsbury has many attractive attributes.
The stock trades at 13.3x historical earnings, suggesting there is still plenty of room for multiple expansion. In addition, should sales and profit momentum continue into the current financial year, this multiple will fall, making Bloomsbury shares look very good value. The question is whether they can maintain 30% sales growth into a second year.
Bloomsbury shares are up 31% this year, but this does not mean they are expensive. The company will release a trading statement 16th July.
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hVIVO (HVO)
hVIVO is one of the best companies London’s junior markets has to offer. It is a world leader in bespoke end-to-end human challenge trials and early-stage clinical development services.
hVIVO operates FluCamp, a specialist testing programme for vaccines. FluCamp recruits healthy volunteers for the testing of vaccines under controlled quarantined conditions in the group’s facilities. hVIVO’s world-class facilities have attracted a plethora of Big Pharma clients and smaller, more innovative biotechs. Many of its contracts are worth more than £10m.
hVIVO’s numbers speak for themselves.
Sales have grown consistently as it wins new contracts with tier 1 customers. Revenue grew 16% to £56m in 2023FY and EBITDA soared 44% to £13m. The company’s contracted orders point to further revenue growth in the future.
Speaking at a UK Investor Magazine event held at the London Stock Exchange Group in March of this year, CEO Mo ‘Yamin’ Khan presented the company’s ambitious growth plans, outlining a £100m revenue target for 2028.
Its most recent contract win was a £2.5m award to establish the world’s first Omicron BA.5 challenge model. This will be the first use of hVIVO’s Omicron BA.5 challenge agent in COVID-19 trials, which will take place at hVIVO’s state-of-the-art new facility in Canary Wharf.
Investors will look forward to news of additional contract wins.
The UK government has identified the life sciences industry as an area of focus and support. In the recent budget, the chancellor set out plans for life sciences hubs in Cambridge and Canary Wharf as part of a drive to secure foreign investment into the sector and further the UK’s prowess. hVIVO was one of the first companies to announce it was taking the opportunity to open a new facility in the Canary Wharf.
hVIVO has a deep and growing MOAT. It wouldn’t be a surprise if an interested party bid for the company before long.
Tekcapital (TEK)
Tekcapital is an intellectual property investment company that has built a portfolio of technology companies with expansive commercial opportunities and the potential to improve the lives of a great many people.
Tekcapital’s portfolio consists of four companies, three of which are listed and one privately held. There is a straightforward valuation mismatch between Tekcapital’s share price and the underlying value of its holdings. These types of disconnects can persist but rarely last forever.
Macroeconomic conditions have not been kind to many AIM shares, and investment companies have been particularly hard hit. This has created a deep opportunity in Tekcapital, which, along with the broader early-stage knowledge-intensive constituents of London’s AIM, is primed to explode higher as monetary policy eases.
TEK’s underlying portfolio companies have taken material steps forward in 2024. MicroSalt has IPO’d, Innovative Eyewear launched new Nautica and Eddie Bauer ranges as revenue jumps, Belluscura has secured growth capital, and Guident launched groundbreaking strategic partnerships with globally recognised autonomous vehicle companies.
MicroSalt listed in London in early 2024 and was met with a rapturous reception. Floating at 43p, the company quickly doubled and then tripled, reaching a high of 142p. The value of Tekcapital’s 77% stake in MicroSalt – worth around £31m – exceeds Tekcapital’s current market capitalisation by some margin.
Guident, an autonomous vehicle safety specialist, is considered Tekcapital’s most exciting prospect in some corners of the market. Tekcapital’s only privately held portfolio company, Guident, is rolling out autonomous vehicle safety solutions with an array of strategic partners. The company recently launched the first remote control and monitoring centre of its kind in North America and will service MiCA autonomous shuttles as the company broadens the scope of applications.
Innovative Eyewear recorded more revenue in the fourth quarter of 2023 than the preceding three quarters. Revenue growth continued into 2024 amid the launch of Eddie Bauer and Nautica branded ChatGPT-enabled smart eyewear. Innovative Eyewear will launch Reebok branded smart eyewear later this year.
After announcing a step change in revenue generation and order flow last year, Belluscura has embarked on a funding journey to support increased production of concentrated oxygen units for distribution across Asia and the US.
Tekcapital has alluded to launching a Generative AI venture this summer to harness the explosion in AI adoption. We have few details on the new company thus far, and investors will be watching closely.
Adsure Services (ADS)
Adsure Services will be under many investors’ radar. The business assurance company listed on AQUIS last year, setting out its mission to grow revenues organically and bolster shareholder returns through dividends.
The company is one of just a few AQUIS-listed companies to pay a dividend, an accolade we discussed with CEO Kevin Limn during a podcast in June.
The company provides a range of business assurance services to government-funded organisations such as health trusts, emergency services, and education institutions.
Through its operating subsidiary, TIAA Ltd, Adsure earns recurring revenues from long-term contracts, typically ranging between 2 and 5 years. Around 85% of Adsure’s revenue is considered recurring. The clear revenue visibility these contracts provide enables Adsure to pay a dividend—the company has been paying a dividend for years before listing. TIAA has been operating for over 20 years.
In the last half year ended 30th September, Adsure’s revenue grew to £4.25m. Positive EBITDA growth meant the company had cash balances of £1.27m at the end of September last year. For context, Adsure’s revenue for 2023FY was £8.99m.
Adsure Services has embarked on a 5-year corporate plan to grow the business, both organically and by entering new markets.
Although internal audit is the company’s core service, it offers a wide range of additional services that its clients can benefit from. These include cyber security, sustainability audits, AI planning and risk management, and safeguarding audits, to name but a few.
TIAA has a material opportunity to offer existing clients additional services, as well as to enter new markets and win new customers.
Adsure is an interesting prospect in that, being a profitable growth company, it didn’t raise any funds during the IPO process, and its main motivation for the listing was to diversify its shareholder register.