Spotlight 24 November 2022

Introduction

WWelcome to Spotlight, a bonus report which is distributed eight times a year alongside your digital copy of Shares.

It provides small caps with a platform to tell their stories in their own words.

The company profiles are written by the businesses themselves rather than by Shares journalists.

They pay a fee to get their message across to both existing shareholders and prospective investors.

These profiles are paidfor promotions and are not

independent comment. As such, they cannot be considered unbiased. Equally, you are getting the inside track from the people who should best know the company and its strategy.

Some of the firms profiled in Spotlight will appear at our investor webinars and live events where you get to hear from management first hand.

Click here for details of upcoming webinars and events how to register for free tickets.

Previous issues of Spotlight are available on our website.

DISCLAIMER

IMPORTANT

Shares Spotlight is a mix of articles, written by Shares magazine’s team of journalists, and company profiles. The latter are commercial presentations and, as such, are written by the companies in question and reproduced in good faith.

Members of staff may hold shares in some of the securities written about in this publication. This could create a conflict of interest. Where such a conflict exists, it will be disclosed. This publication contains information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters. Comments in this publication must not be relied upon by readers when they make their investment decisions. Investors who require advice should consult a properly qualified independent adviser. This publication, its staff and AJ Bell Media do not, under any circumstances, accept liability for losses suffered by readers as a result of their investment decisions.

Recognising and rewarding the best growth companies in 2022

Examining the smaller firms nominated in the

latest Shares Awards

The Shares Awards look to reward companies across the retail investment world for their quality of service, performance and products. The achievements of UK growth companies are among those to be recognised and in this article Shares looks at some of the nominated companies.

Unsurprisingly there is a healthy representation for resources stocks in the AIM Company of the Year category, reflecting the strong commodity prices seen in 2022.

Hampshire-headquartered i3 Energy (I3E:AIM) has benefited from growing production in Canada and progress on its UK assets.

Similarly iGas Energy (IGAS:AIM) has enjoyed success with its conventional portfolio in the UK, though excitement around a green light for UK fracking, and the implications for its shale assets, quickly dissipated as a policy outlined by short-lived prime minister Liz Truss was swiftly reversed by her successor Rishi Sunak.

Another nominee who plays into energy demand is load bank specialist Crestchic (LOAD:AIM) which has seen strong demand for its equipment, used to test power systems, from a customer base which includes data centres, oil, gas as well as mining operations and renewable power and marine facilities.

In research published in September Shore Capital observed the group was ‘firmly on the front foot, serving major growth markets and with reduced exposure to the oil cycle; recapitalised and heading towards net cash; investing in expansion, principally the Burton factory, as well as in its growing US business, and, importantly after years for firefighting, the

group has invested in key management hires’.

This article, written by the company, provides more information on the business.

Commenting on the first half results announced on 3 August, broker Shore Capital said: ‘We continue to see Keywords as well placed to benefit from favourable structural growth opportunities as demand for bigger and more content-rich games remains and look forward to further progress in the second half.’

Elsewhere, Telecom Plus (TEP) has seen its Utility Warehouse brand, offering insurance, broadband and energy services, strike a chord with hard-pressed UK households.

Growth Company of the Year- 2022 Shares Awards nominees

There is some crossover in the Growth Company of the Year category with Fulham Shore (FUL:AIM) among the names to appear on both lists. The restaurant outfit behind the popular Franco Manca pizza chain has managed to pass on costs and has continued to deliver strong trading despite the gloomy consumer backdrop.

Another firm belying a tough economic environment is US-focused promotional products firm 4imprint (FOUR), setting new sales records as it takes share in a large and fragmented market. As FinnCap analyst Guy Hewett observed in the wake of the latest positive trading update on 4 November: ‘4imprint has resolutely proved that it has once again emerged from an economic downturn in a stronger position, accelerating market share gains.’

Computer games service provider Keywords Studios (KWS:AIM) continues to deliver earnings growth as it pursues a strategy based on bolt-on acquisitions.

AQSE Company of the Year- 2022 Shares Awards nominees

All Things Considered Group Black Sea Property Capital for Colleagues Daniel Thwaites Equipmake Holdings National Milk Records Table: Shares magazine • Source: Shares magazine

A diverse range of names have been nominated from the Aquis Stock Exchange, including agricultural technology information services provider in UK dairy – National Milk Records.

As Canaccord Genuity analyst James Wood observed following numbers for the first three months of the financial year running until 30 June 2023: ‘We believe the Q1 results demonstrate pricing power against a backdrop of industry cost inflation. While producer margins are currently protected by milk price increases, inflationary cost pressures underline the importance of data insights from milk recording to manage yields and quality through animal health and breeding.’

