May 2015 AIM Prospector

Page 1


Issue 13 May 2015

Profit by numbers Mechanical strategy selects Top Pick

ÂŁ *NINE* AIM firms featured software firm on a modest rating new fund manager retail software specialist plus SIX more AIM companies free to private investors

AIMprospector AIMprospector

Issue 13 May 2015

Profit by numbers Mechnical strategy selects Top Pick


Welcome back to AIMprospector, the monthly online magazine from Blackthorn Focus.

In addition to the usual five features, this month’s magazine contains a write-up on every company that participated at the recent Blackthorn Focus AIM Investor Focus event (Christie Group, EMIS, Fairpoint and NAHL). *NINE* AIM firms featured

software firm on a modest rating new fund manager

Contents Welcome . ......................p2 SCISYS..........................p3 Top Pick: H&T..............p4 Keywords Studios...........p6

retail software specialist

plus SIX more AIM companies

free to private investors

AIM Investor Focus will next run on October 15th. The last AIM Investor Focus ran at capacity so if you would like to be at the next event, make sure that you book your place soon. I am taking this opportunity to mention a phenomenon that has crept up in the last couple of weeks. That is, the large number of very successful AIM-quoted companies that are trading near a low for the year. Four previous Top Pick shares can today be bought at their lowest price of the past year. Perhaps I am just picking the wrong ones but it is surprising that while stocks are enjoying a bull market, some of AIM’s most successful companies are in the doldrums. I am referring to RWS, Goals Soccer Centres and Wynnstay Group. Some other very respectable firms are also trading at lows. Companies such as Begbies Traynor (I hold shares), Bonmarche and Northbridge Industrial Services. Sure, for each of these you can likely find a reason for the current depressed valuation. However, good companies frequently overcome sticky patches. I have been taking a good look at Northbridge Industrial Services. The recent profit warning has damaged confidence in the forecast EPS (Bloomberg suggests consensus for 2015 is 31p) and the shares are today trading at around their lowest price since January 2013. Considering that Northbridge has been increasing its dividend for the last eight years, a feat achieved by only 21 other AIM companies, I’m inclined to apply the rule of thumb ‘class is permanent, form is temporary’. Northbridge is now well and truly on my watchlist. Remember, that to receive AIM Prospector first, register your email address at Registered subscribers receive their copy at least 24 hours before AIM Prospector is made public. If you have not previously attended AIM Investor Focus but would like to register your interest for the next event, get in touch using the form at “Enjoy this month’s AIM Prospector and good luck with your AIM endeavours.” David O’Hara, Editor, AIMprospector 2

Miton Group..................p7 Universe.........................p8 AIM Investor Focus........p9


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Undemanding valuation for dependable tech firm Shares in software firm SCISYS fell with recent final results. However, a 10% dividend hike was delivered. This makes SCISYS one of only 55 AIM companies to have achieved five successive years of dividend increases. The company first listed on AIM 1997. CODA was acquired in 2000. SCISYS was demerged from the combined entity in 2006. CEO Klaus Heidrich arrived at SCISYS following the 2007 acquisition of German broadcast technology specialist VCS. Today, SCISYS describes itself as a developer of “bespoke software systems, IT based solutions and support services to the Media Broadcast, Space, Government and Defence and Environment sectors”.

expertise is uncommon By serving these industries, SCISYS can fulfil a critical role, enabling highvalue services. SCISYS’ role frequently requires the integration of software with sophisticated hardware. This dual expertise is uncommon and would require significant investment to replicate. Much of SCISYS’ work can be characterised as large scale projects for big customers, often over an extensive period. While such relationships are frequently contracted over a period of just one year, SCISYS’ ability to secure

large scale projects for big customers repeat contract wins has resulted in the company enjoying several longterm relationships. For example, the Flight Dynamics provision to the European Space Operating Centre (mission analysis, planning, software development) has been supported by SCISYS for almost 20 years. The nature of SCISYS’ customer base can be a double-edged sword for investors: while big customers are likely better payers and resistant to supplier churn, dependence on a small number of large contracts brings earnings risk. However, it appears that the operational importance of SCISYS’ work brings significant revenue security. In 2014, approximately 75% of revenues came from clients that had been with SCISYS for more than five years. Around half of all revenues came from clients that have enjoyed a relationship with SCISYS going back more than a decade. One example of what SCISYS does is its work in the weather forecasting industry. Here the company provides the expertise to control geostationary weather satellites, alongside the technology used in image transmission. Broadcast media is a key market for SCISYS. At the end of March, SCISYS announced a £6m contract win with the BBC, set to run “over the next 3-4 years”. Here, SCISYS will deliver the software used in the scheduling and editing of audio. Recent results showed adjusted

