Today I want to look at three AIM-listed companies that I think have great potential as long-term investments.

NWF shares: a 25-year track record

Small-cap NWF (LSE: NWF) is a distribution business that supplies fuel oils, animal feed, and stores, and delivers food for supermarkets. NWF flies below the radar for many investors, but has delivered reliable profits and growth for more than 20 years.

The company first floated on the AIM market in 1995 and has expanded steadily. Since 2017, annual profits have risen from £5.5m to £8.4m.

NWF has also increased its dividend every year for the last 25 years. That’s a fairly rare achievement, even among top FTSE 100 firms.

I can see a few concerns. Demand for heating oil and road fuels could one day start to fall as fuel users adopt electric power. Another risk is that many of the group’s operations run on fairly low margins — strong management is essential.

However, I think these risks are reflected in the share price. The business currently trades on a price-to-earnings (P/E) ratio of 12, with a well-covered 3.4% dividend yield. I view the shares as a long-term buy at this level.

A quality, family-owned business

My next pick is timber merchant James Latham (LSE: LTHM). This business has a market cap of £255m and is one of the largest distributors of timber and panels in the UK. The business was founded by the Latham family 260 years ago, and remains under family management today.

Business boomed during the pandemic construction boom, but profits are expected to drop back somewhat this year, mainly due to inflation.

So far, the company says that demand has remained stable, except for builders merchants, where demand has slowed. There’s obviously a risk the UK could suffer a worse recession than expected, but Latham’s long history and £36m cash balance give me confidence the company will ride out any storm.

The shares are currently rated on a forecast P/E of nine, with a 2.6% yield. Given the group’s long record of growth, I think this could be a buying opportunity.

A specialist investor

B.P. Marsh & Partners (LSE: BPM) is not a household name, but it’s a well-known expert in its field. The company, which was founded by chairman and 40% shareholder Brian Marsh, invests in small insurance businesses.

It’s a specialist operation, for sure, and there’s not much I can do to evaluate the company’s investment decisions. However, I think B.P. Marsh’s track record speaks for itself.

Over the last 10 years, the group’s net asset value per share has risen from 189p to 445p. That’s equivalent to an average annual growth rate of 9%. I think that’s a solid achievement for a period that included the pandemic.

This business is led by an expert team, with a long record of success in a specialist niche. At a share price of 325p, the shares are trading at a big discount to their book value. I think this AIM share could deliver solid long-term returns.

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It’s James Latham (LSE: LTHM) of which I speak, and the timber and panel products distributor has just announced a 9.4% rise in revenue. That did translate to a less impressive rise in pre-tax profits, from £15.2m a year ago to £15.3m as gross margins have shrunk a little.

Still, in a year in which there’s been pressure on the construction industry, I think that’s a pretty decent result. And after adjustments, earnings per share perked up 6.4% to 61.1p, and the full-year dividend has been lifted by 7.8% to 17.9p per share.

Dividend lesson

There’s a dividend lesson here. Cover by earnings has dropped, but only from an extremely healthy 3.9 times in 2018 to a still very healthy 3.5 times this year. When a company has strong dividend cover, it can even-out its payments over the long term for a stable income.

Admittedly, the yield is only around 2%, but that’s still better than you’d get from a Cash ISA, and in any case, I see it as a bonus from what is effectively a long-term small-cap growth prospect.

The share price went off the boil in late 2017, but the subsequent 12-month drop has now largely recovered, and we’re still looking at shares on a trailing P/E of 14 after the morning’s 3.5% rise.

The company enjoys a net asset position too, so there are no debt worries as there are with so many bigger companies on similar fundamental valuations.

The new year has started well, with sales per working day 4.5 % higher for April and May than last year, and margins are starting to improve.

Biotech

A couple of years ago, I suggested I’d sell Purplebricks shares and buy Allergy Therapeutics (LSE: AGY), a pharmaceutical group specialising in allergy vaccines.

I kind of got it half right, as since then Purplebricks shares have fallen by 73% while Allergy Therapeutics’ have lost 60%. So what’s gone wrong?

There have been a number of issues, but a trading update plus the settlement of a litigation dispute give me some cause for optimism.

Looking at the latter first, on Thursday the company told us that “it has received a $7.6m settlement from Inflamax Research Inc.  in relation to legal proceedings about the previously disclosed inconclusive Phase II Grass MATA MPL trial which took place in the USA in 2015-16.” It added that “Inflamax has also agreed to pay a substantial part of the Group’s legal costs.”

The case was brought by Allergy Therapeutics “against Inflamax in March 2017 for breach of contract and misrepresentation [in relation to that study].”