Crestchic Plc – assuring power reliability for a digital, connected global economy that is transitioning to renewable power

Crestchic (LOAD:AIM) is a British designer and manufacturer of loadbanks, used for testing mission critical power generation, which it sells and rents worldwide via a global network of rental depots and sales offices.

A loadbank, which can vary in size from a suitcase to a 30 foot container weighing 25 tonnes, is a device that accepts the power load from a generator and turns it into heat, which is then dissipated by fans. the, The “brain” of the loadbank is our class leading smart control system which exactly simulates the real-life load that will be placed on generator over the full daily cycle of operation.

Crestchic, with 40 years of

electrical engineering heritage, is unique in the marketplace as a specialist that designs, manufactures, sells and hires loadbanks. This breadth of capability, market coverage and brand awareness keeps us at the forefront of product innovation and delivers outstanding customer acquisition and retention.

The growing demand for Crestchic loadbanks is driven by three global megatrends:

MEGATREND ONE – THE DATA REVOLUTION

We live today in a digital, connected world where the collection and mining of data informs and influences our personal and working lives in a way that few would have contemplated at the turn of the millennium, changing forever the way we communicate, how decisions are made and how our needs

for information, education, and entertainment are satisfied.

Data is collected, processed and stored via Data Centres –huge facilities where multiple servers are employed to handle the massive volume of electronic data that flows around the world – and the number of data centres is continually expanding to meet the remorseless increase in demand for data transmission and storage.

Reliable, resilient electrical power is mission critical to the operation of data centres. Crestchic loadbanks, tailored to the specific data centre requirements, test back up systems protecting against power outages, comprising an instant-response battery powered UPS (Uninterruptible Power Supply) and a generator to cover longer outages. Both the UPS and the generator need rigorous testing on commissioning and ongoing through the life of the centre.

The opportunity does not stop there. Servers generate heat while they are running, which has to be dissipated by sophisticated air conditioning systems. Crestchic loadbanks can be configured to replicate the heat generation pattern of the racked servers, allowing the air cooling system to be

comprehensively validated.

The vibrancy of this market sector, coupled with the ability of Crestchic to innovate to meet its unique requirements, has underpinned exceptional growth in sector revenues. A decade ago, data centres accounted for 10% of total sales and rental revenues. Today that percentage stands at 30% - and that notwithstanding continued growth in the other four sectors; Critical Infrastructure, Extractive Industries, Marine Industries and Energy Transition.

The data revolution is a global megatrend that shows no sign of slowing and we will continue to expand the range of products and services we offer to the sector, while simultaneously continuing to expand our geographic coverage. Just this year we have opened new rental depots in Antwerp and in Fort Worth, where our primary focus will be on serving the fast growing Benelux and Texas datacentre hubs.

MEGATREND TWO – INCREASING ELECTRIFICATION

The growing primacy of electricity as a power source benefits all our five sectors. Our Marine Industries sector in particular is a big winner and Crestchic loadbanks are regularly seen in shipyards around the world. Modern vessels, including FPSOs (Floating Production, Storage and Offloading), bulk gas carriers and cruise liners, have highly sophisticated electrical power systems for propulsion, navigation systems, lighting, welfare and cargo handling, which need extensive testing and commissioning.

MEGATREND THREE –ENERGY TRANSITION TO RENEWABLES

The transition from carbon based fuels, in response to the environmental imperative to increase power generation from renewable/clean energy, will drive growth for decades to come. Though still in its infancy, already some 10% of Crestchic revenues are derived directly from the Energy Transition Sector, with specialist equipment used for R&D into and the testing of new Hydro schemes, wind and solar farms, tidal power and hydrogen fuel cells. The increasing proportion of grid intake from comparatively unpredictable renewable power generation also creates grid instability, benefitting the Critical Infrastructure sector as customer awareness of the need for resilient back up power is heightened.

EXCEPTIONAL FINANCIAL PERFORMANCE

This virtuous combination of the strong Crestchic brand, growing markets propelled by long term global megatrends, a focused business model, product innovation and geographic expansion has produced a record first half in 2022 – with sales up 35% year on year and profits up 131%. With record forward visibility into H2 and 2023, this is increasingly being recognised in the share price which at 285p, is up almost 263% over two years.

Shares Spotlight

Crestchic Plc

Crestchic (p)

discoverIE: innovative electronics for long-term, sustainable & structural growth markets

Guildford-headquartered discoverIE (DSCV) is a leading international designer and manufacturer of customised electronics for industrial applications, such as wind power systems, robotic controls and medical equipment.

Listed on the FTSE 250, discoverIE operates internationally with c.5,000 employees spreading across 20 countries. Its 31 manufacturing sites in Europe, Asia and North America produce electronic components that are designed by the company and are used in niche industrial applications. From its UK roots, discoverIE has successfully expanded, organically and by acquisition, into continental Europe, Asia and North America, with c.90% of its revenue now coming from these regions.

