November 2015 AIM Prospector

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Issue 14 November 2015

Valuation challenge Can this stellar stock keep rising?

*NINE* AIM firms featured modestly rated marketer top software exporter property franchisor plus SIX more AIM companies free to private investors

AIMprospector AIMprospector

Issue 14 November 2015

Valuation challenge Can this stellar stock keep rising?

Welcome to AIMprospector, the online magazine from Blackthorn Focus, dedicated to AIM companies and their investors.

This month’s publication features a massive nine AIM companies. We have the standard five company writeups plus a bonus four that all featured at the recent AIM Investor Focus event. *NINE* AIM firms featured modestly rated marketer

top software exporter property franchisor

plus SIX more AIM companies

free to private investors

Top Pick this month is ASOS plc. ASOS is a fantastic company, one of the finest of all AIM firms. That said, I have some concerns over the valuation that the shares enjoy. I hope that both my admiration and caution are given appropriate emphasis from page 4. The last year has been kind to quality AIM companies, with many shares now trading around long-term highs. This can make it more difficult to write about companies, as price increases dampen the investment case. Nevertheless, a company’s life rarely proceeds without surprises or setbacks and companies can fall out of favour. I would highlight Matchtech, Brainjuicer and Northbridge Industrial Services as three examples of previous high-flyers that are currently trading well off recent highs. That’s why I am pleased to be featuring Fulham Shore this month. There is huge potential in the company’s roll out of the Franco Manca pizza restaurants. Although the shares already trade on a premium rating, the long-term opportunity is clear. At the time of publication, I own shares in The Mission Marketing Group. Also note that Blackthorn Focus, publisher of AIM Prospector, may have ongoing, historic or future business relationships with any company featured. If you value meeting and hearing from successful AIM companies, register your interest in attending AIM Investor Focus events at www.blackthornfocus. com/contact. The event has regularly featured some of AIM’s very most successful companies and I look forward to welcoming discerning AIM investors to future events. Finally, an amendment to the last edition of AIM Prospector. The consensus market expectation for Miton Group predicts a fall in earnings per share this year, not an increase as may have been inferred from the article.

Contents Welcome ........................p2 Fulham Shore.................p3 Top Pick: ASOS.............p4 Cello...............................p6 Craneware......................p7 AIM Investor Focus........p8 MartinCo.....................p10


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Published by: “Enjoy this AIM Prospector and good luck with your AIM endeavours.” David O’Hara, Editor, AIMprospector 2

Blackthorn Focus Limited


3 roll outs on menu at Fulham Shore Fulham Shore is the AIM-quoted plc behind the Franco Manca and The Real Greek restaurant chains. The company is led by David Page, a former Chief Executive of Pizza Express. Mr Page is one of a collection of UK businessmen that has achieved almost revered status among investors for their ability to successfully roll out themed eateries. Like his peers Luke Johnson and the Kaye family, Mr Page attracts a premium price to the shares of any restaurant company that he gets involved with. The maths behind investing in roll outs is simple. As existing sites become profitable, the cash generated is used to build more sites. As a chain matures, cashflows within the business increase as initial fit-out expenses decline as a percentage of revenues. Fulham Shore only began trading in November 2013 following the acquisition of a single Franco Manca franchise in central London. In October of last year, money was raised for the acquisition of The Real Greek restaurant group (seven sites at acquisition) and Fulham Shore moved to AIM. In April of this year, the company undertook another fundraising to buy 99% of the equity

of Franco Manca Holdings Limited (formerly Rocca Limited), bringing all of the Franco Manca restaurants and the brand under Fulham Shore’s control. Another two London Franco Manca sites were soon added. With final results at the end of July, Fulham Shore announced that the company was operating 24 restaurants, comprising nine The Real Greek and fifteen Franco Manca. The Franco Manca website currently lists seventeen trading restaurants. The Real Greek website lists nine. An eighteenth Franco Manca is listed as soon to open.

distinctive in having a very short menu Fulham Shore’s most recent results contained only six months’ contribution from The Real Greek. The balance sheet showed cash of £3.9m. Another £4.75m was added to this via a placing at 11p soon after the year closed. Franco Manca was purchased for £6.2m in cash and the issue of around £21.3m worth of shares. Franco Manca is distinctive in having a very short menu, with a selection of just six pizzas. Pizza Express has 29. A tomato, mozzarella and basil pizza at Franco Manca is just £5.90. That’s around two pounds cheaper than the similar pizza at Prezzo. There are only two side dishes available at Franco Manca and diners can drink filtered water free. Shareholders will be delighted

a proven restaurant roll out winner to know that this restraint hasn’t prevented the chain quickly becoming very popular, with TripAdvisor users frequently ranking Franco Manca among the top 10% of all London restaurants. The Real Greek enjoys similar ratings. Mr Page has already earned his spurs with successes at Pizza Express, Gourmet Burger Kitchen and Bombay Bicycle Club. Shares in Fulham Shore look a great way to back a proven restaurant roll out winner.

