Taking stock – Part 2
27th May 2021 |
As alluded to in last week’s update, the stock markets have taken a downturn in recent weeks. Trading has been volatile, and many companies have seen a drop in valuations. Investors have resorted to safer investments, as their appetite for risk has waned.
As part two of our Frontier Tech Investor portfolio update, we explain why we still believe our stocks are an excellent investment opportunity at this time of uncertainty.
To us, each stock has the ability to generate significant returns. If we didn’t think they could, then they wouldn’t be a part of the portfolio.
A short-term period of volatility does little to change our long-term outlook on our stocks. In this report, we will reiterate why this is the case for each stock, and the appropriate action to take.
Note: the three-month percentage change in share price will be from the closing price on 26 February 2021, to the closing price on 26 May 2021. As stated, the last three months have been a sometimes turbulent period for the stock markets, in which a number of company share prices have fallen.
We are providing a short-term assessment of how our stocks are currently faring, with the appropriate action to take at this time.
Kanabo Group (LSE: KNB)
Three-month share price change: -25.7%
The medicinal cannabis industry has significantly increased in value over the past year. To give an idea, the medicinal cannabis market was valued at $13.4 billion in 2020. By 2025, it is predicted to be worth $44.4 billion.
Lockdown has increased the need for CBD oil to alleviate mental and physical health issues bought on by it. Kanabo Group, a developer of medicinal cannabis products, has been capturing this demand for CBD products.
In truth, Kanabo has been a little quiet recently in terms of news. Apart from its initial public offering (IPO) in February of this year, which successfully raised £6 million, the only other news refers to a scale-up in the production of its VapePod inhalation device.
In the deal, 36,000 cartridges will be prepared at cannabis group PharmaCann.
The key challenge for Kanabo will be to commercialise its products on a mass scale. At the same time, it must adhere to the growing regulations in the CBD industry in terms of product standard and authenticity.
Currently, it is early days for UK-listed cannabis companies. The industry is a lot smaller in the UK than it is in the likes of Australia, Canada, and the United States. This is partly due to legislation.
However, we expect to see the sort of growth in the UK medicinal cannabis industry that the industries in these other countries have seen. As the demand for and popularity of cannabis products rise, we anticipate that regulations in the UK may be relaxed, allowing for greater medicinal cannabis use.
We reiterate our BUY recommendation. You can find the original recommendation here.
Marston’s (LSE: MARS)
Three-month share price change: -0.2%
Marston’s is a UK pub and hotel operator.
Like all the other pubs throughout the UK, Marston’s opened its indoor facilities to the public on 17 May. It has endured a torrid year thanks to the pandemic, but it is now recovering in line with the re-emergence of the hospitality industry.
Half-year profits from 4 October 2020 to 3 April 2021 equated to £199.3 million. In the corresponding six months to early April 2020, the company made a loss to the tune of £28 million.
The company’s cash generation is heavily dependent on footfall in Marston’s pubs, which of course has been restricted over the past year.
Marston’s is now readying itself for the pent-up demand. To deal with it, the company has launched an interactive training app that will help to train staff quickly and efficiently.
We believe that Marston’s valuation will rise in the near term. The app will help it to optimise productivity in a time where the hospitality looks set for a post-pandemic, summer boom.
Continue to HOLD Marston’s. You can find the original recommendation here.
Meggitt (LSE:MGGT)
Three-month share price change: +14.6%
Meggitt provides components and systems engineering for extreme environments.
Meggitt has a key part to play in driving environmental sustainability amongst economies of the world.
From efficient aircraft engines, to green energy solutions, Meggitt is striving to drive down the number of emissions being produced. Over the past year, Meggitt has announced countless new deals and partnerships: this underlines the green transition that many economies are going through.
Notably, Meggitt has signed multi-million-pound contracts with Siemens Energy and ENPPI for its specialist printed circuit heat exchangers. Printed circuit heat exchangers deliver sustainable energy using heat transfers.
Meggitt has created several revenue streams through its commercial partnerships. We believe that it will create more as organisations continue to adopt greener and more efficient technologies.
We reiterate our HOLD recommendation on Meggitt. You can find the original recommendation here.
Ocean Outdoor (LSE: OOUT)
Three-month share price change: +5.6%
Ocean Outdoor is an operator of premium outdoor advertising space in the UK.
The company recently announced its most significant piece of news.
