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Issue 8 October 2014

The dividend share King More than 35 years of income growth

write-ups on five AIM-quoted companies fund manager offering a high yield discount retailer selling cheap the fast-growing AIM star ambitious industry consolidator free to private investors

AIMprospector AIMprospector

Issue 8 October 2014

The dividend share King More than 35 years of income growth

write-ups on five AIM-quoted companies fund manager offering a high yield discount retailer selling cheap the fast-growing AIM star ambitious industry consolidator free to private investors

Welcome to AIMprospector, the online magazine from Blackthorn Focus. Three companies previously featured in AIM Prospector announced results recently. Each reported impressive progress.

The first company to ever be featured in AIM Prospector, Christie Group, announced interims on September 16th. In the March edition, AIM Prospector picked out the company as a great play on the recovering economy. Sure enough, Christie reported significant advances in sales and profits, driven by improved trading conditions in its professional services division (business transaction advisory etc.) While turnover was up ‘just’ 14%, Christie’s operating profit for the first six months swung from a £0.3m loss to a £0.8m gain. Management is clearly very confident of future improvement at Christie. David Rugg, Chief Executive, reported ‘confidence that we will deliver a much improved result for the year as a whole, driven by a resurgent UK M&A market.’ The dividend was increased a whopping 50%. Top Pick from the May edition, Bond International Software, reported their six month figures on September 15th. On the headline numbers, Bond is flying. Here, an 8% increase in revenues, combined with an advance in operating margin from 8% to 9%, led to a 29% uplift in earnings per share. Management stated their confidence in the full year result. AIM blue-chip, healthcare software firm EMIS, confirmed its continuing progress in its six month figures. Recurring revenues were 39% higher, giving management the confidence to push through a 15% dividend increase. Cash balances were depressed by recent acquisitions but cash generated from operations rose by 42%. Management expects growth to continue and is targeting opportunities in Scotland and Northern Ireland. EMIS expects their Community Child and Mental Health (CCMH) operations to win between £6m and £8m of additional recurring revenues. That is significant for a company that reported a net profit of £19.4m in its last full year. There are two upcoming investor events that I want to mention. First is the Blackthorn Focus event, AIM Investor Focus, all set for October 23rd at the offices of stockbroker finnCap. Four AIM quoted companies (Cohort, SCISYS, Sprue Aegis and Trakm8) are already signed up to participate. AIM Investor Focus enjoys a very high number of repeat bookings from past delegates. If you want to be involved, apply to attend now as spaces are limited. The second event is being organised by smallcap superhero investor David Stredder. David has piled his formidable energies and contacts into a gala three day event in Derby beginning on November 6th. The event will comprise company presentations with expert investor panels and entertainment. AIM Prospector is pleased to support David’s event and readers have kindly been offered discounted entry. Register using the code PROSPECTOR-DISCOUNT for this event here.

Get AIM Prospector first by registering at “Enjoy this month’s AIM Prospector and good luck with your AIM endeavours.”David O’Hara, Editor, AIMprospector 2

Contents Spreadex ..........................p3 Shoe Zone.........................p4 James Halstead..................p5 Executive Insight...................p7 Brooks Macdonald............p8 AIM Investor Focus...........p9 Polar Capital...................p10 Victoria............................p11 next month......................p12

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Published by: Blackthorn Focus Limited

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Shoe Zone: on the front foot After coming to the market in May at 160p, footwear retailer Shoe Zone has put its best foot forward, delivering both earnings and share price growth. Shoe Zone is a discount footwear retailer operating online and through more than 500 stores across the UK and Ireland. Originally a family-owned business, Shoe Zone’s modern form can be traced back to 1980 when brothers Michael and Christopher Smith acquired Bensonshoe. A trio of acquisitions in 2007 and 2008 (Stead & Simpson, Shoefayre and Shoe Express) saw Shoe Zone grow further.

