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Valuation: Qualities are underrated Allocate’s P/E rating of 12.2x 2014 earnings is undemanding in our view, and a 30%+ discount to its UK healthcare peer group. In particular, we feel the market is not giving Allocate credit for the strength of its position in the NHS, scope for cross-selling or the progress made in transitioning to a more attractive, recurring revenue model.

Expect robust growth to resume Q3 appears to have started well, with almost as many HealthRoster deals signed in the quarter to date as in the whole of H1. With HealthRoster V10 opening up international opportunities and the NHS renewal cycle set to gather steam, we feel prospects remain robust for the core product. Growth in subscription revenues, thus far driven mainly by Clinical Staff Planning (previously Zircadian), will be complemented by HealthRoster Cloud, for which Allocate has an £8m sales pipeline and took £1.4m in bookings in H1, but recognised less than £0.1m revenue over the period. Our sales estimates are unchanged and still look realistic despite heavy back-end weighting. This implies a return to robust underlying growth, which should continue into 2014. EPS is nudged back by 6% and 3% for 2013 and 2014 on higher costs.

Integrated vision starting to take shape Allocate’s longer-term growth opportunity has become clearer with management’s articulation of its strategy to provide an integrated suite of non-clinical healthcare productivity solutions. Execution is not a given, but with healthcare providers being people-based organisations, workforce optimisation looks a good starting point from which to build a more comprehensive offering. The vision appears to be gaining the ear of some strategic decision makers within healthcare providers.

Shift towards subscription revenues Sales were flat year-on-year at £16.1m and down mid-single digits organically, while higher costs resulted in adjusted EBIT falling from £1.4m to £0.4m. The weak start to the year played a part in this, but subscription revenue growth of 18% to £2.9m and a £3.5m increase in deferred income suggest that underlying growth is continuing, and that a migration to a more subscription-weighted model is the main factor at play.

While sales growth stalled in H1, we feel that the transition to a more subscription weighted model was the main factor behind this. With the launch of HealthRoster V10 and Cloud providing fresh sales impetus, the NHS renewal cycle gathering steam and the recurring revenue base growing, we expect growth to resume from here. We believe the current rating captures neither the strength of Allocate’s position in the NHS, nor the progress made in moving to a more attractive recurring revenue model.

Valuation: Growing market share to drive margins Acal currently trades towards the bottom end of its peer group (FY13e P/E range 9.4x-16.6x) and has a stronger dividend yield than its closest peers. Aside from a general improvement in economic conditions (recent PMI data points to improving confidence that could lead to increasing demand), the company has scope to drive upside through its continued focus on margin expansion and growing market share.

Reflecting UK parts disposal Acal sold the UK Parts business on 7 January for £2m. We have reflected this in our estimates: we reduce Supply chain revenues by £6m in FY13 and £23m in FY14. Until more detail is available, we conservatively assume the business generated similar GMs to the rest of the group and was break even at the operating level, resulting in no change to our normalised operating profit and EPS estimates. Operating margins are much improved, with Supply Chain margins now comparable to the Electronics business (which generated 5.2% in H113), rising from 2.6% in H113 to our forecast of 5.4% by H214. We forecast that net cash will rise to £1.9m by end

Positive order trend continues Acal continued to see improving order intake, with orders up 9% y-o-y for the four months to 31 January, and a book-to-bill for the four months of 1.09x, versus 0.93x a year ago. The improving market environment is helping – eurozone manufacturing PMI is at an 11-month high and UK PMI is above 50 for the second month. Acal continues to expect sequential revenue growth for the Electronics business in H213 (our forecast +4.5% h-o-h) and H2 group gross margin at a similar level to H113 (our forecast 31.0% vs H113 31.2%). As a result of last year’s restructuring, operating costs were down 9% y-o-y and the company expects FY13 results to meet management expectations. The new marketing web platform has just been launched in the UK, and as planned, will roll out in other countries in the coming months. Management continues to focus on winning market share, both organically and via acquisition.

Acal’s order intake has improved through the course of H2 to date, supporting our forecast for sequential revenue growth in the Electronics business in H2 and into FY14. We have revised our estimates to reflect the recent disposal of the UK Parts business. This has no significant impact on earnings in FY13, but improves the company’s operating margins and net cash position. Management continues to focus on gaining market share, a key driver of upside to the share price.

Valuation: NPV per share of 47.7p Our model and valuation for the enlarged company is 47.7p a share (previously 57.5p), reflecting the dilutive short-term impact of the merger. The valuation assumes success of the ambitious expansion strategy for the Fabergé business, with an expectation of continued growth in the luxury goods investment sector. There is a longer-term strategy to apply for listing on the LSE main board.