EPS slipped from 9.3p for 2013 to 8.2p for 2014. Currency movements and the risk of spending cuts in the public sector forced management to warn that 2015 profit would likely be flat compared to 2014. This news knocked 10% off the share price as the market re-rated the stock to reflect the lack of growth. Management’s primary goal is to increase operating margin to more than 10% by 2018. The last five years shows the clear progress already made toward this goal. According to consensus data, SCISYS is expected to deliver EPS of 8.75p for 2015. A 9% dividend increase is also forecast. SCISYS is one of AIM’s most successful companies, with a blue-chip customer base and a debt free balance sheet.

£6m contract win with the BBC SCISYS (LON:SSY) FOR Modest valuation Successful firm AGAINST Little growth expected Key-customer risk Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£24m 80p:85p 9.1 1.9% 76p:97p




H&T: an algo’s Top Pick Share filtering website Stockopedia applies an algorithmic scoring method to every company in its database. Known as the StockRank, this methodology has been delivering impressive results. In recent weeks, one company has been dominating the StockRank leaderboard: AIM-quoted pawnbroker H&T. At the time of writing, H&T boasts a StockRank of 99, meaning that it is ranked in the top 1% of all companies quoted on the LSE. By ascribing quantitative measures based on share price performance and profit history, valuation and corporate performance, Stockopedia awards a rating to each company for Quality, Valuation and Momentum. These three scores are then blended to give the StockRank. In the Stockopedia system, H&T currently scores 92 for Quality, 88 for Value and 90 for Momentum. It is important to note that Stockopedia’s ‘Momentum’ score considers not just momentum in the company’s share price but also the scale of any past profit forecast increases. The Stockopedia StockRank system has demonstrated significant outperformance of market indices. For this reason, smallcap investors should take a look at the H&T business. H&T is a pawnbroker operating nearly 200 stores across Britain. Customers use the H&T pawnbroking 4

ranked in the top 1% of all companies service (152 stores) to receive cash, secured by a valued asset or an unsecured loan. Another 39 stores are branded ‘est1897’ and operate as second-hand jewellery outlets. In addition, H&T runs foreign exchange and an unsecured loan service titled ‘Personal Loans’. The rates charged by H&T’s Personal Loans have always been significantly less than more maligned participants in the sector. As a result, recent changes to legislation have had little impact on this business. Management describes Personal Loans as a ‘key medium term opportunity’. A pawnbroking customer is,

unfortunately, someone that typically has poor budgeting skills. This type of customer is frequently a regular user of short-term credit. The shop interface is a very personal service, making satisfied customers ‘sticky’. The alternative finance and pawnbroking sector has undergone considerable upheaval in the last five years, due to the end of the bull market in precious metals and changes to lending regulations. H&T cited the decline in the gold price as the principal reason for pre-tax profits falling almost 20% in 2014. Management considerably derisked H&T in 2014, reducing the size of the pledge book and cutting net debt from £20.7m to £9.7m. In 2014, H&T added personal

H&T runs a portfolio of 192 stores across the UK



StockRank system has demonstrated significant outperformance of market indices loans to its offering. While this part of the business is subject to the FCA’s new cap on high-cost lending, H&T’s profitability has been broadly unaffected due to the already low rates being charged. For example, a £500 loan for six months from H&T Personal Loans would cost a total of £780.42. A similar loan from Satsuma would cost around £850. sunny would demand a total of £993. H&T’s main high street competition comes from Albemarle & Bond. In a former life, Albemarle & Bond, like H&T, had an AIM quote. However, the gold price decline proved too much for Albemarle & Bond and the company sunk into administration in March 2014. A private equity group later purchased 128 Albemarle & Bond stores, and its pledge book, from administrators. The buyer appears to have been over-enthusiastic, with the Albemarle & Bond website now claiming a portfolio of 118 stores. Although other competitors have been reducing their store portfolios, there is still significant competition in the sector. H&T stands out however due to its scale, track record and range of offering.

recent changes to legislation have had little impact on this business H&T is forecast to deliver EPS of 15.1p for 2015, rising to 17.6p the year after. The dividend is expected to show modest progress this year and next, rising to 5.0p, then 5.4p for 2016.

