Pick of AIM by Miles Nolan

Companies that enjoy significant asset backing provide investors with a useful and tangible cushion. Highlighted below are two very different opportunities that fit the bill

One of the more interesting aspects of my role at Growth Company Investor is the scope to attend site visits. I recently made the four-hour drive to visit cosmetics manufacturer Swallowfield, in Wellington, Somerset. The AIM counter makes a range of products that spans eye-pencils and deodorants through to its latest move into sun creams. Swallowfield has increased the level of automation to boost efficiencies, and now manufactures over 90 million items a year.

Battling against a backdrop of rising input costs and weak consumer spending in the UK, the firm has done well to secure new business. In the six months to 8 January, sales increased 7 per cent to £31.2 million, as pre-tax profits dipped 7 per cent to £689,000. Thanks to a raft of product launches, the second half is expected to be much stronger. House broker Smith & Williamson predicts a full-year pre-tax profit of £1.7 million and EPS of 11.1p.

It is a big local employer and I was impressed at the slick manufacturing process and its modern equipment. But to further its expansion drive overseas Swallowfield also owns a facility in the Czech Republic and a 19 per cent share of a joint venture in China. It recently opened sales offices in New York and Paris and has also started selling in India and the Middle East.

Cost control
Efforts to pass on cost increases are helping, and the current order book is strong, which augurs well. At the last count, Swallowfield had a net asset value of 116p a share, which is split equally between property and plant & equipment.

Dissident shareholders are trying to unseat chairman Shena Winning at a meeting on 11 April. With 46 per cent of Swallowfield, their move would appear a fait accompli. At 135.5p, the shares trade on 12 times forward earnings while offering a useful 4.6 per cent dividend yield.

Institutional favourite
At the other end of the spectrum is fellow AIM constituent Blackstar, which is a leading South Africa-focused investment company. It joined the market in 2006 and in that year raised £80 million to fund its growth.

Blackstar has a good institutional following with the likes of Schroders and Henderson but is little known by retail investors. The shares floated at 100p but now languish at 81.5p, which is a far cry from the last reported net asset value of 130p a share.

Founder Andrew Bonamour says ‘we look at companies that generate cash and have great management’.
He adds that their skill is in delivering returns.

The star performer has been Litha Healthcare, a diversified healthcare operation with divisions in biotech, medical and pharmaceuticals. It is a leading manufacturer of vaccines in South Africa and is working with the government to provide free vaccines to all children in the country. Last year the shares soared 193 per cent on the Johannesburg Stock Exchange. Blackstar holds 45 per cent, which is valued at £40 million, a significant uplift on the £10 million it invested.

Another win was the £19.9 million disposal of its stake in mining company Mvela, which yielded an £8.5 million profit. 
Blackstar is riding the wave of the strong rebound in liquidity to emerging markets, with foreign investors channelling increased funds into South Africa. The board and senior management hold 27 per cent of Blackstar, further evidence that their interests are fully aligned with those of shareholders.

Share buybacks and tender offers have returned £12 million and Blackstar is now planning on a dual listing in Johannesburg in an attempt to unlock value. The £10 million to £11 million to be raised is being pitched at 85p – a premium to the current share price.