1. CAP-XX (CPX)
The first of our top 3 AIM stocks for Q2 is the rather bizarrely named CAP-XX. It’s an interesting little
company which specialises in the design and manufacture of ‘supercapacitors’.
If, like me, you’re not an expert in the field of electronic components, you probably haven’t even heard of
‘supercapacitors’ before. However, whilst you might not realise it, they’ve already become an essential
component for many everyday electrical devices and demand looks set to explode in the coming years.
With a staggering range of huge global markets at its fingertips, CAP-XX plans to become the go to brand
for supercapacitors in the same way that Intel has done for computer chips. There’s every reason to believe
they can do it too…
Cutting edge technology
Capacitors themselves are not a new invention. In fact, they’re one of the most common electrical
components around and are used to store small amounts of electricity within a circuit.
Supercapacitors can hold a lot more energy; a bit like a rechargeable battery but with the added benefits
that they charge much quicker and last longer. The only drawback being that they tend to be far larger than
conventional batteries – up to ten times bigger for a given charge.
CAP-XX’s team of scientists have spent the last few years experimenting with new materials and
manufacturing techniques, trying to create a new generation of supercapacitors.
The results have been impressive, giving CAP-XX a distinct competitive edge. It’s now able to produce
supercapacitors which are smaller, more powerful and cheaper than other manufacturers.
Multi-million pound markets
Because of their ability to extend battery life and speed up recharging times, supercapacitors are becoming
increasingly popular with the manufacturers of all kinds of electronic devices. This gives CAP-XX a diverse
selection of markets to target and its product range is split up into three core areas:
Commercial – Uses here include automotive solutions (such as start-stop technology and powering electric
cars), location trackers, medical devices, back up electricity supplies and point of sale terminals.
Consumer – eBooks, toys, digital music players, notebook PCs and digital cameras.
Wireless – Smartphones, tablets, PDAs, smart credit cards and routers.
These are all individually multi-million pound markets, so collectively they offer CAPP-XX a staggering
potential customer base. Also, as more and more electronic devices continue to become connected
wirelessly (via the ever expanding ‘Internet of Things’) the demand for supercapacitors is likely to accelerate
World’s thinnest supercapacitor
As electronics manufacturers strive to create smaller, lighter and more portable devices, the spaceconstraints
on components are becoming tighter and tighter. This is where CAPP-XX really comes into its
In April last year CAP-XX shares surged higher when it released its new ‘Thinline’ range. These are the
lightest and thinnest (0.6 mm) supercapacitors on the market, making them perfect for electronic devices
such as phones, tablets and laptops where space is at a premium. Of course, the extra battery life is a big
They are particularly exciting because they can be used in ultra-thin electronic devices. These include
wearable technology, such as fitness monitors, smart watches and drug delivery systems, which are all
rapidly growing markets.
Several key deals already in the bag
CAP-XX has also been working hard to produce high-performance supercapacitors at the other end of the
size-spectrum too, making larger units to help power cars and trucks. Last year the company announced a
mutually exclusive Memorandum of Understanding with a leading (undisclosed) North American car parts
company. Early feedback was very positive and the deal was extended in February.
In March there was more good news when CAP-XX revealed a new three-year licence agreement with US
electronics manufacturer AVX. This is expected to significantly boost revenue, with an initial upfront
payment of at least £1.3 million for the first 12 months.
Most recently, earlier this month, shares in CAP-XX shot up more than 15% in one day when it struck a deal
with Japanese firm Murata to licence its supercapictors for use in a range of lithium ion batteries.
Profit margins more than doubled
CAP-XX places a big emphasis on R&D. Last year it spent £1.25 million on research, which amounted to
60% of all revenues. However, keeping its technology ahead of the competition is essential for its success.
It also recognises the importance of protecting its intellectual property and does so with an ever expanding
portfolio of 45 granted patents.
By researching new manufacturing techniques and materials, CAP-XX has been able to significantly reduce
operating costs. This in turn has helped to boost profit margins and during 2015 gross margins more than
doubled to 30.6% on sales of £2.11 million.
The shares could really soar
As the wider adoption of CAP-XX’s technology continues, we expect the share price to rise significantly over
the next couple of years.
Once it starts securing some big orders for its Thinline and automotive supercapacitors the upwards
momentum should build considerably. There’s also always the possibility of new big-name partnerships or
licensing agreements, which could really send the shares soaring. We think they should easily recover to last
August’s high of 9p, which would see them more than double in value.