retail accounted for 35% of total sales in 2014

The failure of Albemarle & Bond will remain in the conscience of anyone analysing H&T. This will weigh on the company’s valuation. What seems to be getting people most excited however is not earnings or dividends, but the fact that H&T is a profitable business, trading at a significant discount to net asset value.

there is still significant competition in the sector In this kind of situation, investors must attempt to ascribe an appropriate level of certainty to the value of the assets on the balance sheet and the likely long-term earnings. The asset question boils down to H&T’s ability to successfully lend against pledged assets. One would expect that default levels would be quite easily forecast, leaving only the uncertainty in pledged asset values as a significant risk. Now that the unsecured lending market has undergone drastic adjustment through legislation,

modest valuation for a profitable, dividend-paying company H&T should be well-positioned to establish this offering in its market. The chain of stores effectively acts as free advertising for the service, which may go some way to explaining the lower prices offered versus high-profile competitors. The 2014 balance sheet showed current assets of £87.2m and total liabilities of £25.5m. That suggests a modest valuation for a profitable, dividend-paying company. H&T Group (LON:HAT) FOR Modest valuation Strong market position AGAINST Gold price risk remains Few barriers to competition Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£67m 182p:191p 12.5 2.7% 140p:198p



Keywords: gaming on growth

The computer gaming industry has disappointed investors in the past. Keywords Studios is a different proposition.

The retailer GAME went into administration in 2012. Even Eidos plc, developer of winners including Tomb Raider and Hitman, ultimately disappointed investors. Hardware manufacturers have also been and gone. However, throughout all of this, the industry has continued to grow and is today, by some measures, earning more than the film business.

clients in more than fifteen countries One company that I met recently, Keywords Studios, looks a great way to access this booming industry without the risks of game development or hardware manufacturing. Just as the desperados chasing the California gold rush mostly failed, while the purveyors of picks and shovels prospered, Keywords is thriving via the provision of a range of outsourced services to the games developers. Keywords joined AIM via IPO in the middle of 2013. Originally formed and headquartered in Ireland in 1998, the company today provides translation, audio, art design, test and user support services to game developer clients in more than fifteen countries. In an industry where development 6

profit before tax doubled from €2.4m to €5.1m cycles are typically measured in years, Keywords’ service means that companies need only bring in expertise when it is required. 2014 saw the revenue spread at the company widen as testing and audio service sales increased. Localisation (translation) remains the majority of revenues. The share of revenues derived from localisation is down significantly from the near-90% delivered in 2013 as other services have grown. The company has a strong position in its markets, servicing 20 of the top 25 games companies by revenue and seven of the ten largest mobile game developers. Keywords is thriving in its position as an outsourced supplier to a growing industry. Organic revenues increased by 23% in 2014. Contributions from four acquisitions made in 2014 meant that overall revenues increased by 130%. Adjusted profit before tax doubled from €2.4m to €5.1m. Despite spending €6.0m on acquisitions in the year, Keywords ended 2014 with net cash of €11.0m. The company has never had any debt.

Two more acquisitions were made post year-end. Alchemic Dream of Montreal was bought for a maximum of CAD$1.25m. Alchemic Dream delivers customer care services tailored to game communities, forums and social media channels. The second, smaller acquisition, was Reverb, a Brazilian Portuguese translation specialist. Reverb’s portfolio includes World of Warcraft and Magic: The Gathering. Management declared with results that trading in the first three months of 2015 was in-line with their expectations. According to my data, Keywords is forecast to deliver EPS for the current full year of €0.13. The industry expects further growth from console and particularly mobile gaming. Keywords has the balance sheet to continue to scale up and the market position to enjoy ongoing growth.

never had any debt Keywords Studios (LON:KWS) FOR Long-term growth industry Solid balance sheet AGAINST Short track record Acquisition integration risk Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£75m 124p:126p 16.5 0.7% 140p:167p


Miton: a less geared market play than larger peers Miton Group is a fund management firm led by former Gartmore fund manager Gervais Williams. Mr Williams took the helm in March 2011. His appointment was part of a change of control of the business from when it was known as MAM Funds. This change was accompanied by a significant fundraising that successfully wiped out MAM’s debts. The investment case was clear: an opportunity to give corporate backing to one of the City’s most high profile fund managers.

group suffered a disappointing 2014 Shares in the group suffered a disappointing 2014. The sale of one arm of the business, the retirement of a key fund manager and the poor performance of a collection of funds led to a large amount of customer monies leaving the company. The aggregate effect of these changes was that £1.4bn of funds left the company’s management. The economics of a fund management firm are straightforward. Revenues increase proportionally when

assets under management rise. If a good return can be made on those funds, then assets under management increase further. Strong investment returns will attract more funds away from the competition. Of course, if this runs in the other direction, profits can fall hard.

