March 2015 AIM Prospector

Page 1


Issue 11 March 2015

Another level How one big contract transformed this AIM company five AIM companies profiled leading niche software provider rapid turnaround marketing firm repeatedly successful holding company specialist investment manager free to private investors

Supported by

AIMprospector AIMprospector

Issue 11 March 2015

Another level How one big contract transformed this AIM company five AIM companies profiled leading niche software provider rapid turnaround marketing firm

Welcome again to AIMprospector, the monthly online magazine from Blackthorn Focus. This month’s magazine again features five AIM-quoted companies.

repeatedly successful holding company specialist investment manager free to private investors

Recent months have been characterised by large commodity price declines. This has had a dramatic effect on the share prices of some AIM-quoted resources firms and the companies that service them. Smallcap markets frequently overreact and this creates opportunities for investors. Private investors possess a significant advantage over the fund managers as they are able to quickly move in and out of smaller company shares. This month’s Top Pick is engineering firm Solid State plc. Investors have become more aware of the company in recent months, following a gamechanging contract win with the UK government. The offender tagging contract is time-limited. However, as governments come under pressure to save costs by not imprisoning offenders, demand for this type of solution will likely increase globally. If Solid State can establish itself as the go-to supplier for such a solution, then there would be significant further uplift in the share price. In fact, there are two stories here. Even before the tagging contract win, Solid State had already established itself as one of the most successful companies on AIM. Elsewhere, since the last AIM Prospector, July’s Top Pick, Wynnstay Group, has reported full year results for the year ending 31st October 2014. Sales, profits and EPS were approximately level on the prior year. However, total dividends for the year were 9.7% ahead and net assets showed an 8% increase. Remember, to make sure that you get AIM Prospector first, register your email address at to receive a pdf link 24 hours before the magazine goes live to the public. The Volvere article was shared with an expert shareholder in the company during drafting. Unless stated otherwise, I do not have any financial exposure to the shares of any of the featured companies.

Contents Welcome ...............................p2 The Mission Marketing Group....................................p3 Top Pick: Solid State.............p5 Executive Insight...................p7 Juridica Investments.................. p8

Supported by

StatPro...................................p9 Volvere................................p10

Contact twitter: @aimprospector email:

Published by: “Enjoy this month’s AIM Prospector and good luck with your AIM endeavours.” David O’Hara, Editor,

AIMprospector 2

Blackthorn Focus Limited


Rescued marketing company is now thriving Shares in The Mission Marketing Group (‘The Mission’) have risen sharply since the financial crisis. The company is now paying dividends and group debt has been reduced significantly.

The Mission is a collection of marketing communications and advertising companies. The group employs a total of 850 staff in the UK, Asia and San Francisco. The Mission has been built via a series of acquisitions. The group now comprises twelve operating companies.

further acquisitions announced in October and November of 2014 Announcements from the company are frequently littered with the type of patter that seems (exclusively) popular among marketing professionals. Recent interims touched upon a small change in the company’s acquisition strategy, articulated as a ‘plan to step up the introduction of tautoousian Agencies that can work alongside our existing [agencies]’. My dictionary defines ‘tautoousian’ as ‘being identically of the same nature’. The Mission duly delivered on this promise, with further acquisitions announced in October and November of 2014. The first of these was the acquisition of 70%

of an ‘Asian-focused digitally-led marketing services agency group, Splash Interactive’. This was followed in November by the acquisition of London-based PR firm Speed Communications. In late January, The Mission provided a trading statement for the full year ending the previous December. Management expressed its expectation for the year to be in-line with the market’s (which AIM Prospector takes to be consensus of 5.0p EPS and a dividend of 1.1p). The Mission also confirmed that debt levels had been further reduced. Another acquisition followed in February as specialist digital agency The Weather Digital and Print Communications joined the group. The business textbook says that marketing firms such as The Mission do well in economic recovery, as companies begin to feel more confident that there is value in promoting their products again. The Mission’s current share price rating suggests that the market retains some worries over the company’s long-term health. Any such fears appear to be overdone.