Gemfields’ vision Gemfields has an enviable status in restructuring and expanding a major ethically sourced premium emerald mining operation and creating a benchmark in grading and marketing rough stones. This will soon be complemented by a ruby operation. Management is confident that Fabergé will help accelerate demand for the company’s finest gems by providing a directly controlled international showcase.

Background and strategy The iconic Fabergé brand was originally established in Russia in 1842. In 2007, the Unilever-owned portfolio of brands was acquired by Pallinghurst, which subsequently established the brand’s new business, licences and trademarks. Fabergé currently has six outlets covering Geneva, London, Hong Kong, Ukraine, and New York, and the strategy is to open 20 new stores over the next 10 years, with a long-term target of 71 stores by 2033.

Fabergé acquisition The all-share deal gave Gemfields a 100% interest in Fabergé through the issue of up to 214m Gemfields shares. This values the purchase at c £58m (US$91) at the current share price (27p). Fabergé is currently loss-making, but management targets profitability through expansion and cost efficiencies. We estimate that the acquisition could become cash accretive to Gemfields within four years. The Pallinghurst Group now has a direct plus indirect interest in Gemfields of 49.3% following the unbundling of the Fabergé equity holdings in the Rox consortium.

Following the 21 November 2012 announcement and subsequent EGM, Gemfields completed the acquisition of Fabergé on 28 January 2013. Management states that by extending control over this high-end luxury goods platform with a global brand and exceptional heritage, Gemfields can position itself as a globally recognised coloured gemstone champion. The market will need to absorb the dilutive effect of a substantial increase in issued capital, which downgrades short-term earnings estimates, and assess the ambitious strategy to rapidly expand the Fabergé business.

Business description Avon Rubber designs, develops and manufactures products in the respiratory protection, defence (70% of 2012 sales) and dairy (30%) sectors. Its major contracts are with national security and safety organisations such as the DoD.

Valuation: Full-year forecasts secure, upside potential With the strong start to Q1, tempered to some extent by external market factors, and with a forecast H2 bias as investments begin to deliver profits, we are maintaining our full-year forecasts. With the shares re-rated to 13.8x CY13 EPS, towards the upper end of sector peers, we view the delivery of incremental, profitable organic growth as the key to sustaining the progress made over the past three months. With no shortage of opportunities, good visibility and a strong balance sheet to support investment, we see no reason why that should not be the case.

Future products and markets provide incremental growth New product introductions and expanded markets continue to provide further organic revenue opportunities. In P&D, the group has delivered the first product introduction from Project Fusion on schedule, the PC50 respirator targeted at correctional facility personnel, while the next wave of products should begin to deliver incremental growth from FY14 onwards. The Dairy business continues to build on the Milkrite success and further in-year product introductions are anticipated to offset any consumable volatility. Likewise, international markets, either the £14.7m export order in P&D, or month-on-month progress in the Chinese Dairy operations, are central to the group strategy, all of which provide further structural growth opportunities.

IMS highlights robust delivery Avon has delivered a positive start in Q1, with Protection and Defence (P&D) benefiting from good order visibility and a better start to the year in non-DoD markets. With US budget uncertainties continuing, we feel this places Avon among a preferred list of companies with orders already in hand, such as the next tranche of 100,000 filters for Q2 delivery. Dairy has continued to benefit from progress in the Milkrite own-brand products and this is offsetting some consumable volatility caused by the impact of flooding in Europe and drought in the US, both of which are increasing farmer’s costs elsewhere.

Avon Rubber’s IMS has shown that the good visibility provided by the strong order book entering the year has continued, with core mask systems largely underpinned for the year and another 100,000 filter order for Q2 achieved despite the uncertainty in US defence budgets. Combining this with further product development, including the first product launch from Project Fusion and as highlighted by the continued success of the Milkrite ImpulseAir liners, we see further growth prospects as these product launches turn into incremental sales. With new markets also delivering ahead of last year, we continue to view Avon as a long-term structural growth play.

Valuation: Unjustified discount The larger recruitment stocks have shown some share price recovery over the last six months, but are still well below their peak of last spring. Domestic and international economic prospects have continued to be mixed at best. Sector sentiment remains subdued. On our unchanged forecasts, Matchtech sits around the top of the pack on EV/NFI but at a c 10% discount to the average EV/EBITDA on current and prospective years. Its balance sheet continues to improve (we forecast gearing falling to 42% by the July year end) and the shares also carry a (1.8x covered) 5.8% yield, around a 63% premium to the sector average.