May 2016 AIM Prospector

Page 1


Issue 16 May 2016

All staff to the pumps While other pubs are sinking, this AIM chain thrives

*NINE* AIM firms featured highly rated luxury manufacturer successful IPO high income AIM midcap transformed retailer/distributor free to private investors

AIMprospector AIMprospector

Issue 16 May 2016

All staff to the pumps While other pubs are sinking, this AIM chain thrives

*NINE* AIM firms featured highly rated luxury manufacturer successful IPO high income AIM midcap transformed retailer/distributor free to private investors

Welcome to AIMprospector, the online publication from Blackthorn Focus, dedicated to AIM-quoted companies. This month I am delighted to be bringing news of the latest Blackthorn Focus (publisher of AIM Prospector) initiative: ALPHA Investor Forum.

This is an investment event for the UK’s most dedicated share followers. The event runs in Cambridge on June 27th. A collection of top drawer speakers are lined up: including the UK’s most successful quoted company, ARM Holdings. This is a superstar stock, increasing its dividend to shareholders every year for the last twelve, at an average rate of 27% a year. You are unlikely to ever meet a better company in your investing lifetime. To this, add the Motley Fool’s legendary dividend investor Mr Terry Harper: ‘tjh290633’. This man is the private investor’s answer to famed fund manager Neil Woodford. Terry has a track record stretching back more than 25 years and he has absolutely thrashed the FTSE 100 with his low risk dividend investment strategy. Terry will be at the ALPHA Investor Forum to explain just how he does it and what is in his portfolio today. AIM tech star Quartix will also be presenting at the event. Though it hasn’t yet been listed for a full two years, Quartix is already fast becoming one of AIM’s most respected companies. The company is enjoying strong growth and is rewarding shareholders with dividends. As if those three weren’t enough, I will speaking publicly for the first time at ALPHA Investor Forum. I will be detailing a collection of AIM companies that I am particularly excited by, including one AIM share that I have never discussed in any media previously. In addition, I will be advising on the advisers – naming and shaming the City brokers and PRs that I associate with ropey, low quality companies. Time and again these firms appear on the news releases of companies that go on to deliver rubbish returns for investors and I’m fixing to start naming every last one of them at ALPHA Investor Forum. Furthermore, you are going to be hearing my two market thrashing AIM investment strategies. In the years that these portfolios have been running, each has beaten AIM, the FTSE 250 and the FTSE 100 by huge margins. To register for this event and more information, see the event webpage.

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

Contents Welcome . ......................p2 Cerillion.........................p3 Top Pick: Young & Co....................p4 ALPHA Investor Forum...............p6 Conviviality Retail..........p7 Executive Insight............p8 Epwin.............................p9 AIM Investor Focus......p10 Mulberry......................p12


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New IPO gets top billing Shares in billing software provider Cerillion plc have rocketed since its March 18th IPO. The company’s customers predominantly operate in the telecoms sector, with some additional sales to the financial services and utility industries. Reliable and accurate billing is vital to a telecom provider’s success. Changing software comprises a huge risk to such a company and thus Cerillion’s sales are frequently expected to be longstanding. Headquartered in London, Cerillion employed a total of 164 staff at IPO, with around half of these based in Pune, India. The company was formed over 16 years ago and management still owns more than 50% of the equity, with CEO Louis Hall retaining 41%.

sales are frequently expected to be longstanding Pre-IPO documentation shows a high margin business that has delivered a similar level of sales and profits for the last three financial years. For the year ending September 2015, Cerillion reported a posttax profit of £2.1m on revenues of £14.0m. Cerillion has a commendable cash flow history, with £8.5m of cash being generated over the last seven years. The admission document showed bank loans totalling £0.4m. It is unsurprising that such a track record attracted a surge of buyers following IPO. The opportunity was

sweetened by the promise that Cerillion will pay out between one third and one half of annual free cash flow to shareholders as a dividend. AIM Prospector expects the full year dividend payout to be around 3.5p.

bank loans totalling £0.4m Two weeks after IPO, Cerillion confirmed a new $2.4m contract with an existing customer. The same deal had been highlighted as a prospect in the IPO documentation. Cerillion’s lack of profit and sales growth over the last three years will have weighed on the IPO price. However, the company’s ability to quickly deliver on its IPO promises has forced the market to reappraise the shares significantly higher. As a provider of such vital functionality to its customers, Cerillion is the type of share that is typically rated higher than its growth prospects might suggest. A share price in three figures is easily justified in my view. Cerillion bases expectations of future growth on both its own product innovation and underlying market advances. Cerillion Skyline is an online software-as-a-service billing platform that the company hopes to sell into markets beyond Cerillion’s

telecom mainstay. The product is hailed by Cerillion as empowering service providers of all sizes through the delivery of functionality that was previously only affordable to blue chips. Cerillion is already successfully selling Skyline, with the service priced on a transactional basis.