Update On Monday, Fulham Shore announced that a new franchised restaurant had been acquired. ‘Bukowski’ is a charcoal grill burger restaurant. Fulham Shore will be opening a franchise in Soho. Fitout costs for the new site will be £500k. Bukowski also enjoys strongly positive reviews on TripAdvisor. Fulham Shore (LON:FUL) FOR Top management Expanding fast AGAINST High valuation Unproven outside South-East Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£97m 16p:16.5p 31.7 0 7.8p:24p




Is AIM star on its way back to Earth? ASOS is one of the greatest AIM companies of all time. But its mega-growth glory days look behind it. ASOS is among the most successful internet retailers in the world. It is the capitalist dream marriage between entrepreneurial risk-taking and equity markets to build a world-class operation from almost a standing start. ASOS’ bold move in the early part of the century was to sell fashion

online. This flew in the face of received wisdom of the time, much of which was inspired by high-profile internet failures, particularly

ASOS leads on the online market among 15-34 year old comsumers

Without the ability to see, feel and try on for size, there were many doubts as to whether online clothing retail would ever succeed. In the early days, ASOS went by the name asSeenonScreen. The raison d’être of the site was to quickly supply fashion designs that had first gained prominence when worn by characters in film/television. As online retail took off, the company switched to general fashion retail and rebranded to ASOS. ASOS quickly became a leading fashion retailer to the UK’s under 25s. Management seized the initiative, entering new markets overseas. A period of massive sales, profit and share price growth followed.

switched to general fashion retail and rebranded to ASOS ASOS became the darling of fund managers, the financial media and shareholders. From trading as low as 5p in the aftermath of the dot-com bust, the shares first passed the ten pounds mark in 2010. The ascent did not stop there. As overseas growth continued, investors’ appetite for ASOS stock grew further and the shares achieved an enormous premium 4

AIMprospector over old-economy retailers such as Debenhams and M&S.

the darling of fund managers Everyone that has been following AIM shares during ASOS’ time has a story about how they bought/almost bought the stock and what it would be worth today. A friend of mine is proud of the fact that he determined they were cheap at 5p and bought before soon selling at 10p when he concluded that the shares were overpriced.

enormous premium over old-economy retailers ASOS’ stellar success means that the company is frequently cited as the paradigm of AIM investments. October’s AIM awards ceremony saw the company named the best performer over the lifetime of the AIM market. That surprised me as despite all of its success and growth, ASOS is yet to pay its shareholders a dividend. Nearly half of all orders are placed on mobile platforms

TOPpick Elsewhere, James Halstead plc has paid an increasing dividend to shareholders for nearly forty years. There’s a lot of love for ASOS. Recent results however, have left me to wonder if the company’s days of breakneck growth are done. Final results for the year ending August 2015 showed an 18% increase in revenues and a 19% rise in gross profit. Profit before tax however, advanced just 1%. Diluted earnings per share was near flat. The lack of growth at the bottom line should concern the market more than it appears to do. ASOS offered some credible reasons for this, such as adverse exchange rate movements. Worryingly however, ASOS has taken on the disingenuous lingo that other retailers have adopted in recent years, that of ‘investing’ by cutting prices to customers. ASOS uses this Pythonesque device to tell shareholders that margins are going to be lower for 2016. This ought to provoke the standard dismissal of ‘sales are vanity, profit is sanity’ but ASOS’ fantastic history means that it gets more leeway with the market.

