Cantor Fitzgerald Europe: Our top stock picks for H2

UK equity markets have continued to shine in the first half of 2017, shrugging off both the uncertainty caused by the General Election and ongoing wrangling around Brexit to touch fresh highs.
Many of the UK’s biggest stocks have made progress year-to-date, with the FTSE 100 up around 3.5% and the FTSE 250 up nearly 10%. With fears mounting that valuations now look stretched for many of the most well-known stocks, attractive opportunities may lie elsewhere.
Below, analysts at Cantor Fitzgerald Europe have identified their highest conviction stock ideas for investors seeking alternatives to mid and large cap companies listed in the UK.
Financials:
Keith Baird, financial services research – chosen stock: Gateley
“Gateley, the commercial law firm and independent pension scheme trustee, delivered a positive pre-close update recently, and reported full year revenue of £77.6m, up 16% and marginally ahead of our forecast.
“Trading in the second half of its financial year has exceeded management expectations, and apart from continued organic growth across all the business segments, the acquisitions of Gateley Capitus and Gateley Hamer have broadened the group’s capabilities and contributed positively following successful integration.
“While revenues have been above what was expected, Gateley continues to make investments in its expansion, showing management’s confidence in the business.
“Our longer term forecasts assume circa 8% organic growth given that Gateley has only a very small share of the overall legal services market. In addition we expect further accretive acquisitions.”
Transport:
Robin Byde, transport research – chosen stock: Air Partner
“Air Partner is transforming into a diversified global aviation services provider, balancing earnings from its successful commercial and private jet broking businesses with specialist aviation consulting & training services.
“The core broking businesses are market-leading and our analysis shows that demand for private jet travel in key European and US markets is currently resilient. In particular, the group’s flexible prepaid JetCard product has continued to grow strongly.
“That said, earnings are characteristically cyclical and, despite a strong market position, Air Partner faces the challenge of more online buying of services.
“To further diversify, the group has recently added fatigue management consulting to its aviation safety advisory & training division, and we view these activities as a key driver of earnings growth linked to strong demand for value added and outsourced services from the airlines. We also expect to see more bolt-on acquisitions in these activities.
“All in all, Air Partner’s fundamentals and market positions are strong. Broking is a cyclical sector but the group’s activities are broad-based, and consulting & training will form a larger component of future profits.
“We believe that the Group can deliver double digit earnings growth and strong free cash this year, with potentially more upside from acquisitions. Its valuation is attractive versus the FTSE Support Services sector and the FTSE All-Share.”
Energy:
Sam Wahab, oil and gas research – chosen stock: SDX Energy
“In its most recent results in late May, SDX Energy – which is engaged in exploring, developing and operating oil and gas properties – underlined another active period for the company, with drilling success and an accretive corporate acquisition.
“The group to develop its asset base across the portfolio, and we have been encouraged by the pace of operational progress SDX has demonstrated in the first three months of 2017.
“Investors can look forward to a period of significant drilling activity providing share price catalysts that set the company apart from its AIM listed constituents in our view.
“SDX’s shares therefore offer investors a low cost entry point into a growing producer with a high impact, fully funded exploration and appraisal programme.
“In the current climate, we continue to advocate companies that pursue low cost development / production strategies and SDX has certainly delivered on this criterion, with further running room in the share price to come.”
General retail:
Mark Photiades, general retail research – chosen stock: Moss Bros
“Specialist retailer Moss Bros has seen its full year 2018 trading season start well, with sales up by 3.7% driven by a strong performance in the retail business versus a tough consumer backdrop.
“Whilst external macro headwinds will pose challenges in the year ahead, the senior management team has been significantly strengthened over the past 12 months and has a number of initiatives which will drive further growth.
“New profitable space continues to be added as part of the expansion plan alongside the refurbishment of the existing store estate, while new product ranges have been added and have been well received, with Tailor Me gaining increasing traction.
“The multi-channel offer is advancing and we expect significant progress in the year ahead as management start to leverage the customer file and steps are taken to expand the online offer further overseas.
“Our analysis suggests scope to add over £40m of incremental sales over the medium term, and the potential for profits to nearly double from current levels.
“There are risks, including the impact of rising clothing costs as a result of a weakening in sterling against the US dollar and increases in minimum wage rates, but we recently increased our target price and maintain our BUY rating, given the business’ current trajectory.”
Healthcare:
Brian White, Healthcare Research – chosen stock: Mereo Biopharma
“Mereo is a late stage drug development company with a focus on rare diseases. It has a highly attractive model that involves identifying and securing drug candidates from large pharma companies which come with substantial and positive human clinical efficacy data.