Strong investment returns will attract more funds Assets under management, and the outlook for this sum are the main determinants of a fund management group’s share price in the long term. Therefore, when investing in such a company, I would always take a view on the outlook for global stock markets. With a smaller group such as Miton however, large changes in assets under management can occur independently of the broader market. Although assets fell hard in 2014, there is the possibility that a star fund manager may be recruited. Such an event would likely push the shares significantly higher. Management’s ability to attract new funds organically is also of note. In 2014, £708m of new funds were brought under management. It is hoped that Miton’s UK Multi Cap Income fund will play a role in developing the business in 2015. Consistent top quartile performance

here is expected to attract more assets. Another exciting prospect is the UK Value Opportunities Fund. According to Hargreaves Lansdown, this fund delivered a 26.8% return in the year to May 2nd 2014, followed by a 14.9% rise the year after. Miton Group delivered an 11% dividend increase for 2014 and another rise is expected this year. The rating versus 2015 forecast earnings suggests that the market is expecting significant earnings growth this year. The dividend yield is respectable and the shares trade at a modest discount to book value. In the event of a wider market sell-off, the shares could present an opportunity for contrarian value investors.

an 11% dividend increase for 2014 Miton Group (LON:MGR) FOR Well-regarded team Decent yield AGAINST Unproven funds Key-person risk Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£47m 27p:28.5p 16.3 2.9% 19p:45p



Universe sets up to attack new markets Universe Group is a retail technology business with a strong position in fuel forecourts. Universe technology encompasses point-ofsale (checkout terminals), payment switches (charging a card) and loyalty schemes.

Universe Group has been a listed plc for sixteen years. In December 2014, Universe announced that its HTEC subsidiary had won the contract to design and build Morrisons’ ‘Match & More’ points scheme. This was an extension of the existing relationship between the companies and was described by Universe as supporting “market forecasts for the Group in the current financial year and beyond”. I can think of no other AIM company of similar scale that has delivered such a high profile service to a FTSE100 firm. Universe boasts a number of other large forecourt customers such as Walmart (Asda), Exxon, Valero (Texaco) and independents MRH and MFG.

supplying Asda for 20 years The value of Universe’s service is reflected in the long-term relationships that it enjoys with customers. The group has been supplying Asda for 20 years. The Morrisons relationship is fifteen years old. Away from petrol retail, Universe, through its recent acquisition of Spedi, provides stock level and pricing software mainly to the Londis and Costcutter chains. 8

The Spedi acquisition takes Universe into a new ‘vertical’ (a distinct market sector). Convenience retail represents an opportunity for Universe to replicate the sale, payment software and loyalty deals that it has delivered to forecourts.

opportunity for Universe to replicate the sale, payment software and loyalty deals There are twice as many convenience stores in the UK as there are petrol forecourts. Universe plans for this market to deliver much of the profit growth at the group in coming years. The pharmacy sector has also been highlighted as an opportunity, as its semi-franchised nature has deterred larger competitors. 2014 results, released in April, showed the significant progress made in the year. Universe reported organic sales growth of 16%. Overall group revenues increased 31%, aided by a full year contribution from a June 2013 acquisition. Counting expenditure on product development as an operating cost, cash inflow for the year from operating activities was £1.8m. Current assets approximately matched liabilities and there was a cash balance of £2.1m.

The reliance on a small number of customers reduced, with the top three Group accounts being responsible for 59% of group revenues in the year, down from 63% in 2013. For 2015, Universe is targeting sales to new forecourt customers, expansion across the forecourt portfolios of existing customers and progress in the convenience store sector. The company admits that dividends are some way off, with cash being prioritised for acquisitions. Consensus forecast is for a modest increase in turnover this year, leading to 0.7p of EPS. Profit growth will be considerable if Universe can replicate its forecourt success in the convenience space.

dividends are some way off Universe Group (LON:UNG) FOR Strong market position Acquisitions bring growth opportunity AGAINST Unproven away from forecourts No dividend Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£17m 7.0p:7.5p 10.1 0 4.5p:8.5p


Event Review April 21st saw the Blackthorn Focus event AIM Investor Focus run for the sixth time. Four AIM-quoted companies participated. An AIM Prospector staff writer met with executive directors of each company. Here is the lowdown on all four.