ASOS is a fantastic company deserving of a premium valuation

frequently cited as the paradigm of AIM investments sites such as boohoo and missguided. In the context of increasing competition and stuttering bottom line growth, ASOS shares look to be trading at completely the wrong price. While I would accept that ASOS is a fantastic company deserving of a premium valuation, a dramatic improvement in profitability would be required before I would drop any claim that the shares are overpriced. The absence of a dividend also means that unless you are a staff member, the only way to make money from ASOS is to sell some stock. While the balance sheet will support any further real investment (e.g. warehousing, tech) it is actually flattered by the lack of a dividend payment, meaning that many millions are being retained within the business. ASOS’ Founder Nick Robertson sold shares in the company earlier this year at an average price of 2,716.5p. I don’t know how much of an expert stock market investor Mr Robertson is, but he likely knows ASOS better than anyone else, along with the market that the company operates in. ASOS (LON:ASC)

Investors appear to be treating ASOS complacently. While ASOS had the online space almost to itself ten years ago, established bricks and mortar players such as Debenhams and Next have upped their game significantly. ASOS’ target space of twenty-somethings is also more competitive now, particularly at the bottom end with the emergence of

FOR Strong market position Great track record AGAINST High valuation Competitive landscape Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£2,702m 3,268p:3.270p 60.4 0 2,146p:4,259p



Cello. Is it dividends you’re looking for?

Marketing firm Cello is one of just 25 AIM shares with a track record of delivering dividend increases to shareholders for more than seven years running. The historic success and today’s modest rating mean that the shares are worthy of a closer look. Cello is a marketing group comprising two divisions: Cello Health and Cello Signal. Cello Health provides expertise to the global pharmaceutical and health sectors. Cello’s collection of marketing agencies aims to serve the communication needs of pharmaceutical developers through the full product life cycle, from preclinical testing to approval, launch and patent expiry. Cello Health has performed well in recent years and is key to the Group’s success, delivering around 2.5 times the profit managed by Cello Signal.

Cello Signal is a more typical general marketing agency Cello Signal is a more typical general marketing agency, offering its services to consumer brands and business-to-business clients. The recent annual report highlights some notable accounts, such as the marketing for Barr’s Irn Bru at the Commonwealth Games and 6

the Royal British Legion’s D-Day commemorations. Due to a barnstorming first half of 2014 and costs associated with senior hires to support expansion, Cello Signal’s first half performance dipped in 2015. One Signal division that looks particularly interesting is its Pulsar suite of social media products. From launch in April 2013, Pulsar now has 150 clients and is delivering annualised license revenue of £2.0m. Signal looks to be onto a winner with Pulsar and the division is expected to move into profit by the end of 2015. Unfortunately, a VAT issue is a major problem. This has arisen from some of Signal’s charity activities, where it turns out that the Group may not have been charging correctly. A £1.1m provision was added to the accounts in H1 2015, taking the full provision to £3.2m. This amounts to around half of 2014 pretax profit. Cello is not the first company to have fallen foul of a change of judgement/opinion at HMRC. Disappointments at quality

companies can present buying opportunities. That may be the case with Cello. Following publication of H1 results, shares in the company fell to 80p, their lowest price since January 2014. The current share price suggests that Cello may be entering a period where it will be struggling for earnings growth. That seems a little harsh, given that revenues have increased at an average rate of +6.5% a year over the last five years, with dividends racing ahead at an average of almost 15% per annum.

VAT issue should not be expected to worsen further The last reported balance sheet showed long-term borrowings of £10.2m, comparable to one year’s EBITDA. Trade receivables were £8m ahead of payables. Cello has been advised that its VAT issue should not be expected to worsen further. Indeed, there is the possibility that the Group will be able to secure contributions from some clients.

Cello Group (LON:CLL) FOR Successful firm Discount rating AGAINST Modest growth forecast VAT issue not finalised Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£71m 82p:85p 10.0 3.3% 79p:107p


Edinburgh firm moves beyond AIM fringe Craneware is one of AIM’s cute smallcap success stories. Such a success that it is now pushing toward midcap status. First incorporated in 1999 in Livingston, Craneware is a successful exporter of pricing and billing software to hospitals in the US. Today the company is headquartered in Edinburgh and has staff at offices in Arizona, Tennessee, Atlanta and Massachusetts.

just two modest acquisitions in the last five years The company joined AIM in September 2007 and paid shareholders a dividend for the full year 2008. The dividend has increased every year since. In the last five years, revenue increases have averaged 9.6% a year. Dividend growth has outstripped this, increasing by an average of 12.8% a year in that time. Much of the revenue growth has been delivered organically, with the company making just two modest acquisitions in the last five years. Craneware’s software products are used by American hospitals to assess and report cost to the patient of the treatment required. Craneware helps hospitals identify billable items in a course of treatment and handles the

workflow should bills be queried. Being embedded in such a vital and high revenue business has made Craneware into the type of company that ticks many boxes for textbook investors. Craneware technology is part of its customers’ day-to-day business. It is deeply embedded in business practice and its users depend on it for their lifeblood. Customers are loathe to cut out or replace such systems. This leads to a high degree of recurring income and pricing power. Craneware’s final results for the year ended June 2015 are a paradigm of how a software company should demonstrate its future earnings stream. Visible revenues (three year horizon) were reported at $123.4m. This comprised $93.1m of contract revenue (each future year is itemised with the results), $28.9m of renewal activities (expected contract renewal income – supported by historical customer behaviours) and $1.4m of other revenues. The total figure was 10.2% ahead of the previous year.