would be the fourth successive year of EPS increases June, the balance sheet showed a net current liability of £1.5m and a further £7.0m of bank debt. In aggregate, this was around £2m better than six months previous. Another £2.4m was raised via an equity placing in October. Four years ago, The Mission’s EBITDA was £5.5m. Debts were more than three times this. The company’s market capitalisation was around £10m. A dramatic turnaround has been achieved. 2014 is now expected to be the fourth successive year of EPS increases at the company. A 14% increase in EPS is expected in 2015. Since preparing this article its author, David O’Hara, has purchased shares in The Mission Marketing Group.

The Mission Marketing Group (LON:TMMG) FOR Positive momentum in the business Undemanding valuation AGAINST Acquisitions present integration risk

expectation for the year to be in-line

Sentiment overhang needs to clear

After struggling under heavy borrowings in the depths of the financial crisis, The Mission has been paying down debt fast. At the end of


Market cap

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

£34m 40p:42p 8.4 2.7% 37p:57p 3


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Crook tag win gives Solid State big lift Solid State is one of AIM’s most up-and-coming smallcap stocks. Last year, the company secured a large contract with the UK’s Ministry of Justice (MoJ) that has taken the company (and the shares) to a new level. Solid State is frequently described as a provider of ruggedised computer equipment. Typically, customers approach Solid State when they require a technological solution to operate in a harsh environment. Solid State will then produce bespoke hardware with attributes that could not be matched by an off-the-shelf solution. Solid State is a group of two companies: Solid State Supplies and Steatite.

design and specification through to manufacture and deployment Solid State Supplies is a distributor of specialist electronic components. Steatite is the main trading division and participates at all levels of the process, working with the customer from design and specification through to manufacture and deployment. Steatite solutions include computers, batteries, radio equipment, antennae and electronic monitoring. It is the electronic monitoring side of operations that delivered the transformational contract win, an offender tagging order from the MoJ. Steatite applications include military, industry and emergency services. For example, Steatite manufactures computer servers that are designed to continue operating

even through the shock that would be expected from a torpedo strike. Other solutions include in-vehicle communications and location systems for fire departments and police. In these areas Solid State’s strategy is to be a small but important part of big budget projects. Another high profile example of Steatite’s work is the Avantix Mobile, the mobile ticket dispenser carried by guards on the national rail network. Rail is an attractive niche for the company, with moves being made into the manufacture of in-station ticket machines and cellular routers delivering passenger WiFi.

The group has positioned itself mid-market. Volumes in the company’s application area are typically too small to attract the like of Siemens and Philips, while smaller operators are unable to establish themselves with the customers worth chasing e.g. governments.

a member of ‘List X’, an elite group of companies The specifics of the products being supplied also creates a significant barrier to entry. Solid State has ISO and AS approvals that cannot be secured without significant

Solid State designs and manufacturers equipment for heavy industry and harsh environments


AIMprospector investment. Solid State is a member of ‘List-X’, an elite group of companies permitted to work on UK government work at confidential level.

TOPpick MoJ offender tagging contract takes Solid State to a new level

sales and operating profit have increased year-on-year The application area frequently means that the cost of equipment failure is vastly greater than purchase cost. One example is Steatite’s provision of downhole oil and gas probes, where the value of accurate reading and reports can be immense. Here, a company can be ‘reassuringly expensive’ and satisfied customers are reluctant to switch provider. The MoJ contract is for a 3 year minimum term and valued at approximately £34m. Margins of 25% are forecast. Revenues are expected from the fourth quarter of the company’s 2015 year (Solid State has a March year-end). Considering full year revenues for 2014 were £32m for the entire group, the significance of this contract win is clear. Management invested considerable resources to win the business. The entire bid process stretched over three years. Solid State took a charge of £244k for sunk costs associated with the contract process in the first half of 2015. Solid State’s superior technical capability was decisive in securing the contract. The new equipment to be supplied has more sophisticated features than the current generation of tags. The share register and management of Solid State mean that it could reasonably be described as a listed family business. The founders of the 6