The company has been awarded a contract, worth £25 million, to sell and market advertising space in Edinburgh’s newly developed St. James Quarter. The contract will last for a period of ten years.
This deal will help provide Ocean Outdoor with substantial revenues and boost its reputation for hosting advertising technology. It adds to its growing presence in Scotland, with its screens also currently operating in Glasgow and Aberdeen.
We think demand for premium advertising space will rise. The key reason for this is that there will be increased footfall in public spaces across the UK as the country emerges from lockdown. Ocean Outdoor should be the beneficiary of this, and we think this may be reflected in its share price over the next few months.
We reiterate our HOLD recommendation on Ocean Outdoor. You can find the original recommendation here.
Rolls-Royce Holdings (LSE: RR)
Three month-share price change: -4.3%
Rolls-Royce Holdings is an engineering company, focused mainly on propulsion systems.
The company has endured a difficult lockdown period that has seen it incur losses of £4 billion in 2020.
However, the share price has rebounded sharply. Since hitting a price of 38.98 in early October, its share price is now more than 150% higher, at around 106.6p.
Rolls-Royce has been involved in numerous projects over the past year, including the development of its very own electric airplane and the world’s largest aero-engine.
As the aviation industry recovers, we see Rolls-Royce facing increased demand for its specialist engine parts. Alongside this, Rolls-Royce has diversification across other industries, including shipping and power generation.
We reiterate our BUY recommendation on the stock. You can find the original recommendation here.
Surface Transforms (LSE:SCE)
Three-month share price change: +2.3%
Surface Transforms patented carbon-ceramic brake technology, making the company a key player in the brake industry.
It is highly specialised and serves a niche market which it is currently establishing itself in. Its brakes provide up to 70% in weight savings and are crucial to the efficiency of its customers in the automotive and aviation industry.
Currently, Surface Transforms is in the process of promoting its brand and raising industry awareness. In March 2021, it signed a contract with Chamois (a marketing agency), to do exactly this.
In addition, the company has plans to expand its production facility in Liverpool. Non-executive chairman, David Bundred, anticipates that it will provide the company with “£35 million worth of revenue capacity” from 2022.
We believe that its increased market exposure and scale-up in production will help the company’s valuation.
We reiterate our BUY recommendation on the stock. You can find the original recommendation here.
Smartspace Software (LSE:SMRT)
Three-month share price change: +9.6%
The office space management software company is supporting the return to “normal” working practices after the Covid-19 pandemic.
The company offers a range of solutions to make the return to the office safer. For example, solutions enable socially distanced desk booking, and general office access/management.
Its financial state looks very healthy. For the 2021 fiscal year (ending 31 January 2021), gross profits were up 28% on the previous year.
In its most recent news, SmartSpace announced a contract with CityFibre, a major UK provider of 5G network infrastructure. It will allow key personnel of CityFibre to return to the workplace in a safe and secure way.
The changes to working in the office environment that the pandemic has provided may serve to benefit Smartspace in the long term.
For this reason, we reiterate our HOLD recommendation on the stock. You can find the original recommendation here.
Spirent Communications plc (LSE:SPT)
Three-month share price change: +6.6%
Spirent is establishing itself as a leading provider of 5G testing and assurance solutions. In the race to deploy 5G, technology firms must ensure their own infrastructure can host it efficiently and securely.
Spirent’s solutions allow them to do this. In particular, the company recently announced a breakthrough that will provide cost and time savings to its customers.
It comes in the form of its Landslide 5G Core Automation Package, which becomes the industry’s first subscription-based, 5G test platform.
With this product, we think Spirent will incur significant revenues. It will undoubtedly improve the efficiency of the testing and assurance process, which will give Spirent’s clients an advantage when looking to deploy 5G as speedily as possible.
We reiterate our BUY recommendation on Spirent. You can find the original recommendation here.
Trackwise Designs (LSE: TWD)
Three-month share price change: -10.9%
Trackwise Designs is a manufacturer of printed circuit boards (PCBs). PCBs are the platform on which semiconductors operate. Semiconductors are a crucial part of many electronic devices, providing functionality to things like televisions, smartphones and laptops.
Trackwise’s innovative PCB technology is an industry first that will help provide efficiency gains to the aviation and automotive industries.
The company’s PCB is beginning to gain recognition, and Trackwise has even secured a deal with a major aerospace components supplier, called GKN Aerospace.