no debt and a net cash position In the year to 5th October 2013 on a continuing basis, Shoe Zone made revenues of £193.9m and a pre-tax profit of £9.3m. Both figures were significant advances on the previous year. As at April 5th, the company had no debt and a net cash position of £7.8m. Shoe Zone has thrived by making itself the destination for the cheapest footwear on the high street. According to statistics issued pre-IPO, the average price of a pair sold in Shoe Zone was just £9.77. There’s a great logic to this. Many shoe purchases are deliberately short term such as party or holiday-wear. There is little advantage to paying a premium for children’s shoes either as they have such a short life. 4

The UK recession and the absence of a recovery in living standards have also had a significant beneficial impact on Shoe Zone, pushing more customers into the stores. By delivering value, Shoe Zone has retained these shoppers and grown significantly. This is a theme that is playing out across the UK’s high streets. Unashamedly budget retailers such as Poundland, Wilkinsons and Aldi are thriving while the middle tier providers are being squeezed hard. Shoe Zone represents a great way for AIM investors to access the budget retail theme. Management has committed to rewarding its shareholders by adopting a progressive dividend policy. The consensus forecast in the market is for a generous 12.3p dividend for 2015. At current prices, that would place the shares among the highest yielding on AIM.

lower rents to be a big driver of profit growth Shoe Zone plans to deliver further growth through increased direct factory orders and scaling back price reductions. High street turmoil is presenting great opportunities for the company to optimise its store estate.

Indeed, Shoe Zone expects lower rents to be another big driver of profit growth going forward. Online channels are growing strong (up 27% in 2013) as the company’s free delivery offer proves popular.

average price of a pair sold in Shoe Zone was just £9.77 Shoe Zone encapsulates many of the characteristics most desired by equity investors. The company has no debt. It is successful. The founding family retains a large stake in the business and executive managers are part of the family. The company is well placed to capitalise on trends within its sector and its growth strategy is already delivering results. SHOE ZONE (LON:SHOE) FOR Leading position in niche Multi-channel growth likely to continue AGAINST Family stake will hold back liquidity Could lose if economy improves Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£107m 212p:215p 12 3.6% 168p:227p



All hail the UK’s dividend king

No UK-listed company has a longer history of successive dividend increases than the AIM-quoted floor coverings business James Halstead plc. After reporting a 9% hike in the interim dividend in March, the company is on course for its 38th year of successive dividend rises. The James Halstead (Halstead) business first came to life in 1915 under its eponymous founder. Originally providing textiles for outdoor clothing, in 1934 the founder’s sons Herbert and John Halstead diversified into the manufacture of flooring materials. Much of the company’s success since has been built around the development of Polyflor, a vinyl product that at the time of its original production was quite revolutionary. Polyflor became such an important product for James Halstead that it is now the name of the group’s UK company.

Boryspil Airport in Kiev’. The company is proud to mention any sales to football clubs and has completed installations recently at West Bromwich Albion and Blackpool FC. Around half of the shares in the company remain in the hands of members of the Halstead family. Both the current Chairman and CEO are descendants of the original founder. Such a shareholder register and management team frequently brings a

superior level of stewardship and longterm decision making than is delivered by many other quoted companies. The fact that another party effectively has control of the business need not be a big issue for shareholders; it has been working at James Halstead for decades. James Halstead’s dividend record is superior to any other UK-listed company. Although Shell has not cut its dividend in dollar terms since the end of World War II, the oil giant has on occasion lacked the confidence or capability to increase its payout. It is notable that neither company would be considered high-tech but has nevertheless delivered phenomenal dividend growth. James Halstead is a

James Halstead is headquartered in Radcliffe, Manchester

a leading position selling floor coverings A series of acquisitions has seen Halstead achieve a leading position selling floor coverings to schools, workplaces, public buildings etc. Halstead’s customers utilise their product in a wide range of applications. Interim results from the company confirmed that Halstead products have recently been installed at ‘the Mississippi Crime Laboratory in Jackson, the Sberbank in Moscow and