company, Gordon Comben and William Marsh, own 19.8% and 13.8% of the company respectively. Mr Marsh’s son, Gary, is today CEO of Solid State. Gary Marsh owns 5.3% of the company. Messrs Comben and Marsh retired from the board at the end of 2014. The company’s success is not new. Solid State has been dividend paying since 1999. The payout increased from 2p a share for 2008, to 8.5p for 2014. During the last five years, sales and operating profit at the company have increased year-on-year. Before the MoJ contract was won, Solid State was already one of the very most successful companies on AIM. The contract has now moved Solid State up a division. Fund managers have been buying in, encouraged by the enhanced scale of revenues. This has taken the shares to a fairer rating. Although the shares have already three-bagged in the last 12 months, the existing growth being delivered by other parts of the business shows that the company is growing fast even outwith the MoJ work. The possibility

already proven stewards and managers that Solid State could export its offender tagging capability to other jurisdictions is particularly exciting. If this were achieved, it is difficult to imagine that the company would not receive a takeover approach. Investors with the intention of holding for the long-term should take encouragement from the fact that no transaction could happen without the assent of a founding family that are already proven stewards and managers.

Solid State (LON:SOLI) FOR Long-term success Products serve broad industrial base AGAINST Any MoJ errors will cause damage Shares no longer cheap Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£61m 735p:760p 24.1 1.6% 312p:874p


Executive Insight One of the biggest complaints we hear about in the world of small and mid-caps is that there is little or no reliable information about the companies on the market. Yes, companies produce annual reports and RNS announcements, but there is little independent comment and research on those companies. That position looks set to get worse. Peel Hunt and Extel have recently published an excellent piece of research looking into the potentially damaging effects that changes to the way investment research is paid for may have on coverage of small and mid-cap quoted companies. The views of both institutional investors and quoted companies were sought. It makes very interesting reading. In this report Steven Fine, Managing Partner of Peel Hunt, says: ‘Such changes are likely to have a considerable impact on the UK Small & Mid-Cap market and equally soon the quoted companies, the brokers and the asset managers investing in these stocks.’ The Quoted Companies Alliance shares this concern. We note from this report that 85% of the responding companies think that small and mid-size quoted companies will be impacted. So what is going on? Well, currently brokers get paid for research after they have produced it. Fund managers assess who has produced valuable research and allocate the dealing commission that they have spent to be shared between the broker who did the transaction on their behalf and the broker who generated the research. The choice is discretionary so that in theory anyway, brokers feel incentivised to produce quality, accurate and useful research as part of a trusting, long-term

relationship with institutional investors. The European regulators and the Financial Conduct Authority (FCA) do not like this as they believe that there is little transparency for the asset owners to determine whether they are getting value for money. We do not necessarily disagree with that view, particularly in the large stocks which can be covered by dozens of analysts. In the small and mid-cap quoted company world, changes need to be considered very carefully. What the FCA would like to see is investors subscribing up front for research so that there is more transparency about the process. Policies which improve transparency at the top of the market could create opacity at the other end. However, in an ever shrinking world where information is already at a premium, we fear that research will end up produced mainly by the large investment banks and that most of it will be focused on the largest stocks. So what little research that currently exists in the small and mid-cap world

Tim Ward, Chief Executive, QCA

could completely or substantially die out. The FCA and others suggest that this will lead to innovation in the research world, but someone ultimately has to fund that innovation and be able to pay for the resulting service. The small and mid-cap world is not blessed with deep pockets. Independent research contributes to consensus forecast and helps create differences of investment opinion which leads to trading in shares. Our concern is that without this, there could well be fewer liquid stocks and more volatility of share prices due to information being held by a select few. Market abuse could well result. Peel Hunt and Extel’s report is well timed and, we hope, will contribute to a reassessment by the FCA of the impact that this could have on small and mid-cap quoted companies. Watch this space.

