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Issue 10 December 2014

An outstanding AIM share The niche firm that attracted top investors

five AIM companies profiled fast-paced rollout recovering manufacturer cash-rich caterer big dividend payer free to private investors

AIMprospector AIMprospector

Issue 10 December 2014

An outstanding AIM share The niche firm that attracted top investors

five AIM companies profiled fast-paced rollout recovering manufacturer cash-rich caterer big dividend payer free to private investors

Welcome again to AIMprospector, the monthly online magazine from Blackthorn Focus. To make sure that you get AIMprospector first, register your email address at to receive a pdf link 24 hours before the magazine goes live to the public.

This month’s Top Pick is Burford Capital. The company is a very distinctive type of business, making its money from, pretty much, investing in other organisations’ lawsuits. Furthermore, the company’s market cap and dividend yield are such that Burford is among the top 10% of all AIM stocks on both measures. Burford has already won some impressive backers. I hope you agree that the company deserves highlighting. A quick mention of two other firms that have previously featured. November was a big month for housebuilder/regeneration specialist Sigma Capital. First came the announcement on the tenth, of a ‘strategic partnership to deliver regional Private Rented Sector developments’ with blue-chip property firm Grainger. Here, Grainger will have the exclusive option to buy sizeable chunks of land that Sigma has secured for development. Sigma followed this nine days later with the announcement that after receiving £67m of financing from Barclays, construction has begun on a collection of sites in Greater Manchester and Liverpool. 927 homes will be built under this phase of the scheme. Manufacturer Tricorn announced results earlier this week. AIM Prospector featured Tricorn in the July edition. The results had a strange feeling to them. A small pre-tax loss was reported and management warned that another, larger loss is expected for the second half. A significant reduction in debt was achieved thanks to the sale of the group’s aerospace division and there is no dividend. However, Tricorn seems to be aiming at something bigger than a 2015 or 2016 profit figure. For some time now, Tricorn’s long-term strategy has been to become a tubing supplier to global blue-chip customers, serviced through an intercontinental manufacturing base. The China part of this equation appears to be going to plan, with Tricorn’s wholly owned facility ‘extremely busy managing the in load of further new work’. A good report was also delivered on the company’s joint venture in China. However, the US operations remain a disappointment. Acquired in March 2013, this division must start delivering soon. There are some encouraging signs that things may be turning around stateside, with Tricorn saying that the division’s ‘new management team has made an encouraging start in creating a solid platform from which the business can develop’. The investment case remains unchanged: if Tricorn can deliver a level of sales appropriate for the manufacturing capacity that it possesses, at a profit margin in-line with what the group has achieved in the past, then I expect that the shares would more than double from here. Please note that there will be no AIM Prospector next month due to Christmas/New Year. That just leaves me to say good luck for the holiday period and see you in 2015. “Enjoy this month’s AIM Prospector and good luck with your AIM endeavours.” David O’Hara, Editor, AIMprospector 2

Contents Welcome ...............................p2 GLI Finance .........................p3 Top Pick: Burford Capital.....p4 Chamberlin ..........................p6 Journey Group......................... p7 Patisserie Holdings................p8

Contact twitter: @aimprospector email:

Published by: Blackthorn Focus Limited


Big dividends from SME funder GLI Finance is a provider of loan financing to small and medium-sized businesses in the US and UK. Historic and forecast dividends make the company one of the highest yielding shares on AIM today. After first coming to AIM as T2 Income Fund in 2005, the company was renamed Greenwich Loan Income Fund (as in Greenwich, Connecticut) in 2009. To better reflect the more geographically diverse nature of its lending activities, the name was changed again in April 2013 to GLI Finance Limited.

goal is to become a unique SME financing business With companies still complaining of the difficulty of achieving bank finance, lenders such as GLI have moved to meet the demand. GLI does this through its relationships with a number of lending platforms, each having a particular focus. For example, is a public platform for UK SME lending and borrowing. Once the relevant checks have been passed, anyone with a UK bank account can be a lender through fundingknight. Businesses applying for funding are then given a rating by fundingknight, with loans to apparently riskier businesses

paying more interest. Like many such platforms, a lender’s funds are spread across a portfolio of borrowers, reducing the risk of wipeout. Other GLI platforms offer invoice discounting, where cashflows are provided in exchange for the lender becoming the payee of the business’ debtors. GLI’s ambition is to re-orientate the business away from simply being an owner of loans originated by third parties, to becoming both an SME lender itself and an equity owner of the lending platforms conducting SME financing. The goal is to become a unique SME financing business by ‘combining traditional SME finance disciplines with the fast-growing online alternative finance providers, many of whom would be described as “peer to peer” (“P2P”) or marketplace lenders.’ GLI is keen to stress that the platforms that it takes a stake in are complimentary to traditional bank lending rather than competing. That is important because if appetite for SME lending did return among the mainstream banks, they could quickly undermine the next-generation lending platforms. GLI believes that cultural changes in the banking sector toward an exclusively quantitative approach to lending decisions (computer says no)

make it impossible for many young SMEs to borrow. Furthermore, new capital rules are forcing banks to hold more reserves against certain types of lending. GLI is keen to point out that neither of these are short-term trends: both would take many years to reverse.

