BUY: Oxford Instruments (OXIG)
Mergers and acquisition speculation could continue to mount, writes Mark Robinson.
Oxford Instruments continues to benefit from heightened levels of activity in its high-end tech markets, registering constant-currency order growth of 19.9 per cent at its March year-end. That translated to a 26.6 per cent increase in the order book on a cash basis to £260mn, while the book-to-bill ratio came in at 1.15. This could suggest that there may be more demand than can be efficiently supplied across its main markets, or perhaps it simply points to pent up demand linked to the pandemic.
Prospects are bound up with the expansion of cutting-edge scientific industries across the wider economy. Oxford’s technologies are being utilised in the development of advanced materials, quantum computing, and semiconductors, to name but a few. Indeed, those segments of the business saw revenue growth rates ranging between 21.4 and 36.2 per cent over the period, although regional performance levels were distorted due to the staggered easing of Covid-19 restrictions. We will probably get an even clearer idea of segmental performance once we can view a trading period that hasn’t been affected by an irregular phasing of shipments.
The growing imperative for R&D within what’s sometimes termed “the knowledge economy” underpins the group’s investment case. Unfortunately, that doesn’t mean it has been immune to supply chain disruption, evidenced by a slight decline in organic revenue in its European markets due to fewer shipments of semiconductor process tools.
By contrast, Asia — the group’s largest region by revenue — delivered 25.6 per cent top-line expansion on an organic constant currency basis, as demand continued to build for Oxford’s electron microscope analysers, semiconductor processing tools and cryogenic systems. China accounts for 55 per cent of the region’s sales, so the restrictions (post period-end) that were put in place by Beijing in response to the Omicron variant could conceivably impact first-half trading in full-year 2023.
A high proportion of sales are denominated in foreign currencies, so the group regularly employs hedging arrangements. Statutory profits contracted year on year largely due to the movement in the mark-to-market valuation of financial derivatives. However, once you exclude currency effects, the adjusted operating margin increased by 20 basis points to 18 per cent.
Oxford enhanced its optical imaging capabilities through the period with the acquisition of Wissenschaftliche Instrumente und Technologie. And it, too, was subject to M&A speculation after tech rival Spectris had lined up a possible 3,100p a share bid, subsequently withdrawn due to the situation in Ukraine. However, the interest should provide further support for the stock’s valuation, priced for growth at 24 times Peel Hunt’s adjusted earnings forecast.
BUY: Bloomsbury Publishing (BMY)
The UK publisher is celebrating the “reacquired habit” of reading in wake of the pandemic, writes Jemma Slingo.
During the first lockdown, many people rediscovered a love of reading. As a result, sales at Bloomsbury Publishing rose steeply and the group repeatedly beat market expectations. As Covid restrictions were lifted, however, some feared that reading would fall out of fashion once again.
These concerns have so far proved unfounded. Sales at Bloomsbury are up 24 per cent year on year, while adjusted profit before tax has jumped by 40 per cent to £26.7mn. Growth has been fairly consistent across all divisions: adult revenue is up 26 per cent at £55.2mn and children’s revenue has risen by 25 per cent to £93mn. (Amazingly, almost 25 years after publication, Harry Potter sales are still growing by 5 per cent each year.)
While still smaller than the consumer division, Bloomsbury’s non-consumer arm — which consists of academic and professional resources and special interest products — is also fast expanding, with adjusted profit before tax up 68 per cent at £9.1mn. This is encouraging as non-consumer publishing tends to have higher, more predictable margins, is less reliant on retailers, and ushers in more digital opportunities. As such, it’s a key part of Bloomsbury’s growth strategy.
The publisher’s specific digital resources arm is performing particularly well. When it was first established in May 2016, management predicted it would generate £15mn of sales by the year to February 2022. It has actually surpassed this target, delivering revenue of £18.6mn and profit of £6.8mn.
Bloomsbury has long been defined by its Harry Potter hit. However — while literary crazes remain very important — the publisher has sensibly diversified its revenue stream and future growth looks less reliant on consumer trends and the shares hold their own at a forward price/earnings ratio of 18 for 2022.
HOLD: Iomart (IOM)
The cloud computing group has complained of a lack of large-scale IT projects, writes Jemma Slingo.
In April, analysts at Peel Hunt described Iomart as a “bargain tech company awaiting growth”. Since the pandemic began, however, growth has not been forthcoming.
In the year ended March 31, revenue shrank by 8 per cent to £103mn, and adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) fell by the same percentage to £38mn. Management said this reflects lower non-recurring equipment and consultancy sales, caused in part by the conclusion of a large consultancy project.
This is not quite the full story, however: recurring revenues also dropped by £4.2mn, split equally between Iomart’s core “cloud managed services” division and its “self-managed infrastructure” arm. Customer renewals dipped in the first half of the year, but these have since returned to normal levels.
Iomart is not immune to macroeconomic pressures. Management has noticed a lack of larger-scale IT projects, and cited inflationary pressures, supply chain challenges and geopolitical uncertainties. However, it said “the requirement for organisations to be supported with their hybrid cloud challenges will continue to grow for the foreseeable future”.
Iomart only recently repositioned its offering around the growing ‘hybrid cloud’ market, which allows clients to store information in a variety of different places and access it easily. However, the security market is also a cornerstone of its growth plan, and it has recently struck a partnership with a cyber security specialist. Management also hopes that the appointment of a new chief commercial officer will help to improve the group’s sales pipeline.
The projections are not great, however. Analysts expect sales to remain below 2020 levels in the year ended 31 March 2023, while profit margins have been shrinking for several years.
Cash conversion remains high at 100 per cent, however, and the company has paid down a sizeable chunk of its debt.