TOPpick manufacturing and input purchasing. Enhanced margins enable investment in staff and equipment. Halstead’s products are frequently installed in locations where replacement would be prohibitively costly. This means that buyers can be reluctant to select a cheaper product lest it prove inferior. As the market leader, Halstead can be ‘reassuringly expensive’, enhancing profits further still.

frequently installed in locations where replacement would be prohibitively costly

James Halstead employs approx. 900 worldwide

great example of how a well-managed company operating in a mature industry can keep adding shareholder value. Ten years ago, the company paid an interim dividend of 6.0p per share. The shares were split 2-for-1 in 2006. In 2013, a bonus issue of shares was made, with an additional share in the company awarded for each share held.

Enhanced margins enable investment in staff and equipment The effect is that in ten years, the interim dividend has increased almost fourfold — an average annual increase of 15.2% per annum. Once a company establishes itself as the global go-to manufacturer it can become very hard to beat. High sales bring economies of scale in 6

James Halstead’s haul of accolades adds further evidence of the company’s calibre. In 2006, the company received The Queen’s Award for Enterprise: International Trade. This was followed in 2007 when the company won a second Queen’s Award, this time for Innovation. Halstead then repeated the International Trade win in 2011.

in ten years, the interim dividend has increased almost fivefold The specific products are also popular within the industry and there is an impressive record of trade association and industry journal wins. According to Stockopedia, James Halstead is set to deliver a modest EPS rise of 4.3% this year, accompanied by a 7.4% dividend hike. Another 5.3% rise in earnings is forecast for the 2015 financial year, along with an inflationbeating 5.9% dividend rise. The world’s best investors, such as Mr Warren Buffett, swear that building stakes in quality businesses is the way

to succeed in the stock market — even if this means paying a high price for stock. James Halstead’s quality is manifested in its balance sheet and track record of rising shareholder dividends. ‘Which is the best company on all of AIM’ is a great topic for a pub discussion. Clearly, James Halstead is a contender. The company’s diversification across geographies and customers (both private and government) brings a high degree of reliability to its earnings. Of the attributes that top investors look for in a company, Halstead looks to have the lot.

building stakes in quality businesses is the way to succeed in the stock market The likely yield on James Halstead shares is well ahead of what is available on cash deposit. Although the current P/E is high, Halstead has a great record of increasing profits. Provided that the company maintains investor perceptions of excellence, it would not surprise me to see more share price gains in the medium term.

James Halstead (LON:JHD) FOR World leader with pedigree Emerging markets still offer opportunity AGAINST Strong pound may damage exports Premium rating Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£574m 275p:279.75p 18.9 3.4% 256p:344p


This month’s Executive Insight column comes from one of the UK’s most respected smallcap fund managers. Paul Jourdan is CEO of Amati Global Investors and oversees the management of approximately £80m of funds. What kind of governance makes an AIM quoted company with a sound business proposition investment grade? AIM functions as a half-way house between being a private company and being fully listed on the London Stock Exchange. When it works well, it can be spectacular. The institutions which invest on AIM are in my experience imaginative, receptive and forward looking. They also tend to reward success with loyalty. But there are many flops too, and there are companies which are incapable of attracting professional investors. What kind of AIM company can attract and retain a following of institutional investors? The starting point has to be strong corporate governance. AIM is not a half-way house in this respect. Once a company is public it acquires a fragmented shareholder base, and the level of trust which shareholders are required to place in the company is very high. Of necessity there is a great asymmetry of information between shareholders and management in a public company. There is also a mismatch of incentives, as executives can easily take advantage of the trust placed in them, especially when things are not going well. They can lapse simply wanting to keep a well-paid job, and dig trenches to make sure that happens. Investors will always ask themselves: “Is this board defending my interests as a shareholder first and foremost, or the interests of the directors?”