Trackwise is scaling-up its production too. It recently opened a new 77,000 sq ft facility that will allow it to keep up with the rising demand for its specialist PCB.
The company’s financials are also looking healthy. It expects to report revenues of £6.1 million for 2020, compared to £2.9 million from 2019.
Crucially, Trackwise accommodates the needs of a greener and more sustainable economy. As the automotive and aviation industries try to adhere to ever stricter emissions regulations, its PCB may be a viable solution for them.
We reiterate our BUY recommendation on the stock. You can find the original recommendation here.
Velocys (LSE:VLS)
Three-month share price change: -13.4%
Velocys develop sustainable fuels for the aviation industry.
Velocys’ fuels will undoubtedly help the aviation industry to achieve the 78% reduction in emissions target (compared to 1990 levels) by 2035. This has been mandated by the UK government, in its bid to tackle climate change.
Velocys’ reactors can generate energy from unlikely sources such as household waste and forest material. The reactors can create fuel which actually generates negative carbon emissions. In other words, the fuel absorbs more emissions from the environment than it produces.
Velocys has emerged from the pandemic relatively unscathed. Revenues in 2020 were down slightly to £0.2 million from £0.3 million in 2019. Operating losses fell from £9.6 million to £8.8 million over the same period.
We are glad to have Velocys in our portfolio again after being stopped out recently. We reiterate our BUY recommendation on the stock. You can find the original recommendation here.
WANdisco plc (LSE: WAND)
Three-month share price change: -9%
WANdisco is a provider of data management infrastructure.
The company has had a solid 12 months. Its data management infrastructure has attracted the attention of notable clients.
In particular, the company extended its relationship with Microsoft, as its “LiveData Platform” solution became the first integrated service into the Azure platform.
In addition, they have a popular data migrator offering which helps customers migrate data from its premises to Amazon Web Services or Google Cloud.
For 2020, revenues fell by around one third on the previous year. Of course, the pandemic is partly to blame for this.
The outlook for WANdisco is promising. There is currently a huge market for data management and integration services. More companies are looking to efficiently secure its data and have accountability over it, as a way of protecting themselves from cyber-attacks and financial crime.
We reiterate our BUY recommendation on WANdisco. You can find the original recommendation here.
Volatility spells opportunity
Market downturns provide chances to buy into sound, growing and exciting companies at cheap prices.
As we have explained over the last few weeks, what has happened since early February is that investors’ appetite for risk has diminished somewhat.
The slippage in appetite for risk is the principal reason for volatility in stock markets in the UK, the United States and elsewhere.
What has not changed are the themes and trends which underpin the growth of the companies in the Frontier Tech Investor portfolio.
Standby for our next recommendation on 10 June.
The Frontier Tech Investor “Top Three”
Sometimes it’s hard to decide which stocks to invest in from our buy list.
Below is our Frontier Tech Investor “Top Three” section, which shows three stocks in open BUY positions. If you’re trying to figure out what to invest in next, these are three that we think are a great place to start.
This doesn’t mean our other stocks are no good: this is just a tool to help you spot the next Frontier Tech Investor stock that could be worthy of your consideration.
Kanabo Group (LSE:KNB) – one of the world’s most controversial investment ideas is around the legalisation of medicinal and recreational cannabis. It’s sweeping across Canada and now the United States. Both countries are leaders on the way to legalisation. In Australia a similar path is being followed. And now the UK is on the same track. Kanabo is one of the newest and best plays in this huge investment opportunity. You can find our recommendation here.
IQE (LSE:IQE) – our most recent recommendation, IQE, is a key part of the supply chain getting semiconductors into the world. You can find our latest discussion on IQE here, and a link to the original report here. With a gigantic increase in the demand for semiconductors, the world is facing a “chipageddon”. This is a situation where there simply aren’t enough semiconductors to supply the world’s biggest, most demanding companies. IQE is one of the few UK-listed stocks that are a play on this theme.
Velocys (LSE: VLS) – there’s no doubt that governments will continue to push the global “green agenda”. This means that they will do what they can to support industry in ways that will help enable carbon neutral economies. Velocys is a big part of this – developing sustainable fuels for transport and logistics (in particular aviation) with pioneering technology. If you’re looking for a great “green energy” play, Velocys is a very good place to start. You can find the original recommendation here.
Sam Volkering
Editor, Frontier Tech Investor
Elliott Playle
Junior Analyst, Frontier Tech Investor