The group has an ongoing commitment to reducing the impact of its operations on the environment and with its key markets aligned with a sustainable future, MSCI has awarded the group an ESG ‘A’ rating.

DIFFERENTIATED PRODUCTS AND LONG-LASTING CUSTOMER RELATIONSHIPS

You may not be familiar with the name of discoverIE, but it’s very likely that you have seen or experienced

products that are driven by one of its electronic components. From position sensors used for space rocket landing to liquid-cooled high power transformers in wind turbines to signal detection and processing systems in X-ray scanners; the range of applications is enormous. However the base technologies used to design and build these innovative electronics all have something in common - they are custom designed, which means they are hard to replace, and they are a small but critical part of a larger system. These characteristics mean they command substantial pricing power.

discoverIE works with and sells directly to the original equipment manufacturers (OEMs), most of them western multinationals, and many

well-known names such as Siemens (SIE:ETR) and General Electric (GE:NYSE)

Its engineers work closely with the R&D and/or product development teams of its customers to develop the best solutions to solve their technical challenges.

This requires product knowledge and manufacturing know how. Different to contract manufacturing, discoverIE keeps the IP of the products it develops for its customers. Once the product is designed in, it lasts the lifetime of the system design and is manufactured and delivered globally by discoverIE. Bespoke design, consistent quality, and reliable delivery not only engender longlasting relationships but also create stable and repeating revenues for the company.

discoverIE STRONG GROWTH AND SHAREHOLDER RETURN

discoverIE delivered 19% sales growth a year since the 2017/18 financial year, more than half of which was from organic sales with the balance coming from acquisitions.

Underlying operating profit increased by 144% and underlying EPS (earnings per share) more than doubled from 14.6p to 29.4p in the four years to the 2021/22 financial year. In its latest update, the company reported continued strong sales growth of 26% in the first half of the 2023 financial year, 37% growth in underlying EPS and a record orderbook of £257 million.

Importantly, discoverIE is a highly cash generative business thanks to its asset-light business model, achieving operating and free cash conversion of over 100% in the last three years, against its target of 85%. This strong cash flow, together with a low 0.8x gearing, enables it to fund further acquisitions and continue to invest in new capabilities.

With a track record of strong growth, it’s not surprising to see that the discoverIE share price has risen sixfold in the last 10 years. This, combined with an average 6% per year dividend growth, has given the company an impressive total shareholder return of 515% over that period.

CLEAR AND PROVEN STRATEGY

This remarkable performance was down to the company’s clear and consistent strategy set out by CEO Nick Jefferies who has been at the helm for over 13 years, along with effective operational implementation. The strategy is to grow the business in the

niche market of industrial electronics by focusing on four sustainable end markets with good structural growth prospects and by making margin- and earningsenhancing acquisitions.

The strategy has five priorities:

• Grow sales well ahead of GDP through the economic cycle by focusing on structural growth markets

• Move up the value chain where operating margins are higher

• Acquire high quality businesses with attractive growth prospects and strong sustainable margins

• Further internationalise the business by expanding in North America and Asia

• Generate strong cash flows and long term sustainable

returns while reducing impact on the environment

Management has an exceptional track record of delivering against its strategic targets. The strategy has not only delivered double digit sales growth but also increased business resilience as a result of a well diversified geographic footprint and customer base, higher exposure to structural growth markets and increasing operating margin.

SUBSTANTIAL GROWTH PROSPECT

The niche market of industrial electronics is estimated to be worth around $15 billion. Given many of its competitors are subscale regional or local operators, discoverIE has plenty of headroom to take market share by expanding organically and through acquisitions.

Looking ahead, the growth of its four target marketsrenewable energy, electrification of transportation, medical, and industrial automation & connectivity – are driven by mega trends, such as decarbonisation and industrial IoT (internet of things). The average annual growth rate of the target markets until 2030 ranges from 7% to 23%. With 76% of its sales coming from these markets, with a target to reach 85% by the 2025 financial year, discoverIE will continue to benefit from this structural growth.

We aim is to grow our business in custom and differentiated electronics for niche industrial applications by focusing on markets with structural, sustained growth prospects, complemented by value enhancing acquisitions.’

“ “

Nick Jefferies, group chief executive of discoverIE

hVIVO is accelerating the development of important new vaccines and antiviral treatments

hVIVO (HVO:AIM) is a rapidly growing specialist contract research organisation (CRO) and the world leader in testing infectious and respiratory disease vaccines and antivirals using human challenge clinical trials. The company provides end-to-end early clinical development services for its broad and longstanding client base, which includes four of the 10 largest global biopharma companies.