Trading

A simultaneous trading update is headlined “2019 full-year earnings expected to be ahead of market expectations,” and says that net sales should be in line with expectations and should show good growth “across most of Europe but especially in Spain.”

R&D costs are lower than anticipated, and the legal settlement gives the firm a cash boost, but is it a good buy now? From a low in March this year, Allergy Therapeutics shares are up 69%, and to me that suggests this is a company worth watching. Again.

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The small-cap announced this morning that revenue for the half that ended June 30 rose 14% to £10m from £8.8m while pre-tax profit jumped to £1m from £557,000. The bulk of this growth came from Integrated Computing & Office Networking Ltd, acquired in October 2016. It contributed £419,000 in revenue to the results for the first half. 

Off the back of these impressive figures, management has decided to declare a dividend of 0.2p per share, up a third from last year’s payout giving a dividend yield of 0.4%. 

And it looks as if Elecosoft is on track to continue its impressive performance. In a statement alongside the results, Executive Chairman, John Ketteley said: “Elecosoft delivered a positive performance in the first six months of 2017, with growth in all our geographic regions…We have also made an excellent start to the second half of the year.”

Pushing ahead

Small-cap tech companies like Elecosoft are risky investments, as competition is fierce and plenty of cash is required to grab market share. However, it seems as if this firm has cracked the code. Cash generated from operations during the first half was £2.3m, more than enough to cover capital spending and meet debt obligations. At the end of the period, cash on the balance sheet amounted to £3.5m, compared to debts of around £2.8m. 

As well as a strong balance sheet, this small-cap tech company is projected to grow earnings per share by 29% for 2017 and then 27% for 2018, according to City analysts. These forecasts look impressive and imply that the shares are trading at an attractive 19.7 times forward earnings, a relatively low valuation considering the company’s cash balance and growth potential. 

Under the radar 

James Latham (LSE: LTHM) is another small-cap that flies under the radar of most investors even though shares in the company have gained 223% over the past five years excluding dividends.

Growth at the timber and panel products distributor is expected to slow over the next two years, with analysts predicting little to no earnings growth. Nonetheless, I believe that this slowdown is temporary. James Latham’s management is working hard to turn the business around by cutting costs and improving margins.

Over the past five years, pre-tax profit has almost doubled as management has successfully expanded the business, and I believe that the exec team can continue to produce returns for investors after this period of stagnation. 

The one downside is that the shares are slightly expensive, trading at a forward P/E of 16.7 even with no growth expected during the next two years. Still, the dividend yield of 1.8% looks attractive and is covered more than twice by earnings per share, leaving plenty of room for payout growth. 

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This FTSE SmallCap-listed £109m company isn’t a needle-in-a-haystack breakthrough biotech or disruptive digital star. It’s a thoroughly unglamorous mechanical and refractory engineering company that’s been around since 1883.

Long-term mindset

I’ve put Goodwin into a long-term context for you, because on a short-term view, with the shares having been above 4,000p just a few years ago, you might be inclined to think that the company is a distinctly unpromising prospect to make you brilliantly rich.

Having made the point that, despite the recent slump in the shares, Goodwin has delivered a tremendous return for long-term investors, let me also explain why I’m confident it will go on delivering long-term returns.

The company does significant business with the oil, gas and mining industries where capital expenditure has massively reduced over the past few years. Despite the inevitable pressure on Goodwin’s top line and gross margin, the business has remained profitable. And, in contrast to many other companies involved in, or exposed to oil, gas and mining, its balance sheet has also remained healthy. Debt has increased but net gearing is still a very conservative 31.4%.

I put its resilience down to the long-term mindset of the successive generations of the family who’ve carefully stewarded the business to negotiate the bad times as well as thrive in the good. This is the sort of company I’d happily build up a holding in by regularly investing through rain and shine. Times of rain — as now — I’d view as an ideal starting point.

Another in the same mold

AIM-listed timber firm James Latham (LSE: LTHM) has the same attractive qualities as Goodwin. It was founded in 1757, continues to be stewarded by descendents of the founding family and has delivered excellent long-term returns for shareholders.

Adjusting for a four-for-one share split in 2005, EPS has increased from 7.425p in 1999 to 56p in its latest financial year. The dividend has advanced from 2.75p to 15.35p over the same period. And the share price has climbed from 238.5p at the turn of this century to 897.5p today, valuing the business at £176m.

At its AGM today, Latham said April-to-July revenue was 6% ahead of the same period last year and that customer activity remains positive but the trading environment competitive. The company has invested in new sites for growth and efficiency but said cash reserves remain strong (there was net cash of £16.3m on the balance sheet at the 31 March year end).