2. Redcentric (RCN)
Our second Q2 stock pick from AIM is IT services firm Redcentric. It’s a fast growing company with a strong
foothold in the revolutionary world of cloud computing.
Redcentric shares have been consolidating steadily since last summer, but we think it won’t be long before
they breakout significantly higher and the long-term uptrend resumes – which could make this a good time
to snap some up.
The company is just three years old, having been formed after a demerger from IT infrastructure specialist
Redstone. It was spun-off to focus on higher margin cloud-based services, which have seen a massive spike
in demand recently.
With a bulging order book, strong recurring revenues and further acquisitions on the cards, it looks like
2016 is shaping up to be another record year for Redcentric…
An easier way to manage IT
If you’ve ever worked in an office, or anywhere with a large network of computers, you may have seen just
how complicated IT systems can become.
The traditional type of IT network has basically remained unchanged for the last 25 years or so. A chaotic
amount of cabling is often required to join all the computers and then feed back to a power hungry central
Maintaining this kind of system is labour intensive and comes with all kinds of potential problems. It needs
to be kept running 24 hours a day and any down-time can become very costly.
However, in recent years the rise of cloud-based networking has started to change all that. Like other cloudbased
IT services, all the data storage and software is hosted on a remote server (run by a provider like
Redcentric). Basically all that’s needed to access the system is an internet connection, eliminating the cost
and complexity associated with running local servers.
Demand is rising quickly
More and more companies are waking up to the huge benefits cloud-based networking can offer.
As well as being far more cost effective, data-security is tighter and it’s much easier to scale things up as a
company grows. There’s no need for extra hardware or upgrades to buy. The whole network also becomes
readily accessible anywhere via the internet, including on mobile devices such as smartphones.
So far, Redcentric has focused on winning contracts from medium sized businesses, where demand is
particularly high. These companies are large enough to require extra help with their IT, but not big enough
to spend millions of pounds installing the latest server systems.
This mid-market focus really has paid off. It’s an area that’s still relatively fragmented and there’s plenty of
business to be won. Redcentric now has around 2,000 customers from a broad range of sectors, including
healthcare, construction, retail and financial services.
Whilst many of its competitors simply resell other people’s data services (often hosted overseas) Redcentric
stands out from the crowd because all of its managed services are hosted across its four UK data centres.
Reassuringly, this gives them complete control over the data and improving security.
Strong recurring revenues
About 80% of Redcentric’s customers are on rolling contracts, which usually last for at least three years.
This provides a solid base of recurring revenues to underpin future growth, with great earnings visibility.
Contract renewal rates are high too.
Once a client gets their network set up with Redcentric, they’re unlikely to want the hassle of moving to
another service provider.
The company has recently announced the award of five new contracts worth over £1 million, including
several from Government organisations, which are becoming increasingly important for Redcentric. Public
sector business now accounts for around 17% of all contracts and is growing strongly.
Acquisitive and organic growth
As I’ve already said, Redcentric’s key market is highly fragmented and ripe for consolidation. There are
plenty of smaller rivals that lack the cash to seriously compete with its technology and Redcentric plans to
snap some of these up…
It’s already begun to make some key acquisitions, including Calyx last April. This significantly boosted the
range of services Redcentric can offer, as well as bringing a whole new raft of customers.
Whilst this was loss making at the time of purchase, it’s expected to hit profitably sometime this year which
should give earnings a healthy boost.
In January there was another important purchase when Redcentric acquired City Lifeline for £4.8 million.
City Lifelife owns and operates one of the best connected data centres in London and has been trading for
over 20 years.
This was an important step for the group, greatly improving its capacity for expansion as well as being
immediately earnings enhancing.
A recently arranged £50 million bank facility will help the group to continue making suitable acquisitions as
and when good opportunities arise. The board plans to supplement this with an equal amount of organic
growth, which should be achievable through new contract wins and cross-selling to the existing client base.
On track for another record year
The latest set of interim figures was impressive, with double-digit growth across the board.
Group revenue jumped 15% to £54 million, with roughly a 50:50 split between acquisitive and organic
growth. This helped pre-tax profit to climb 22% to £5 million and EPS increase 18% to 4.7p.
This means Redcentric is firmly on track to meet full-year forecasts of £110 million in revenue and more
than double last year’s pre-tax profit
A breakout higher looks imminent
Since Redcentric floated on AIM back in 2013, the shares have performed very well and we think they’ve
still got much further to go. The strong upwards momentum has paused slightly over the last six months or
so, with the shares consolidating in a fairly tight range.