UNRIVALLED EXPERTISE

Building on an unparalleled heritage dating back to the Salisbury Common Cold Unit in the 1940s, hVIVO is the only CRO in the world focused on human challenge clinical trials. The company also provides world class expertise and capabilities in challenge agent manufacture and has built a diverse portfolio of 10+ human challenge models to test a broad range of infectious and respiratory disease products, including RSV, influenza, malaria, asthma and Covid-19. The company has inoculated over 3,500 healthy volunteers and safely conducted over 60 human challenge trials, which are conducted at the company’s specialist quarantine facilities in London.

CHALLENGE STUDIES

BECOMING MAINSTREAM

A human challenge study

involves the intentional infection of healthy adult volunteers with a specific virus, known as a challenge agent, to test the safety and efficacy of a potential vaccine or antiviral.

Human challenge trials offer clear time and cost-saving advantages over traditional vaccine field trials. They require significantly fewer volunteers to achieve the target number of the infected patients. This is the key sample size required to determine the efficacy of a vaccine. In comparison to the traditional field-based trials a challenge trial can be conducted at up to 50% of the costs and within a 10-month period.

In addition to the time and cost savings a biopharma company can de-risk their Phase III program, reduce regulatory timelines and optimise dosing and endpoints.

Following the successful completion of the worlds first Covid-19 challenge trial, hVIVO has seen a significant increase in demand for its challenge models.

GROWING MARKET OPPORTUNITY

Covid-19 was a catalyst for the biopharma industry to prepare for the next pandemic and invest in the development of antivirals and vaccines. As a result, the clinical trial market for infectious disease is expected to increase to over $5.5 billion by 2027, with human challenge a rapidly growing segment. In 2021, there were 2,500-plus vaccine, antiviral and respiratory compounds in development, up 86% on 2019 and due to hVIVO’s wide portfolio of challenge models, they can conduct trials on many of these indications.

As Big Pharma and biotech seek to test their products against specific virus subvariants, the company has seen increasing demand for its unique full-service contracts that involve manufacturing new challenge agents and conducting a characterisation study (assessing the correct dose of challenge agent that causes a safe and reliable

hVIVO

infection) finally followed by a challenge trial to test the client’s product. hVIVO has signed three such contracts this year and expect this trend to grow going forward, generating larger revenues due to the multiple step process involved.

TRUSTED, LONG TERM PARTNER

hVIVO has a large and growing repeat client base, which includes an increasing number of biotech companies and four of the top 10 global pharma. For some clients, such as Pfizer (PFE:NYSE), Janssen and Bavarian Nordic, efficacy data gained through hVIVO’s RSV challenge trials has helped enable them to gain FDA Breakthrough Therapy Designation for their candidates, shortening the timeline for US regulatory approval. At least one biotech has used the challenge study concept not only to increase their valuation but also gain an acquisition by a big pharma.

LEADER IN VOLUNTEER RECRUITMENT

More than 80% of clinical trials in the US fail to meet patient enrolment timelines and patient recruitment issues account for 55% of cancelled clinical trials. To address this challenge, hVIVO has a long-established dedicated volunteer and patient recruitment arm, FluCamp, which has an extensive database of over

250,000 potential volunteers. Through its state-of-the-art screening facilities in Central London and Manchester, it boasts unrivalled screening capacity, increased earlier this year to now screen over 1,000 taking place per week to meet demand.

EXPANDED OFFERING

Although challenge trials remain its main focus, hVIVO recently broadened its offering to provide additional clinical trial services, including volunteer recruitment services for field trials, utilising the volunteers screened who are unsuitable for human challenge trials. It also provides standalone laboratory services, which have been accredited by the College of American Pathologists. hVIVO is also now able to act as a trial site for larger Phase 2 and Phase 3 field studies, which do not require a quarantine setting. All of these services will use the company’s existing infrastructure, providing new revenue streams to increase utilisation and improve margins. hVIVO’s subsidiary Venn Life Sciences provides drug development consultancy services to a wide range of clients as well as support services to hVIVO. The company has seen increased cross selling between the two companies with two significant hVIVO contracts signed in 2022 with existing Venn Life Sciences clients.

RAPIDLY GROWING ORDERBOOK & REVENUE CONVERSION

Demand for the company’s human challenge services has seen significant growth, reflected in the order book which has increased nearly three-fold year-on-year and stood at £80 million at 1 September 2022, providing revenue visibility into 2024.

The company is now focused on expanding its order book with numerous significant contracts signed this year, while revenues of £9 million for July and August in 2022 underline that the company is successfully converting its order book to revenue.

FOUNDATIONS IN PLACE FOR LONG-TERM SUSTAINABLE GROWTH

The company has a robust financial position. It remains well capitalised with a growing cash figure of around £20 million as of 1 September to support future growth opportunities and the foundations are in place to deliver long term sustainable growth and continued profitability. It reiterated its 2022 revenue guidance of around £50 million, representing more than 25% growth yearon-year, and double-digit EBITDA profit margins between 13–15%, and already has over 80% of the targeted revenues of around £55 million for 2023 contracted.