Management are proud of their success at anticipating trends within their target market, particularly the move toward ‘value-driven healthcare’. Commentary in the most recent results described this change as presenting “a significant opportunity for the expansion of Craneware”. That reads more positively than the growth being forecast and perhaps explains why the shares appear to trade on a high rating.

significant premium rating is deserved Past performance suggests a significant premium rating is deserved at Craneware. With directors owning over 26% of the shares, the company is likely to evade the clutches of an acquirer for as long as its founders wish.

Craneware (LON:CRW) FOR High earnings visibility Essential product

ticks many boxes for textbook investors

AGAINST Operates in narrow niche High valuation

The last balance sheet showed cash of $41.8m and total liabilities of $30.6m. More modest earnings growth is forecast this year and next.

Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£190m 700p:730p 26.6 2.2% 473p:730p



Event Review AIM Investor Focus ran for the eighth time on October 15th at the offices of finnCap. Four AIM companies were present on the day. AIM Prospector heard from all four.

Keywords Studios Keywords Studios began life in 1998 as a one-woman translation service in Dublin. The company is now an international leader in the provision of outsourced technical services to the $90bn global video gaming industry. The company’s IPO on AIM in 2013 raised €10m for an ambitious acquisition-led expansion. Strong organic growth in core services (localisation), key timely acquisitions (in customer care), and horizontal expansion (in art production) have contributed to Keywords Studios’ spectacular growth in both sales (+500%) and pre-tax profits (+600%) between 2010 and 2014. The market is expecting further strong results for FY2015 with sales and pre-tax profits rising to €55m (+48%) and €8m (+45%) respectively. The fragmented market for technical services in the video games sector is growing at 8%pa. This has enabled the Keywords to win and retain new business without resorting to pricing tactics. Keywords Studios shares have enjoyed a revaluation as more investors have become aware of the potential of the group’s significant outsourcing presence in the global video games industry. The biggest shareholder, the founding family, is now a passive investor with 24.8% of the equity while institutions hold over 40%. Watch this space!

Keywords Studios plc (LON:KWS) Market cap

NWF Group NWF is a support services conglomerate operating mainly in England. Its historic North West cooperative agricultural roots are represented by its ruminant feed business which at the end of last year (31 May 2015) accounted for under 30% of sales. Company management runs a portfolio of value-adding support services for the farming, supermarket, and fuel oil distribution sectors. Outperformance in one division can offset tougher market conditions in another. This is reflected in the shares’ modest PE rating. Despite faltering sales in the last three years, NWF remains a cash generative mature enterprise that continues to deliver dividend growth to shareholders. NWF continues to build value adding services within each of the group’s three divisions. Efficiency gains have further assisted the steady decline in net debt over the past 10 years. The most likely employment of the company’s strong financial position will be in strengthening the largest divisions of feed and fuel. Acquisition opportunities here are being constantly evaluated. One recent example, New Breed, an agricultural advisory business, was acquired in June. This business is expected to make a contribution of some £400k of sales to the feed division for FY 2016. The share price has had a good run since the company’s 31 May year end, hitting new highs. NWF’s defensive qualities have likely found it in favour with buyers during the recent uncertain financial markets. NWF (LON:NWF)


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Event Review continued… Miton Group

The Mission Marketing Group*

After a history of several corporate restructurings, Miton is trying to differentiate itself from the myriad ‘long-only’ asset management firms. Fund managers in the group are encouraged to pursue value stocks with low volatility premium returns within single strategy funds. This business plan, developed by Managing Director Gervais Williams, is already delivering. The CF Miton Multi-Cap Income Fund is enjoying strong net inflows and excellent ratings. Miton’s ambitious sales efforts have seen marketing staff at the Group now outnumber portfolio managers. The sale of Miton’s Liverpool business (AUM of £0.4bn) accounted for a large portion of the fall in Assets Under Management (AUM) to £2.1bn in H1 2015. The result was a decline in net revenue of 26% to £7.1m. However, a positive result of £0.6m was reached compared with a loss for the same period last year, caused by exceptional charges related to losses of £12m on the disposal of Miton Capital Partners. Further inflows since the interims have lifted AUM to £2.36bn by end-August and a star portfolio manager has been recruited for the launch of a new European equities fund in Q4. Altogether, the revenue outlook for H2 is for a continuation of the recovery enjoyed in Q2. The effects of the new marketing effort are clearly being enjoyed and should contribute to a strong finish to 2015.