Here are a couple of useful test questions to ask yourself, if you are running an AIM quoted company: “Do you regard the shareholders as your partners, or as a threat to your interests?” “Which do you think about more: creating shareholder value or about your career?” “Are you creating a culture of transparency in your company?” Non-executive directors are a crucial part of the jigsaw in the reputation of an AIM company. The shareholders rely on them, not just to advise management on strategy, but to guarantee good governance. The structure that we like the most at Amati is this: an effective non-exec chairman, well-versed in public markets, overseeing a team of 2-3 executive directors, and 2-3 other non-execs. We don’t like non-execs to own options, but we do like them to be shareholders. We like executive management to be substantial shareholders, in virtue of having either founded the business, or invested in it alongside institutions. Institutions like to see boards controlling costs as if they were spending their own money. An effective board of an AIM company should be unlikely to come into conflict with the shareholders over excessive remuneration, or other incentive schemes. They are also likely to insist upon transparency when it comes to disclosing executive pay. It is

Paul Jourdan, CEO Amati Global Investors

Executive Insight

not a requirement for an AIM company to produce a remuneration report. But if you don’t, investors will ask “why not?” The executive management teams who make the best use of AIM get to know their institutional shareholders very well. They are quick to disclose bad news as well as good news. They will also make good use of their professional advisors, including the NOMAD and broker. There are no catch all answers about what dividend policies or capital structures are best; but these should be set with due regard to how shareholders are likely to view them. Typically, a board that hoards cash because it might one day want to make an acquisition is unlikely to be seen in a good light. All of the above probably can’t turn a bad business into a great one. But it should enable a company with a strong proposition to realise its potential on AIM.

Paul Jourdan is an award-winning fund manager, with a strong track record in small cap investment. He manages the TB Amati UK Smaller Companies Fund, Amati VCT plc and Amati VCT 2. 7


AIM star with more growth to come £200m market cap financial services firm Brooks Macdonald is one of the most successful companies on AIM.

The Group comprises six companies: a wealth management operation (Brooks Macdonald Asset Management), a discretionary asset management business, a fund management business, a financial advisory and employee benefits operation, a retirement planning services provider and a specialist property management company. The Group also runs an investment management and stock broking business in the Channel Islands. Brooks Macdonald has grown fast. The assembled collection of related operations has taken the company to AIM’s top table.

wins many of its mandates through a network of around 100 professional intermediaries For the year 2005, Brooks Macdonald paid shareholders a 1p dividend. The shares at the time traded around 150p. The dividend has been increased year-on-year since then, reaching a total of 26p for 2014. Earnings have followed a similar trajectory: from £0.6m of pre-tax profits for 2005 to £13.3m in 2014. As you would expect, growth is also reflected in Brooks’ funds under management figures. Five years ago, the Group had £1.4bn of funds under management. Brooks added a further 8

£1.4bn in 2014 alone, £1bn of which was added through organic growth. 2014 results, released in the middle of September, revealed a slowing in growth at the company. Although revenues were 9% higher, pre-tax profit showed an increase of just 2%. However, there was still some considerable cheer for shareholders in the dividend as it was raised 15% for the full year.

forecast to report 96.3p of earnings per share for 2015 Funds under management at the end of June 2014 hit £6.5bn. Brooks Macdonald has been a major beneficiary of consumers’ move toward managing their own pension. 40% of funds under management at Brooks Macdonald are the pension savings of private individuals. The company wins many of its mandates through a network of around 100 professional intermediaries. Brooks Macdonald hopes, in time, to double this to 200. Changes in the recent budget are expected to have a minimal effect on the business in the short term but a make a more meaningful difference in time. According to Stockopedia, Brooks Macdonald is forecast to report 96.3p of earnings per share for 2015 and

another double-digit dividend rise to 29.3p. Brokers put 2016 EPS at around 120p, with the expectation that dividends could hit 35p.