Tim Ward is Chief Executive of the Quoted Companies Alliance, the independent membership organisation that champions the interests of small to mid-size quoted companies.



Claims investment firm with big dividend prospects Quoted on AIM since late2007, Juridica is a company that invests in litigation and arbitration claims. In broad terms, Juridica uses its capital to back a party that is going through proceedings, in exchange for a portion of any award. Juridica restricts itself to corporate disputes. It is not involved in claims for personal injury, class action etc. As business disputes can be complex, the frequency of wins and losses is difficult to predict. To date, however, Juridica claims a gross internal rate of return of 66.7% on completed cases.

more than $200m of assets under management Juridica has more than $200m of assets under management. It is the responsibility of its investment team to see that this is deployed in such a way that an acceptable rate of return is made for the risk being taken. Juridica’s positions are managed by Juridica Asset Management Limited. Here, a collection of expert litigators and risk managers examine the opportunities presented and decide if Juridica should be involved and at what scale. Juridica does not get involved in a case unless an amount greater than $25m is being argued over.


should be able to support a high dividend payout ratio According to the company website, its investment size in any case typically ranges from $2m to $10m. Time is one of the key issues that Juridica considers before supporting a case. For this reason, Juridica seeks to invest in claims that are likely to be resolved through settlement in a reasonable time frame. Unlike many quoted companies, Juridica does not have to worry about investing in stock, software or machinery. Therefore, the company should be able to support a high dividend payout ratio, depending on management views on how capital should be deployed.

at around that time. Since July 2013, the stock has traded between 120p and 160p. That is steadier than many. ‘Quality of earnings’ is a key plank of equity valuations. Just as there is risk that Juridica might back the wrong cases, some investors also fear that its business model could face regulatory threat. A small number of US states prohibit outside parties bankrolling litigation. Investors will have to decide whether the actions of a firm like Juridica could face curtailment in the longer term. In the meantime, the shares are an opportunity to grab a high yielding AIM share, whose earnings should be broadly uncorrelated with most AIM companies. Juridica Investments Limited (LON:JIL) FOR

its business model could face regulatory threat

Litigation more diverse than most asset classes Large dividend yield AGAINST

Since listing at around 110p, 58.6p of dividends have been paid out. This includes the 20p final dividend declared in November. Shares in Juridica fell from around 110p at the end of 2009 to a low of 75p in 2012. Many shares fared much worse

Possible regulatory threat to activities Key-person risk in case selection Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£139m 124p:126p 12.6 15.9% 111p:151p


Software firm with strong market position Wimbledon-based StatPro is a software provider to the fund management industry. The company has been quoted on AIM for more than ten years. StatPro enjoys a strong position in its markets and is a longstanding dividend payer. Today, StatPro is one of AIM’s mature mid-sized companies. StatPro produces portfolio analysis software for fund managers. Its products deliver risk statistics and performance data. This information is used to determine if portfolio allocation is appropriate and which decisions have led to the fund performance being delivered.

where there is regulation, there is revenue The company’s flagship product is Revolution. According to the company, this product helps clients ‘increase their sales, enhance their client service, meet tough regulations and reduce costs.’ StatPro demonstrates well that where there is regulation, there is revenue. Such regulations can involve the way that fund performance is reported, with rules and standards varying between jurisdictions. Like many software companies, in recent years, StatPro has moved to a cloud-based service, with a rental pricing model. This makes comparisons with past years difficult. Recent announcements from the company highlight StatPro’s continued standing in the market. In the first week of January, a three

year agreement with a European asset manager was announced. This deal is valued at around £3.1m for the duration. The fact that a price premium of 55% over the previous contract was secured will encourage shareholders. As StatPro has matured and secured a stronger position in its marketplace, shareholders have been rewarded along the way. The company first paid a dividend of 0.5p for the financial year 2005. Since then, the payout has been increased year-onyear, reaching 2.8p for 2013. At the half-year stage, the dividend was held. However, according to Stockopedia, a 3.6% dividend increase for the full year is still forecast.