The Mission Marketing Group is run by a twelve-person board consisting of nine executive directors (the CEOs of the member agencies) and three non-executive directors. The company has prospered since a major restructuring in 2010. Management strategy is to mould the client offering from three groups of professionals: ‘integrated generalists’, ‘activity specialists’, and ‘sector specialists’. Executive Chairman David Morgan refers to the confluence of this expertise as ‘concinnity’ – where referrrals to other agencies within the Group result in enhanced aggregate sales. This is demonstrated by the performance of The Mission’s PR agency Proof, where a series of joint pitches with advertising agency April Six have seen Proof deliver a profit for the first six months of the year that is equal to their result for the entire previous twelve months. The Mission should be a classic recovery story. All an investor needs is faith in the skill and charisma of the current executive chairman David Morgan in successfully knitting together a mini WPP. Brokers are forecasting approximately 10% profit growth for each of the coming two years. The company’s single digit forward PE and discount to listed peers suggests that there is still some scepticism as to whether The Mission is fully extracting the corporate/financial synergies of its structure. * at the time of publishing, David O’Hara, Editor of AIM Prospector, is a shareholder in The Mission Marketing Group.

Miton Group (LON:MGR)

The Mission Marketing Group (LON:TMMG)

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If you would like to attend a future AIM Investor Focus event and hear from some of the most successful companies on the market, contact Blackthorn Focus



Lettings franchisor is growing up fast MartinCo is a lettings and estate agency operating from nearly 300 offices around the UK. The company’s shares have traded on AIM since December 2013. MartinCo has grown both organically and through acquisition. The company possesses many of the characteristics of a smallcap investment that are most desired: it is established, successful, dividend paying and produces dependable cashflows. Funds raised at the 2013 IPO were used to purchase Legal & General’s property franchise business ‘Xperience’ just over a year later. This added four new franchised brands to the existing Martin & Co business. This acquisition is key to understanding MartinCo’s growth over the last two years.

the fourth largest property group in the UK Like Martin & Co, Xperience ran a franchised model. Xperience differed however, in having a more even 50:50 split in revenues between sales and lettings. The acquisition of Xperience increased the Group’s total managed portfolio by around one third. MartinCo is now the fourth largest property group (as measured by office count) in the UK. The MartinCo business benefits from some powerful trends. Net migration to the UK brings many working age people to the country


every year. The ageing UK population delays the release of family homes onto the market. This reduces the supply of homes for sale, pushing up prices and increasing demand for rental property. Divorce rates have led to an increase in the number of households being formed and a decrease in the average number of people per household. The result is that in the last twenty years, the proportion of homes being rented in the UK has doubled. A franchised lettings business is ideally placed to profit from this. Letting produces a longstanding and dependable income stream. Under the model that MartinCo runs, most of the business risk lies with the landlords and franchisees. Landlords must foot the bill for maintenance and repairs, while franchisees bear the fixed cost of staff.

a longstanding and dependable income stream

The risk to MartinCo comes from competition and a market downturn, which would see agency fees decline and voids (lack of tenancy) increase. Recent experience and the trends outlined above, show how unlikely the second scenario is.

increased the skew toward sales The Group boasts a sound balance sheet. Current assets of £4.7m at the half-year stage comprised £3.8m of cash. Total liabilities amounted to £0.5m less than the current asset figure. MartinCo is not bulletproof however. The Xperience acquisition increased the skew toward sales, a notoriously more volatile market. Nevertheless, the revenue mix at the Group is still overwhelmingly derived from lettings, with sales accounting for only around 20%. The Group has a progressive dividend policy, with a huge 38% increase announced at the half-year stage. Management is targeting growing the business to 400/500 offices. MartinCo (LON:MCO) FOR Dependable cashflows Supportive demographics AGAINST Interest rate risk Possible EU out vote Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£44m 193p:198p 19.7 2.8% 85p:200p


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