market usually forces investors to pay a premium for quality Despite dropping back from around 1700p six months ago, Brooks Macdonald shares are not cheap. That should not come as a surprise, as the market usually forces investors to pay a premium for quality. AIM has a great record of rewarding investors in successful smallcap companies either through share price and dividend progression or a takeover. Brooks Macdonald shares are an opportunity to back a successful, enterprising management team that has made dividends a priority. Brooks Macdonald Group (LON:BRK) FOR High quality company Growth forecast to pick up again AGAINST High valuation given last year's growth Regulatory changes always possible Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£191m 1,400p:1,420p 17.3 1.8% 1301p:1817p


Event - October 23rd The Blackthorn Focus event will again be showcasing four AIM-quoted companies on October 23rd at the offices of finnCap

Return from companies presenting at past AIM Investor Focus events: April 2012 AIM Investor Focus: median average return +36%. April 2013 AIM Investor Focus: median return +43% October 2013 AIM Investor Focus: median return +26% April 2014 AIM Investor Focus: median return -4% (data as of September 25th, 2014)

Presentations begin at 11:30am on Thursday, October 23rd. The event is free for private investors. To apply for your place at the event click on the button below: Apply

Fund managers and private client wealth managers who would like to meet the management of any of these companies should contact Blackthorn Focus here: Contact Media should contact Vicky Watkins at MHP Communications (020 3128 8100) for Cohort, Sprue Aegis or Trakm8. Contact Tom Copper at Winningtons (0797 122 1972) for SCISYS.


Polar Capital: funds paying dividends At the last update, fund manager Polar Capital was administering $13.6bn of investor funds. The forecast profits from this operation are expected to be used to pay a dividend in excess of 30p per share. At current share prices, that would make the company one of the biggest dividend yields available on AIM today. Polar Capital offers a range of funds to professional and institutional investors i.e. not direct to Joe Public. It runs what looks to be a very lean operation. That $13.6bn of funds constitutes 20 funds and 40 managed accounts, overseen by just 46 investment professionals and another 53 group staff.

a strong owner/manager culture at the company Polar Capital came to AIM in 2007. There is a strong owner/manager culture at the company — 36% of the equity is in the hands of directors, staff and original founders. The company is committed to paying a majority of the group’s total earnings for the year as dividend. For the year ending March 2014, Polar paid 25p of dividend from (diluted) earnings per share of 29p. The equation is obvious. Big profits 10

= big dividends. That leaves the usual challenge of gauging Polar Capital’s long-term earnings potential. Looking back, Polar’s progress is impressive. In 2009, Polar began the year with $3.1bn of assets under management and ended with just $1.5bn. Nevertheless, the company still managed to report £12.1m of pretax profit and pay total dividends of 4.5p. For the year ending March 2014, assets under management reached $13.2bn and pre-tax profit hit £32.7m. Asset managers’ fees are typically charged as a percentage of funds being managed. Some Polar funds are run on performance-based arrangements that can lead to even higher revenues when a fund does well. Good performance ratchets assets under management higher, increasing future fees. It also attracts more investors, further increasing the revenues that can be earned. If performance disappoints, this process goes into reverse and a fund manager’s profits can fall fast.

even higher revenues when a fund does well

the FTSE 100 is up 36%, America’s S&P 500 is up 90% and the Nikkei 225 is 53% higher. However, with economic panic receding, further rounds of quantitative easing are unlikely.

further rounds of quantitative easing are unlikely This leaves me to conclude that unless Polar can win an enormous amount of assets over from its peers, the performance of recent years is unlikely to be repeated. While it feels like we are overdue a market correction, the bull market has not gone away. I have no strong feeling that a big move in stock markets would be merited. I am left to conclude that Polar Capital looks to be well worth further research. Polar Capital Holdings (LON:POLR) FOR Big dividends forecast Markets remain strong AGAINST Dependent on a small number of key managers Strong pound may hurt Market cap Bid:offer

Volleys of quantitative easing in large economies have delivered massive stock market advances. In the last five years,

P/E (forecast) Yield (forecast) 52week low:high

£375m 423p:432.5p 12 7.2% 388p:572p


Carpet firm that is ready to roll Following a massive shake-up, carpet manufacturer Victoria has new management, a transformed balance sheet and real growth prospects. Change at the company began at the end of 2011, when a group of shareholders threatened to requisition an EGM and oust the board. Sufficient other shareholders sided with the rebels at the March 2012 AGM. Geoff Wilding was made Executive Chairman of the company in October 2012. In July he took control of 50% of the shares in Victoria. Shareholders voted for this dilution in exchange for a large special dividend payment.

