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Questor: at barely 12 times earnings, risk-tolerant investors could get a bargain with Anexo
Questor share tip: the firm, which helps ‘non-fault’ motorists after a crash, could be back on the road to 30pc margins
Smaller companies are inherently riskier as they tend to depend more on one key line of products or services, have a narrower geographic reach and perhaps rely more heavily on one or two important executives.
Yet the rewards can be considerable too and any company that generates operating margins north of 30pc and returns on capital of more than 20pc when things are going well must be worth at least a second look. Anexo is just such a firm.
The Liverpool-headquartered company provides credit and legal services to non-fault motorists who are involved in an incident, helping them to get a hire car while their own is being fixed and possibly to seek legal redress.
The pandemic and spring lockdown were understandably bad for business as they kept motorists off the roads. August’s interim results registered a slight dip in sales and a one-third drop in underlying operating profits.
A good portion of that dip relates to investment for future growth and a larger workforce, while a lot of the company’s customers are key workers, who are keeping going.
Credit volumes are recovering quickly and the number of hire vehicles on the road in August exceeded forecasts.
Meanwhile, Anexo raised £9m in May to expand its legal services business, Bond Turner, which is now working on a class-action lawsuit against VW in relation to the emissions scandal.
Cash generation was still good in the first half and that enabled the firm to pay a first-half dividend of 0.5p a share, although that was a reduction from 1p a year ago. The improving outlook also prompted management to reinstate full-year earnings guidance, which indicated that profits in the second half would be much higher than in the first, at least before investment in the VW legal case.
Bond Turner continues to increase its number of fee earners and the VW case could make a huge difference, since Anexo could be in line for a percentage of any damages and costs should the German carmaker lose.
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Two key executives own around 60pc of the shares. This is good in that their interests are aligned with those of external shareholders. It is less convenient from a liquidity point of view when it comes to buying the shares, which trade on Aim, and there are other potential dangers to note.
A second wave of the pandemic and more local lockdowns could crimp the recovery in car hire volumes, while there is no guarantee of victory in the VW legal case, even when it finally comes to trial in 2022 (or beyond).
However, the shares trade on barely 12 times (depressed) earnings for 2020, which gives us some protection. The net debt position of £27m, including leases, does not look too much of a burden, given that interest cover was still more than six times in the first half, so we should be able to wait out patiently any fresh turbulence in trading.
Risk-tolerant investors could be getting a bargain here, at least in the absence of a second wave.
Questor says: buy
Ticker: ANX
Share price at close: 127.5p
Update: Contour Global
Interest rates remain anchored at record lows in Canada and the EU after last week’s central bank meetings in Ottawa and Frankfurt, and America’s Federal Reserve and the Bank of England are hardly going to rush to raise borrowing costs this week.
In fact there have been more than 180 rate cuts around the world in 2020 so far, against just four increases, according to cbrates.com (Tajikistan, the Czech Republic, Kyrgyzstan and Kazakhstan, if you must know).
That puts a continuing premium on income and takes us back to Contour Global. Alongside last month’s very robust interim results, the owner and operator of power generation plants around the world declared a second-quarter dividend of 3.11p, which is in line with its goal of a 10pc annual growth rate. The firm also continues to run a share buyback scheme.
Contour Global remains a good option for income seekers thanks to its forecast yield of 6.2pc.
Questor says: hold
Ticker: GLO
Share price at close: 204.5p
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.