We think it shouldn’t be too long before they break out decisively to the upside and there are plenty of
potential catalysts which could trigger this. The publication of full-year figures in June, Calyx reaching
profitability or further earnings enhancing acquisitions could all send the shares higher.
Once the dominant long-term uptrend resumes, we could see them easily hitting broker finnCap’s target of
245p, suggesting around 30% potential upside.
3. Somero Enterprises (SOM)
Our third and final stock pick for Q2 is Somero Enterprises, a company which has developed a revolutionary
way to lay concrete floors much quicker and flatter than ever before.
Somero designs, makes and sells laser-guided flooring machines which save customers both time and
money. It’s listed here in the UK on AIM, but headquartered in the States where most of its revenue is
Both sales and profits are growing quickly as Somero’s patented technology is being snapped up by floor
laying companies across the world. Its machines can already be found in 93 different countries but there’s
still massive growth potential, particularly in Asia – where Somero has only just begun to dip its toe in the
Last month full-year figures for 2015 revealed forecast beating sales and the current year has got off to a
solid start too. At the current price, we think the shares offer great value and should rise considerably over
the next few years…
Disruptive new technology
These days, almost every new building in the developed world will have a concrete floor and obviously this
needs to be flat. Traditionally this is achieved by raking the wet concrete and then manually smoothing it
with planks of wood. It can be a very labour intensive, time consuming process and with wage costs rising
quickly Somero’s technology has become very attractive indeed.
It’s developed a range of different sized machines which vary in price from around £20,000 to £250,000.
These can flatten the concrete between 4 and 5 times quicker than the manual method, often requiring just
one person to operate the equipment. What’s more, the laser-guided machines can guarantee the new
concrete flooring is flat to within a fraction of a millimetre.
First mover advantage
Somero was the first company to develop this kind of machine, which has helped it to become the dominant
In fact, CEO Jack Cooney estimates that Somero has an incredible 99% of the global market share. He says
that even though a few small companies have tried to copy its technology by reverse engineering, they’ve
really struggled to compete because of the high barriers to entry.
Somero has developed very good relationships with many of its customers by offering a whole range of
after-sale services, which smaller rivals simply can’t do. It provides education, training and ongoing
technical support that customers really appreciate, helping to keep them loyal.
It’s built up a well staffed global support centre with a hotline covering 65 languages. This comes with the
promise that a certified engineer will be on the other end within ten minutes – any time day or night. That’s
got to be reassuring if you need help or advice when you’re working with concrete that sets in a few hours!
An ongoing commitment to product development also helps to keep Somero well ahead of the competition;
its customers know they’re always getting the latest flooring technology available.
Top-notch client list
It’s very important that concrete floors are flat in large commercial building projects, which is where many
of Somero’s machines end up being used. That’s because in these buildings the floors are often directly
covered with tiles or wood, unlike residential properties where a built up floor is normally used.
Having a perfectly flat floor is particularly crucial in warehouses and superstores, where products are often
stored on racks which can be anything up to 60 feet high. These racks need to be horizontal to ensure the
goods are held securely and can be removed safely at height.
Somero has amassed a long list of large, multinational customers which include several of the world’s
biggest names in concrete flooring. Its machines have been used on buildings for Amazon, Walmart, Home
Depot, B&Q, Sainsbury’s, Costco and DHL to name but a few…
Business is booming in the US
As I’ve already said, Somero’s headquarters are in the US – Fort Myers, Florida to be exact. This is because
at the moment around 60% of annual turnover comes from North America, so it’s a key market.
You may be wondering (as I was) why they didn’t list in the US. Well, according to Jack Cooney, the
directors felt that AIM suited their needs much better than NASDAQ and they prefer the quality of investors
it attracts – which all seems perfectly reasonable to me.
Given the uncertainty surround the US economy at the moment you may also be wondering whether having
so much exposure there poses a risk. Obviously the construction industry is cyclical, but current statistics
are still looking very bullish for the US commercial building sector, thanks to pent-up demand left over from
the last recession.
Huge growth potential in China
Although Somero plans to continue rolling out its products right across the globe, it’s going to be focussing
heavily on China over the next few years. This represents a huge potential market for its flooring machines,
which could be worth around $1.2 billion in annual sales.