‘the Rolls-Royce of carpets’ In October 2013, Mr Wilding secured the acquisition of premium carpet maker Westex for an initial payment of £16.0m. Wilding describes Westex as ‘the Rolls-Royce of carpets’. This was followed in March this year by the sale and leaseback of Victoria’s Kidderminster factory. The sale earned Victoria £5.8m but also brought an additional £0.5m pa of rental costs. This strategy marks a significant departure from how Victoria was previously run. Current management rationale is that Victoria is a carpet manufacturer, not a property investor. The logic is clear. Westex made

a profit of £4.5m in 2014 and contributed £1.2m to Victoria profits following its October acquisition. The return that can be made on a successful acquisition is well ahead of the cost of leasing a factory site. Add in the fact that carpet factories are typically operating under-capacity and the opportunity to significantly increase profits through acquisitions becomes clear. There are around 250 different carpet manufacturers across Europe. The Westex acquisition demonstrates how the plan works. Better still, competition to acquire carpet businesses is weak. The industry has been moribund for some time and running such a business requires niche know-how. Nor is a carpet operation easy to pass on to the next generation.

a bank that is keen to support this strategy Victoria has a clear plan to consolidate a collection of carpet makers and a bank that is keen to support this strategy. With a salary of just £65k it is dividends and share price appreciation that will have the greater

effect on the Executive Chairman’s pocket. The strategy feels very similar to what AIM superstar Judges Scientific achieved in the scientific instruments space. Fortunately for Victoria, it also has fashion working in its favour as British consumers are coming back to carpet.

carpet factories are typically operating under-capacity According to Stockopedia, Victoria is forecast to deliver 31.5p of EPS for the year to March 2015. Management has made clear its intention to recommence dividend payments next year, possibly paying as much as 30% of earnings as a dividend. Another acquisition as successful as Westex could see these forecasts beaten. Victoria is expected to become an income stock next year. The carpet manufacture industry is ripe for consolidation. Mr Wilding has successfully executed a buy and build in the industry before and appears determined to repeat the trick. Victoria (LON:VCP) FOR Consolidation model already working Carpet returning to fashion AGAINST Borrowings increasing Execution risk Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£39m 270p:277p 10.9 n/a 141p:470p



Next month: AIM Prospector will be bringing another five AIM-quoted companies to readers next month. Remember, to ensure that you get AIM Prospector first, sign up here: Registered subscribers receive the magazine as a pdf at least 24 hours before it goes live to the public. Your details will not be shared with any other organisation and there is no spam.

The markets have slipped in recent days and I hope that this is presenting readers with opportunities to pick up quality companies cheaply. If you value meeting the management of companies as part of your research, join us at AIM Investor Focus in London on October 23rd. Cohort, SCISYS, Sprue Aegis and Trakm8 are all participating. Apply for a place at AIM Investor Focus here.


digging for dividends - panning for profits

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AIMprospector AIM Investor Focus is an AIM-dedicated investor and media event exclusive to AIM-quoted companies. The event will next run on October 23rd. More details


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Profile for AIM Prospector

October 2014 AIM Prospector  

Featuring five AIM-quoted companies: Brooks Macdonald, James Halstead, Polar Capital, Shoe Zone and Victoria plc.

October 2014 AIM Prospector  

Featuring five AIM-quoted companies: Brooks Macdonald, James Halstead, Polar Capital, Shoe Zone and Victoria plc.