BUY: Oxford Metrics (OMG)
The 3D sensing software company wants to more than treble its revenue in next five years, writes Arthur Sants.
The release of Apple’s new headset shows that the most valuable company in history believes augmented and virtual realty is here to stay. The fact that 3D imaging is far from dead is good news for smart sensing software company Oxford Metrics, which captures 3D images for entertainment, engineering and life science purposes.
After some pandemic disruption, demand for the software is back. In the 12 months to March, the company has racked up a near record order book of £22mn, up 68 per cent from the year before. This puts it in a good position to keep growing after revenue rose 70 per cent to £21.3mn.
A deal with a content studio in Tokyo helped push entertainment revenue up by 178 per cent to £11mn. Meanwhile, life sciences was up 25.5 per cent to £5.8mn after deals were signed with Victoria University in Australia, and engineering sales rose 15.8 per cent to £3.1mn.
To drive future growth, the company doubled R&D spend from £1.7mn to £3.4mn, but managed to keep its administrative and marketing costs fairly flat. This means that despite investing more in its technology, it was able to increase operating profit by 540 per cent to £3.9mn.
Management says its five-year growth plan is to increase revenue by 2.5 times while achieving a 15 per cent adjusted pre-tax margin of 15 per cent. Numis is confident in this forecast and expects revenue to rise 50 per cent by 2024, leaving Oxford Metrics trading on an EV/Ebitda of 11.6. Expensive, but not prohibitive.
SELL: N Brown (BWNG)
Trading was weak in 2023, and sales are expected to fall again this year, writes Christopher Akers.
N Brown shares were unsurprisingly marked down by 14 per cent after the Aim-traded online clothing and footwear retailer unveiled an uninspiring set of results amid what it referred to as “challenging online market conditions”. Post-pandemic online trading trends were indeed apparent across the company’s key performance indicators, with order numbers down by 15 per cent to 8.7mn and active customer numbers falling by over 10 per cent to 2.6mn.
As well as the revenue contraction and pivot to a pre-tax loss, the board warned that the “challenges of a high inflationary environment and low consumer confidence” will continue to impact performance. Management guided for another sales fall in 2024, with house broker Shore Capital forecasting a 7.6 per cent decline in the key product revenue stream.
A positive highlight was the 180 basis point uplift in product gross margin to 44.4 per cent, however overall gross margin and the cash profit margin fell by 310 and 480 basis points, respectively.
The statutory loss was driven by legal fees and impairments. At least some financial certainty was delivered by the £49.5mn settlement in January of the legal dispute between Allianz Insurance and the company’s subsidiary JD Williams, which concerned issues around historic payment protection insurance (PPI) redress. A non-cash impairment of £53mn, meanwhile, was recorded against intangible and plant and equipment assets due to the weaker financial outlook.
Shore Capital hopes that management’s strategy will ultimately “yield a resilient, profitable, cash-generative and growing business, so reversing the trajectory of recent times”. We see little evidence of that as things stand. And with the broker rating the shares at 18 times its 2024 earnings forecast, significantly above the five-year forward price/earnings (PE) average of nine times according to FactSet, we remain bearish.
HOLD: Celadon Pharmaceuticals (CEL)
The Aim-listed company hopes to bring cannabis-based medicines to the UK market, writes Jennifer Johnson.
As of April, 38 US states now permit the medical use of cannabis products. It’s a different story here in the UK – where Aim-listed Celadon Pharmaceuticals believes it’s one of only two firms with the necessary licences to grow and distribute pharmaceutical-grade cannabis.
In March, the Home Office gave the firm the legal permissions it needs to sell its cannabis oil to a select number of private clinics, as well as to universities and other drug companies conducting research. It was previously able to manufacture the oil, but could not distribute it.
Shares jumped by roughly 25 per cent following the government approval – and they’re up 225 per cent in the year to date. Encouraging as this is, Celadon is still very much an early-stage outfit: it has yet to turn a profit and the board has no intention of paying out a dividend anytime soon.
However, management is confident that momentum is building behind medical cannabis in the UK, largely because there is significant unmet need in certain patient groups. There are an estimated 8mn people in the country with moderate to severe chronic pain – one of the conditions Celadon believes is a good target for cannabis-based treatments.
There are presently very few UK studies that support the use of cannabis as a pain reliever, though Celadon hopes it will be able to open up the market by conducting clinical trials and establishing a domestic supply chain.
The size and strength of the US market should give investors reason to be hopeful. But we’d like to see greater evidence of policy support here.