a price premium of 55% over the previous contract was secured The Q3 trading update exposed the movement in revenues as clients switch to a cloud provision. Recurring revenues increased 35% versus the previous nine months. Almost all of this increase was delivered by StatPro Revolution. 2015 is an important year

for StatPro. The company will be releasing StatPro R+, the cloud-based version of its installed StatPro Seven product. Customer migration will be a considerable challenge: StatPro Seven has around 250 current clients. Although the migration process will take years to complete, the success of Revolution gives considerable encouragement.

customer migration will be a considerable challenge The history of AIM abounds with successful companies being bought out. While the move to cloud services creates significant uncertainty in the short term for StatPro, it is not hard to imagine that some potential acquirer will be keenly waiting to see if the new product is a winner. StatPro will announce final results for 2014 on March 10th. StatPro Group (LON:SOG) FOR Market leader Long-running successful team AGAINST R+ integration risk Dividend cover appears thin Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£51m 73p:75p 26.8 3.9% 70p:92p



Industrial group’s assets well ahead of share price

Volvere plc is an AIMquoted investment firm. The company specialises in the type of activity that is frequently described as ‘turnaround’. Volvere generally acquires distressed, loss-making companies. Volvere will then apply restructuring techniques in the hope that value will be created. Volvere is an industrial holding company. The company has a solid record of selling acquired companies after a turnaround has been secured.

activities make it a rare thing The Volvere portfolio typically comprises between three and five companies. It is not an investment trust. Volvere does not value their companies upward but there is an impairment test on the assets. This can result in the market value of Volvere’s assets being greater than the published asset value. Investment trusts and some other investing companies will typically reappraise their portfolio each time an asset value is published. 10

a 40% annual IRR when sold Volvere’s activities make it a rare thing among AIM companies. The shares are essentially a play on the capability of its management. The growth in the company in the last ten years demonstrates how well Volvere’s shareholders have done out of the efforts of its director brothers Jonathan and Nick Lander. Volvere’s first acquisition, made in 2003, yielded a 40% annual IRR when sold just three years after its purchase. In March 2006, Volvere acquired Sira Test and Certification, and Sira Defence and Security (SDS). Sira Test and Certification was sold to Canada’s CSA Group for a total of £8.3m in July 2009. This price equated to an IRR of 80% per annum. Volvere acquired JMP Consultants for £0.4m in May 2013. At the time JMP had approximately 150 staff. Volvere also loaned JMP just under £1m. Remarkably, JMP made an underlying profit of £0.5m for the full year 2013, paying its owners a dividend of £0.45m for the year. By the end of 2013, JMP had also returned £0.4m of its loan from Volvere. However, not all of JMP still belongs to Volvere today. 25% of the equity was

Volvere does not revalue its investments upwards subsequently taken by management as part of an incentive scheme. The two other companies in the portfolio are an 80% stake in foods manufacturer Shire Foods (a supplier of own-brand products to the supermarkets) and the company’s remaining investment in SDS, a provider of video software to the police. When last reported, SDS was trading at around breakeven. The most recent numbers from Shire showed a £0.2m loss on £4.1m of sales in the six months to June 2014. New business wins at Shire are expected to deliver stronger profits going forward. Volvere’s last balance sheet showed cash and marketable securities of £12.2m. Current assets and current liabilities were approximately matching. There is £5m of property, plant and equipment on the balance sheet, the lion’s share of which is accounted for by a factory. Given that Volvere does not revalue its investments upwards, it is left to the reader to decide the real value in the company. Volvere (LON:VLE) FOR Winning management team Valuation well backed by assets AGAINST Key person management risk No dividends Market cap Bid:offer NAVps Yield (forecast) 52week low:high

£12m 300p:310p 393p 0 250p:335p


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