forced the market to reappraise Cerillion has attracted the attentions of some of the UK’s most celebrated investors. ‘Naked Trader’ Robbie Burns has been buying the shares, as has Lord John Lee. Further gloss is provided by independent forecasts of 15% annual growth in the convergent (multiple services on one network) market from here until 2020. Cerillion (LON:CER) FOR Modest valuation Good earnings visibility AGAINST Low historic growth Small scale Market cap Bid:offer

£37m 123p:125p

P/E (forecast)


Yield (forecast)


52week low:high





Bottoms up for one of AIM’s top stocks With history going back to 1831, Young & Co is one of AIM’s super-established investment grade companies. Formed in Wandsworth, south London, Young’s remains a southern England pub company, with its most northerly property being ‘The Bell at Stow’ in the Cotswolds. Second most northerly is the famous King’s Arms pub, situated a stone’s throw of some of Oxford’s most significant university sites.

Managed pubs receive some criticism Having disposed of its brewery operations in 2011, Young & Co is now exclusively a pub operator. Young’s runs three divisions: Ram Pub Company, Geronimo and the managed Young’s estate. At the end of March 2015, the group was operating 129 Young’s, 37 Geronimo and 80 Ram Pub Company sites.

Geronimo is positioned firmly in the gastro pub sector, with only one pub outside the M25, ‘The Red Barn’ at Lingfield. The fact that The Red Barn has a wine list, an afternoon tea menu and a £24.50 steak option says much about the type of clientele that Geronimo is seeking. As always when looking at pub shares, we need to see the split between tenanted and managed properties. In a managed pub, all staff members are just that and will be paid a salary/wage by the pub operator. Managed pubs receive some criticism, as the pub company (PubCo) has complete control, the result can be a lack of differentiation between managed pubs from the choice of drinks to the décor. Second, the staff in a managed pub have little financial

Geronimo is Young’s premium gastro pub group chain


interest in its success, which can lead to a poor customer experience. A tenanted pub typically involves a licensee paying an upfront fee to the pub company, followed by a regular rent. The licensee is then tied to a supply arrangement with the pub company but is permitted a guest ale. Managed operations are typically preferable to the pub company, whereas the entrepreneurial motivations of a tenant can lead to more innovation and an individual pub vibe. Handling the managed/tenanted conundrum is crucial to a pub company like Young’s. The company’s track record suggests that this is just one of a number of key decisions that Young’s has been getting dead right for a sustained period of time. Ram Pub Company is Young’s tenanted estate. 34 of these are London venues, including City and West End locations. This includes a collection of pretty cool Grand Union named pubs, where the tenant is showcasing a format that appears to mesh pub, restaurant and bar into a single venue. With pubs closing across the UK at an alarming rate, you may wonder



whether the sector is investable at all. According to recent statistics, the UK is losing 29 pubs a week. There are a number of factors behind this trend and it should not be assumed that the decline will continue indefinitely. The smoking ban, attitudes toward drink-driving, the popularity of wine and house price inflation (making conversion preferable) have all contributed but don’t appear sufficient to provide a fatal blow.

motivations of a tenant can lead to more innovation This is evidenced by the fact that while many pubs are closing, Young’s has continued to thrive. In the last five years, earnings per share has tracked the share price, nearly doubling. Dividends at the company have been increased for eighteen years running, with the annual rate of increase over the last five years averaging 4.8% a year. Impressive trading continues. The most recent half year report showed like-for-like growth within the managed estate of 5.5%, the fourth consecutive year of growth greater than 5%. One impressive source of growth is Geronimo. Acquired as a 26-strong chain in December 2010, the Geronimo estate totalled 38 at the end of September 2015. Young’s has promised to expand Geronimo to 40 sites. As for Ram Pub Company, Young’s annual report reveals that, due to the size of the its tenanted portfolio, they will not be required to offer tenants a tie-free option. This could be a material advantage to Young’s versus

The Ship in Wandsworth, Young’s historic heartland

its larger competitors, whose margins would likely suffer if its tenants were able to secure more of their supplies from other providers.