“The company has already secured three assets which we believe have a combined peak sales potential of £2bn. The most advanced programme is targeting sufferers who have an inherited disorder (brittle bone disease) which results in a high risk of fractures and significant disability. The importance of this programme was reflected in its selection for inclusion in the European (EMA) Adaptive Pathway, which seeks to speed the development of important new drugs. Key data is due in early 2018.
“Before that we have important news on the near-term horizon from the remaining two programmes. The first, and arguably highest risk, is looking at improving lung function in patients suffering from chronic bronchitis. Positive data could see us include sales for the first time in our financial model, having a positive impact on valuation and share price progression.
“The remaining programme is targeting obese men with low testosterone levels and looks to be the lowest risk, with Mereo ensuring that the clinical design meets with current regulatory requirements.”
Mining:
Asa Bridle, Metals and Mining research – chosen stock: Orosur Mining
“Orosur Mining, the gold company with mining operations in Uruguay and exploration projects in Colombia and Chile, has just completed another successful financial year.
“The company’s second underground mine in Uruguay was completed on time and budget using the company’s own funds, and was then ramped up which helped Orosur to meet its production guidance for the 4th consecutive year in a row.
“With practically no debt, and production expected to be stable at the San Gregorio operations in Uruguay over the medium term, Orosur can use the future cash generated from its mines to fund both further production development in Uruguay and a significant exploration drilling programme on the exciting Anzá gold project in Colombia.
“This should result in new gold reserves being delineated at the Uruguay mines, extending the life of the operation, and a first gold resource at Anzá. Positive outcomes from either or both of these campaigns would represent notable, value driving, progress for the company as it looks to become a more significant gold producer based on multiple, long life, operations.”
Technology:
Kevin Ashton, technology research – chosen stock: Blancco Technology
“It has been a torrid year for Blancco, the mobile device diagnostic provider and data removal specialist, with the stock down nearly 70% from its March highs and now capitalized at just £65m. Organic growth slowed sharply in the six months to the end of 2016, with the company pointing to sales execution issues.
“It also parted company with the previous CFO at this time. Since then it raised £10m at 169p per share to plug an unanticipated funding gap, and, while it has seen a recovery in organic growth it has recently had to write down receivables. It’s hard to imagine a more shambolic four months.
“New CEO Simon Herrick looks to be a safe pair of hands and the search for a new Chairman is underway. Some of the names in the frame look very good indeed. The premise for sticking with Blancco and picking it for H2 recovery is that there is clearly growth in the end market (historic growth is some evidence of this) and there is considerable pressure on management to up its execution game to exploit this opportunity. From speaking to shareholders I would say the latter is non-negotiable.
“At just over 100p and with a modest net cash position the stock trades on historic EV/sales of under 2x. In 2016 EBITDA of £6.9m generated u/l net CFO of £5m and u/l FCF of £2.5m or a FCF margin of 11.5%. If BLTG can get back to that margin on over £31/2m of sales as just reported for FYJun17 that would be FCF of £3.7m and a yield of over 6%. With CEO Pat Clawson’s LTIP wiped out after the stock price collapse there is every incentive for everyone to roll their sleeves up.”
Industrials:
William Game, industrials research – chosen stock: Renold
“We continue to see good value in Renold, the high precision transmission engineer that has recently delivered a positive AGM update. In this regard, the Group delivered underlying revenue growth of 6.6% in Q1 of FY2017E, and saw the book-to-bill ratio of 105%, or 111% when including a new major project.
“Renold’s largest Chain Division is experiencing the strongest growth (c.8.2% in Q1). Nevertheless, Torque Transmission is now stable after a difficult few years of trading, and contributed 0.5% growth to the top line in the period. Despite increasing raw material costs as a result of sterling weakness, price increases have been implemented that are helping to mitigate margin erosion.
“Elsewhere, management’s STEP 2020 strategy (the achievement of mid-teen operating margins by 2020) remains on course. In this respect, there are a number of projects underway to deliver meaningful cost savings and significant operational improvements, including the UK Couplings consolidation from Halifax into the Cardiff facility.
“Additionally, investment into commercial functions, such as new sales offices and the construction of a new chain manufacturing facility in China, should position the business to accelerate top line progress. The third phase of ‘STEP 2020’ involves acquisitions that we expect to most likely be within the Chain Division, where end markets are broad and highly fragmented.
“The shares trade very modestly on a prospective PE ratio of 9x versus other growing small cap engineers on c.15.5x. This should offer good share price upside as Renold benefits from high operational gearing as incremental sales are captured.”