GLI Finance looks a remarkable proposition Having paid a 5p dividend last year, GLI again declared a 2.5p payment at the six month stage. GLI Finance looks a remarkable proposition: a high-yielding AIM share operating in a fast-growing industry. Unfortunately, as a lending company, shares in GLI Finance would likely not qualify for Business Property Relief and would attract inheritance tax if they were part of an estate.

GLI Finance (LON:GLIF) FOR Operations in sweet spot Huge yield AGAINST Banks could up competition Platform business v. competitive Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£82m 57.75p:58.5p 12.9 8.9% 50p:63p




Niche player attracting income investors Burford Capital is one of the most remarkable companies on AIM. Founded just five years ago, Burford has evolved into an AIM-quoted company able to win the backing of one of the UK’s most celebrated investors. The company is ‘the world’s largest provider of investment capital and risk solutions for litigation’. Put simply, Burford provides money to organisations that are seeking damages from others, in exchange for a fee, interest, share of the award or a combination of the three. This makes Burford an extremely rare type of company, with Juridica Investments the only company on AIM that comes close to this sort of activity.

Burford provides financing to law firms Burford has found some fame as one of star fund manager Neil Woodford’s few AIM holdings. Mr Woodford built his reputation as an income investor at Invesco over a period measured in decades. The fact that his new fund owns over 7% of Burford should be reason enough for income investors to take a look. Burford Capital was incorporated in 2009 and the shares began trading on AIM in October of that year. The company was formed from Burford Group, an organisation that dates back to 2007. Today, Christopher


Bogart is Chief Executive Officer of the business. Mr Bogart is one of the founding principals of the business and has enjoyed a long career as a litigator. Burford’s Chief Investment Officer, Jonathan Molot, was also closely associated with the company from the early days, having been investment committee chairman of the company’s US subsidiary. Burford can become involved in the litigation process from different stages and perspectives. Classic litigation funding is the provision of funding to a plaintiff that simply cannot afford the lawyers they need to effectively prosecute. Here, Burford’s support is required to get the case off the ground. In other instances, Burford are approached part-way through the process, such as when the plaintiff realises that more finance is needed to secure victory. This frequently occurs as the cost and duration of the process is underestimated (q.v. Jarndyce v Jarndyce). Other examples include funding pending an appeal (when the judgement has been won but an appeal is launched)

Christopher P. Bogart, Chief Executive Officer

or simply funding a plaintiff that is awaiting cashflow at the end of the process. In addition, Burford provides financing to law firms, such as those that have arranged not to be paid until the case has concluded, or a firm that is simply waiting to receive the fee that it has been promised. The contract that Burford may agree with plaintiffs is not necessarily

not necessarily a straightforward ‘percentage of win’ agreement



identify good litigation prospects and good borrowers and then negotiate a deal a straightforward ‘percentage of win’ agreement. Cashflows to Burford will be determined by a number of factors, such as the amount that is paid out, or the time taken before payment is received. As above, Burford can profit even if a case is lost. Burford’s job, therefore, is to first identify good litigation prospects and good borrowers and then negotiate a deal. A 2012 Forbes article illustrates a large number of examples of Burford’s work very well. While backing losers could result in Burford’s investment being wiped out, a winner could (for example) result in Burford getting back three times their original investment. The selection and management of Burford’s portfolio is therefore a critical part of the business. Typically, Burford will be involved with around 35 cases at any one time.

clearly an outstanding proposition Many AIM shares are highly correlated with each other, such as the junior oil shares. A large number are young ventures exploring immature industries and niches. This means that when investors’ attitude to risk adjusts, AIM shares can fall or rise sharply as investors’ perceptions change. However, I expect that due to the nature of its revenues, a share like Burford Capital will be much less buffeted in bear markets and neither would it spike upwards when investors switch to ‘risk-on’ mode. It is the distinct nature of Burford’s business that forms the base of the

investment case. You don’t need to have been investing in smallcap companies for too long before experiencing the frustration that engulfs AIM stockpickers when the asset class is out of favour. On the other hand, it is not uncommon for AIM shares to multibag in a broad-based smallcap recovery. The nature of Burford’s operations suggest to me that it is less likely to suffer from dramatic changes in investor sentiment. The shares, therefore, could play a vital role in a diversified AIM portfolio.