One way Latham currently differs from Goodwin is that its share price isn’t depressed. In fact, its shares have made new all-time highs this year. Nevertheless, I continue to see this as a business that could deliver great rewards for long-term investors.

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Yet after this greatly successful run I reckon now may be time for shareholders to begin taking some profit. The main issue for me is that as management has sought out growth, it has been forced to diversify quite far away from its core photo kiosk business into the likes of operating self-serve launderettes across Europe.

This has kept sales growth marginally positive, 3.3% in constant currency terms over the past year, even as the core photo business has turned into a slowly declining cash cow. But, it also means that investors are being asked to trust management to easily switch focus to rapidly expanding the estate of launderettes and the world of investing is filled with examples of companies struggling to successfully diversify into dramatically different industries.

That said, thus far the expansion into launderettes is going well. The group added 1,000 units in the past year and is a little over half way towards its 2020 goal of having 6,000 in operation across the world. And with a net cash position of £39.2m the company does have a buffer to fall back on.

But with its shares pricey at 18.5 times forward earnings in the midst of a dramatic shift in strategy, I’d be wary if I were a shareholder. Given management’s track record of success I wouldn’t sell my entire holding but locking in some of my gains would be too appealing to pass up at this point.

A sturdier business

Another surprising winner of the past few years is lumber merchant James Latham (LSE: LTHM). Shares of the firm are up nearly 200% over the past five years as the company has invested in growth and taken advantage of rising demand for its goods from homebuilders.

In the year to March, revenue rose 6.9% to £198.8m and operating profits rose by £1m to £13.2m. Like Photo-Me, the company’s management team also takes a conservative approach to its balance sheet. It had a net cash position of £17.2m at year-end and maintained dividend cover at 3.6 times.

However, before would-be investors take the plunge, there are a few things to remember about the timber business. For one, it’s a commodity, which means relatively low margins for suppliers, a shallow moat to entry and few competitive advantages. Of course, demand for timber is also tightly correlated to the health of the domestic building trade so sales and earnings can be highly cyclical.

James Latham is a well-run business with a long history of success. But with a low 1.8% dividend yield, its shares pricey for a commodity supplier at 14.8 times earnings, and the domestic housing market looking to be at or close to peaking, I’d wait for a downturn before beginning a position.

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This £167m company may not have shown up on your radar before, but today’s final results suggest to me that the stock continues to offer potential value for new buyers. Sales rose by 6.9% to £198.8m last year, while operating profit was up 7.6% to £14.2m. The total dividend was increased by 7.3% to 15.7p.

Latham’s accounts are refreshingly simple. Unlike those of so many companies, they aren’t packed with adjusted items or ‘what-if’ pro forma figures. What you see is what you get, and in this case I think it’s very attractive.

Surprisingly profitable

Operating margins were stable at 7.1% last year, and the group generated a return on capital employed of 15.1%. Both figures seem good to me, given the commoditised nature of most of the firm’s products.

Although £6m was invested in new sites, free cash flow of £3.4m was still enough to cover the payment of £2.9m in dividends. Net cash rose slightly despite the heavy spending, up from £15.8m to £16.3m.

In my opinion, the main risk facing investors is that a UK recession could cause a slump in demand for timber. This share price would probably take a big hit.

There’s no way to know how likely a recession is, but it’s worth remembering that Latham has been in the timber trade since 1757. I’d argue that a future downturn would be a buying opportunity, not a reason to sell.

In the meantime, these shares trade on a P/E of 15, with a yield of 1.8%. I’d be happy to start building a long-term position at this level, with a view to averaging down during the next market crash.

The perfect business?

Travel and insurance group Saga (LSE: SAGA) may seem a dull business. But the group’s focus on over-50s means that its customer base is expanding steadily as the UK’s population ages. These customers are also among the most affluent in the UK, with high levels of home ownership and disposable income.

In a trading statement today, the group confirmed that trading so far this year has been in line with expectations. Analysts expect the group’s earnings per share to rise by 4.3% to 14.8p this year. This puts the stock on a forecast P/E of 13.5, with a prospective dividend yield of 4.7%.

This level of growth may seem pretty average, but I believe Saga’s focus on developing a closer relationship with its customers should deliver above-average profit growth over the medium term.

To get an idea of Saga’s potential, it’s worth considering last year’s results. The group’s operating margin hit a new record of 22.2%. This resulted in improved cash flow and allowed the firm to increase the full-year dividend by 18%, while still reducing debt.