Christie Group

Christie Group is the leading UK provider of intermediation services (‘Professional Business Services’ or ‘PBS’) for the purchase and sale of property-based small and medium-sized businesses. The company also markets stock and inventory systems (SISS) to retail businesses throughout the UK and continental Europe. The PBS segment is reviving strongly alongside the UK economy, with commission/fees from trade sale transactions increasing with property values. PBS fee income is now back to 2007 levels. SISS growth is driven by trends in the continental European economy. Operating profit has been growing sharply since 2011, such that 2014 operating profits were more than double the previous year. The PBS business retains significant spare IT capacity. High operational gearing within this part of the group points to further sharp increases in profitability should business trends continue. The outlook statement with 2014 finals confirmed management expectation for growth in 2015. Once the inevitable distraction of the General Election is over, investors might begin asking if EPS can recover to 2007 levels i.e. around 19p per share. At that time, shares in Christie Group traded comfortably above 250p.

Christie Group (LON:CTG) Market cap

EMIS Group

EMIS Group provides unique access to UK patient data with a dominant market share (greater than 50%) in connected primary (GP) healthcare IT in England. Accreditation requirements for the handling of personal medical information create a high barrier to entry in this industry. With only two competitors in this space, EMIS has a strong platform for continued expansion into the rest of the UK. Organic operating margins improved significantly in 2014 but are probably now close to the maximum achievable. Overall margins have declined slightly with recent acquisitions in the segments of Child, Community & Mental Health (CCMH), community pharmacy, and secondary/specialist where competition is stronger and more numerous. EMIS pointed to further growth in 2015 with lumpy contract income imminent from the secondary/specialist Ascribe acquisition this year and next. In the medium to long term, EMIS is sure to benefit from the outgoing government’s commitment to integrated care in the NHS. This is part of a Five Year Forward Plan set out in October 2014. EMIS is also a likely beneficiary of the initiative to integrate health and social care systems in Manchester that was announced in February 2015. Potentially, EMIS could be an appealing partner for a multinational medical services group attracted by the UK’s centrally funded and increasingly integrated NHS system.

EMIS Group (LON:EMIS) £33.2m

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Event Review continued…

NAHL Group

The internet has empowered individuals to seek advice for legal and monetary redress following personal injury through noninsurance or non-solicitor websites. The best known of these, National Accident Helpline (an NAHL Group business), enables access to justice and compensation for large numbers of the least able in society. The recent government cuts to legal aid have driven more people to claim through NAHL. Overall revenues, mainly income from NAHL’s ‘Panel Law Firms’ (over 85% of revenues), have grown steadily (average +8%) since 2011. Strong cashflows underpin a generous dividend policy, manifested in a chunky dividend yield. The recent acquisition of Fitzalan Partners, a law firm platform specialising in conveyance services and property, provides access to the highly fragmented consumer legal services market. The total market size here is approximately £10bn pa. NAHL Group’s high dividend yield combined with low PE multiple makes the stock a particularly attractive value investment. Broker consensus is for continuing double-digit annual growth coupled with a single-digit PE multiple. The acquisition of Fitzalan will be immediately earnings enhancing and is forecast to add about £3m in revenues and some £700k in EBITDA for 2015.


Fairpoint Group is the leading UK provider of consumer services in the areas of insolvency solutions (e.g. IVAs), debt and claims management, and (since 2014) legal advice. Despite overall growth, IVA revenues have been in decline for some time, due to lower value agreements and declining fees from new cases. Diversification and acquisitions in high margin debt management services have since helped stabilise group revenues. The 2014 purchase of two legal service firms (Simpson Millar and Foster & Partners) have re-booted revenue growth significantly. More growth is expected in the current year, albeit at lower margin. This segment’s contribution to 2015 revenues and operating profit is expected to be ahead of the 2014 outcome of £25m and £3m respectively. The move into legal practice aggregation in the UK gives Fairpoint access to a new and highly fragmented sector with £10bn in annual fees and growing profits. Fairpoint’s low PE multiple and relatively high dividend yield make it an interesting investment in the current low interest rate environment and ongoing economic recovery.

Fairpoint (LON:FRP) Market cap


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£55.0m 125.5p 7.0 5.4%

11.1 6.1%

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