forecast to report EPS of $0.12 for this year and pay a dividend of around half of that According to Stockopedia, Burford is forecast to report EPS of $0.12 for this year and pay a dividend of around half of that. A quick search shows just how far Burford Capital stands out from most AIM companies. Across all of AIM, only 58 companies have a larger market capitalisation than Burford. I estimate that around 90 AIM companies are trading on a higher dividend yield today. According to the statistics, there are only nine AIM companies with both a larger market capitalisation and a higher dividend yield being traded on the market today. Even better, Burford again beats most companies on the market when profitability metrics such as Return on Equity and Return on Capital are examined. Together, these statistics put Burford Capital among some of AIM’s most highly-regarded companies,

Jonathan Molot, Chief Investment Officer

such as James Halstead and Alternative Networks. One potential negative comes from uncertainty over whether the nature of the business would disqualify the shares for business property relief i.e. they would be included as part of an estate for inheritance tax purposes.

clearly an outstanding proposition However, if you are not planning on dying anytime soon, Burford is clearly an outstanding proposition. Burford Capital (LON:BUR) FOR Strong shareholder register Good yield AGAINST Opaque asset base Key manager risk Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£249m 120p:122p 16.4 3.1% 108p:137p



Turbo-charged recovery at Chamberlin Chamberlin is a group of foundry and engineering businesses operating from five sites. Recent results showed an improvement in performance as the company returned to profitability. Two recent contract wins highlight the opportunity that exists for Chamberlin’s automotive business. The company runs foundries in Scunthorpe, Leicester and Walsall, while the two engineering businesses, Exidor and Petrel, are based in Cannock and Birmingham respectively. The Walsall foundry manufactures light castings and components, principally for automotive and hydraulic applications. This business currently delivers around half of group sales. It is prospects for these operations that are key to the investment case.

cost reductions in the first half saw the company move to an underlying profit The Leicester business produces medium castings for end use in construction and mining equipment, power generation and defence. The Scunthorpe site produces heavy castings for applications such as railways and construction. Past customers include Crossrail, where heavy castings were used to support some of the more complex areas of tunnelling. Exidor manufactures escape door equipment (such as the bar you would push to open a door) and door closing mechanisms. Petrel is a lighting and control business, with products designed for hazardous environments. The current Chief Executive, Kevin Nolan, has been in place for just over one year. Finance Director David 6

Roberts assumed his role in July 2013. Half-year results from the company, issued in November, showed that this new team is making significant progress. Huge cost reductions in the first half saw the company move to an underlying profit of £0.4m from a loss of £0.6m in the previous year. While problems remain at the Scunthorpe site, a return to profitability is expected by Q4. Significant challenges remain at Leicester however, with aged infrastructure holding back attempts at margin improvement. New contract wins for the Walsall foundry point to a more prosperous future for the company. In October, Chamberlin announced a €6.7m, fouryear contract to supply turbo-charger parts for diesel passenger cars. This contract helped underpin full-year forecasts. Chamberlin topped this in November with the announcement of an eight-year automotive parts contract worth €26.0m, again won by the Walsall operations. Management believe that it is the broadening of the engineering skill base in the Walsall business that helped Chamberlin win this large contract.

In the longer term, the prospect of increased proliferation of turbo-charged petrol engines constitutes a companychanging possibility.

new team is making significant progress While there is some debt in the business, Chamberlin has significant headroom to its facilities. The current market rating suggests that there is not much more to come from the company’s recovery. To me at least, the contract wins and recent results suggest that the turnout may be more positive than the share price suggests. Chamberlin (LON:CMH) FOR Modestly priced v. forecasts Petrol opportunity could be bonanza AGAINST Leicester division holding company back Current structure sub-optimal Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£8m 98p:106p 10.6 0 65p:112p


Journey Group: high-flying food Journey Group provides in-flight catering and on-board products to airlines. The company is cash-rich and has significant opportunities for growth. Journey sells through two operating companies: Air Fayre (catering) and Watermark (products). In the first half of the year, revenues were roughly split two-thirds catering : one-third products. Although nearly all of Journey’s revenues are in dollars, the company reports in sterling. As a result, Journey’s numbers can swing with the exchange rate. Furthermore, like any supplier, Journey needs strong customers. This leaves the company exposed to the notoriously cyclical airline industry.

centred on meal supplies to US airlines in America The Group took on its current form following significant restructuring. In 2010, Journey disposed of its joint venture with Alpha Flight at London Heathrow, taking the company almost to a net cash position. More favourable banking facilities were then secured. Operations were streamlined further with disposals in 2011 and 2013. These changes mean that comparisons with past years lose meaning. Most of Journey’s business today and its future prospects, are centred on meal supplies to US airlines in America. This is a $2bn market dominated by two players: Gate