Annual dividend growth is expected to remain around 10% over the next couple of years, offering shareholders the chance to lock in an attractive yield. In my view, this stock is probably undervalued at current levels. Saga could be a stock to buy and tuck away for the next 10 years.

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Improving performance

The AGM statement released by niche specialist services provider Premier Technical Services Group (LSE: PTSG) shows that it continues to make progress with its current strategy. It has recorded continuing sales growth and strong levels of orders since the start of the year. They are in line with expectations, while working capital utilisation and profit levels are likewise as per previous guidance. Furthermore, contract wins have been secured across all disciplines, with the company’s contract renewal rate continuing to be high.

The acquisition of Nimbus Lightning Protection in January could act as a positive catalyst on the company’s future performance. It has been successfully integrated into the company, with it contributing sales and profit to the business. More acquisitions could be ahead as the company seeks to achieve sector dominance, although its organic growth rate remains impressive.

Looking ahead, Premier Technical Services is expected to record a rise in its bottom line of 7% in the current year. Given that its shares trade on a price-to-earnings (P/E) ratio of 15.4, it appears to offer fair value for money at the present time. Its growth rate could improve in future if more acquisitions are made, while its dividend is covered 5.1 times by profit. This suggests a higher level of shareholder payout could be achievable in order to boost the company’s yield of 1.4%. As such, now could be the right time to buy it for the long term.

Strong track record

Also offering upbeat total return potential is timber and panel products distributor James Latham (LSE: LTHM). It has recorded three consecutive years of double-digit earnings growth, with its bottom line rising at an annualised rate of over 23% during the period.

Despite this, it trades on a P/E ratio of just 15.9, which suggests that it could offer upside potential. That’s even after a 32% share price rise during the last year. Investor sentiment appears to be relatively strong, although there could be scope for further improvements should the company continue to deliver on its current strategy and post rising profitability in future.

Even though James Latham currently yields just 1.7%, it could become a more attractive income stock in future. Its dividends are covered 3.8 times by profit, which suggests shareholder payouts could increase at a faster rate than profit over the long run without compromising the financial health of the business. Therefore, against a backdrop of rapidly-rising share prices, James Latham appears to offer a mix of growth, value and income potential for the long term.

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Boxing clever

Packaging giant DS Smith (LSE: SMDS) was one of the Footsie’s largest risers in otherwise-subdued Thursday business, a terrific trading update sending shares 5% higher on the day. The company said that revenues leaped 6% during the 12 months to April 2016, to £4.07bn. This propelled adjusted pre-tax profit 12% higher, to £332m.

The boxbuilder witnessed terrific demand for its products across Europe, it advised, with five acquisitions during the period bolstering its position in 13 countries. And the proposed purchase of Portugal’s corrugated packaging business Gopaca should bolster the top line looking ahead.

The City certainly buys into DS Smith’s strong momentum, and earnings are expected to rise 8% in the year to April 2017. I reckon a consequent P/E rating of 12.5 times — combined with a 3.6% dividend yield — makes the stock a steal at current prices.

Wooden woes

Panel and timber distributor James Latham (LSE: LTHM) also enjoyed a boost in Thursday trade, the stock moving further away from recent seven-month lows as bubbly financials of its own pushed the stock price 3% higher.

The company  saw revenue climb 6.3% in the year to March 2016, it noted, to £185.9m. As a result pre-tax profit shot 27.7% higher from fiscal 2015, to £12.9m.  However, growth slowed during the second half of the year, as falling wood and panel prices weighed. And the company also had to nurse higher overheads due to “extra volumes and longer warehouse hours.”

These problems are expected to continue into the current period, at least according to the number crunchers, and a 12% earnings duck is currently pencilled in. Sure, a P/E rating of 13.4 times may be attractive on paper. But I reckon James Latham’s slowing momentum does not make it a compelling ‘buy’ at the present time.

Fossil fears

Investors in fossil fuel plays like Premier Oil (LSE: PMO) have been encouraged by Brent’s ability to hang around the $50 per barrel marker, despite the huge uncertainty surrounding the outcome of today’s EU referendum.

And yesterday’s EIA stockpile data from the US assuaged enduring fears over the state of the oil market’s long-term supply outlook. Inventories fell by a further 900,000 barrels last week, reducing total stocks to 530.6m barrels.

But this total still stands a whisker away from recent record highs. And while recent supply outages in Nigeria and Canada can be thanked for recent stock reductions, signs that US producers are picking up their tool-belts again casts a shadow on the oil sector’s already-precarious supply/demand imbalance.

Premier Oil is already expected to keep punching losses through to the end of 2017 at least. And I expect bottom-line pain to persist beyond this period, making the producer an unappealing stock pick at present.

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