Gourmet and LSG Sky Chefs. Journey Group currently makes annual sales of around $40m into this market. Journey (through its subsidiary Air Fayre) operates a different supply model to its competitors. Rather than being based on site at the airport, where labour is deeply unionised, Journey operates off-site, frequently working in collaboration with hotels and restaurants. By utilising the spare capacity that typically exists in these establishments at certain times of the day, Air Fayre can negotiate a better price with its suppliers. After being prepared, the food is packaged and delivered using a set of processes that together are protected by a business process patent registered in North America. There are signs that the patent has already proved to be an effective barrier to entry, with one US airline declining to talk further with another provider that proposed a similar solution. A large proportion of Air Fayre’s revenues are effectively a pass-through on the food cost, with Journey making its money on the handling fee. In March this year, Air Fayre secured a contract to serve a second Los-Angeles airport from its local hub. The success of this operation has shown that Journey’s model is scalable. Management now wants to prove that it is transferable. The company’s goal is

to secure contracts at other American hubs in 2015 and 2016. At the end of August, Journey Group reported a net cash position of almost £4m. This cash buffer means that Journey could easily add new hub operations without requiring significant new finances. In the meantime, the company is profitable and management intends to increase shareholder dividends with time.

patent has already proved to be an effective barrier As the US airline industry picks up in a strengthening economy, I would expect margin improvement as utilisation increases. Any new hub wins would take profits to another level. Journey Group (LON:JNY) FOR Real opportunities to double/triple sales Possibly a mini-Compass Group AGAINST Small number of current customers Patent must hold up Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£17m 123p:125p 12.9 2.2% 113p:167p



Patisserie Holdings: a rising roll-out Patisserie Holdings is a collection of food businesses. The group comprises three patisserie brands (Patisserie Valerie, Druckers Vienna Patisserie and Baker & Spice), one bakery (Flour Power City) and the Philpotts sandwich chain. At the end of September 2014, the retail operations comprised 147 stores. 98 were Patisserie Valerie, 22 Druckers Vienna Patisserie, four Baker & Spice and 23 Philpotts. The group is led by restaurant roll-out legend Luke Johnson. Johnson was the driving force behind the early growth of Pizza Express and Strada. During Johnson’s leadership, Pizza Express expanded from twelve restaurants to more than 250. Strada was built from scratch to reach 30 units before both were sold.

group is led by restaurant roll-out legend Luke Johnson Mr Johnson first became involved with the organisation in 2006, when he led a private equity buyout of a majority stake in Pattiserie Valerie. The other group businesses were added one-by-one and Patisserie Holdings came to AIM via an IPO in May. The group’s maiden results showed the continued momentum of the rollout. Nineteen stores were opened in the year. Two sites were closed, one of 8

which was the only loss-making store in the entire portfolio. 2014 was the eighth consecutive year of organic growth in the organisation. Since the end of September, another three sites have opened and management expects to open another seventeen before endSeptember 2015.

online sales doubled in the year Growth flowed through to the company’s reported figures. A 28% increase in revenues produced a 27% profit increase and a 32% increase in diluted earnings per share (adjusted for cost of AIM IPO and the Philpotts acquisition). Management reported how efficiencies were gained from ownership and operation of Flour Power City. Further gains are expected from the upmarket Philpotts (avocado & crispy bacon sandwich: £3.50), which has already incorporated Patisserie Valerie desserts into its menu. Patisserie Valerie has pole position in a market that previously did not exist on this scale. Following the cupcake and Great British Bake Off phenomena, Britons seem to have fallen back in love with cakes. Patisserie Holdings looks a great way to get exposure to this trend and management has thrust the

Patisserie Valerie brand to the forefront of its efforts. Impressively, online sales doubled in the year. The online market, serving workplace or home parties, will inevitably have some cannibalising effect on store sales but I expect that it would mostly add new sales and enhance operational efficiencies within kitchens. According to Stockopedia, a 22% increase in net profit is forecast for 2015 before moderating slightly the next year. Although the stock-market rating is high, a successful roll-out from a winner such as Mr Johnson was always going to be richly valued. If cake is indeed the new coffee, in five years time we could be looking at a vastly larger business.

Patisserie Holdings (LON:CAKE) FOR Run by proven winners Plenty of opportunities for expansion AGAINST Exposed to food fashion Easily copied format Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£199m 200p:203.75p 18.8 1.8% 177p:215p


AIMprospector A Blackthorn Focus publication


Profile for AIM Prospector

December 2014 AIM Prospector  

Featuring five AIM-quoted companies: Burford Capital, Chamberlin, GLI Finance, Journey Group and Patisserie Holdings.

December 2014 AIM Prospector  

Featuring five AIM-quoted companies: Burford Capital, Chamberlin, GLI Finance, Journey Group and Patisserie Holdings.