dead right for a sustained period of time Young’s continues to innovate with its Burger Shack concept. After beginning life as a mobile burger bar at several Young’s pubs and events, in April Young’s opened the first standalone Burger Shack at premises in Wimbledon. This is a neat play on both the street food and premium burger trends. Young’s has clearly seen enough to encourage it to invest in Burger Shack. Shareholders will be imagining what level of earnings uplift a successful roll out of Burger Shack would mean for Young’s, with the most optimistic thinking of the Costa Coffee affect on Whitbread. Another two years of earnings and dividend growth are forecast for the shares, supported by the expansion of

the estate and encouraging sales trends. Young & Co shares are not cheap but it is one of those successful AIM companies that rarely trades at a bargain valuation. The share price has solid backing in the form of property. An excellent counter-example to any naysayer’s claims that AIM is devoid of investment grade companies, Young’s is a firm that any exchange would be proud to host. It is an affirming example of how shareholders today can still become enriched by the Great British pub. Young & Co.’s Brewery (LON:YNGA) FOR Long-term winners Trading is encouraging AGAINST Modest growth Alcohol trends bad Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£515m 1,192p:1,220p 21.3 1.5% 1036p:1320p



June 27th 2016 Churchill College, Cambridge A Blackthorn Focus event for the UK’s dedicated stock market investors Featuring some of the UK’s most celebrated listed companies and investors Two AIM strategies to beat the market

World class company: ARM Holdings ●● ●● ●● ●● ●●

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12 years of dividend increases average increase of 27% a year £13bn market capitalisation how ARM’s business model sees shareholders thrive the future landscape of the tech industry

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Mark Rogers, The Motley Fool: How to discover market beating shares

Mr Terry Harper: thrashing the FTSE 100 ●● ●● ●● ●●



the investment community’s best kept secret investor, ‘tjh290633’ how Terry smashed the FTSE 100 over a 25 year stretch first appearance at a public event what Terry has in his portfolio today

The fast-growing tech gem ●●

speaking publicly for the first time in six years how I turned a £4.6k investment into £25k in just two years how to spot an AIM stinker two AIM portfolios that outperformed the market for years AIM’s 10 most up-and-coming shares

●● ●● ●●

embracing your inner “Foolishness” can improve your wealth my five favourite mid-caps my stock picking strategy Mark is Lead Advisor to an investment newsletter that has beated the AllShare by 16% in 12 months


Quartix is one of the most successful technology IPOs of the decade hear from entrepreneur founders at ALPHA Investor Forum recent results showed 28% revenue growth, 26% profit growth

Event chair Robert Mundy, Research Tree Rob is CEO at Research Tree, the equity research platform

Special intro price for a limited time only: £119 inc. VAT Register here: from 10:00am at Churchill College, Cambridge. Churchill is a campus college located one a mile from the centre of Cambridge with its own private car park Delegate price includes lunch and coffee breaks

About Blackthorn Focus Blackthorn Focus is the company behind the online publication AIM Prospector. David O’Hara, Founder, was responsible for the government epetition that called for an end to the ban on AIM shares in ISAs. Blackthorn Focus operates the successful corporate access event 6 AIM Investor Focus.

Programme contents may change at any point. Refund policy: Blackthorn Focus will accept a replacement delegate for any booking. Cancellations received before the event will receive a 25% refund.


Scaled-up drinks firm set for rule changes Conviviality joined AIM as Conviviality Retail in July 2013. In October 2015, the company undertook the reverse takeover of Matthew Clark.

This transformed Conviviality from chiefly a franchised off-licence operation into “the UK’s leading independent drinks wholesaling group to the on- and off-trade”. The company name was then changed to reflect the reduction in contribution from retail activities. The move toward wholesaling was further advanced by the £60m acquisition of Bibendum earlier in May. The revenue mix across the group is now approximately 1 part retail to 4 parts wholesale. Conviviality retails through Bargain Booze, Bargain Booze Select Convenience (alcohol plus general convenience retail) and Wine Rack.

booze is becoming uncool Matthew Clark is a supplier to the “on-trade”, premises where alcohol is consumed e.g. pubs, bars, restaurants and hotels. Approximately 60% of this industry is “tied” to a supplier, with the rest “free” to use an independent wholesaler such as Matthew Clark. Retail operations are franchised.

There are a total of 624 stores in the portfolio. Multi-site franchisees are especially valued by Conviviality as they are typically more profitable. They now account for around one half of the retail estate. The Matthew Clark acquisition completed in October 2015. Conviviality’s reporting year runs to April. We will not see a full year contribution from the wholesale operations until 2017 results.

higher revenues at better margins Possible changes to the way that pubs are forced to purchase alcohol (the ‘tie’) from one supplier could liberate the on-trade. Such changes to the sector would significantly increase Conviviality’s addressable market. This would be transformational as the improved efficiencies in purchasing and logistics would bring higher revenues at better margins. Results scheduled for July are expected to show a 24% increase in earnings per share with the dividend showing a small inflation-like increase. Forecast dividend cover is low at around 50%. 2017 earnings are expected to be around one third higher, thanks to acquisitions, securing future dividends. All said, the sector worries me. The trends around alcohol consumption

retail operations are franchised in the UK do not read well for companies such as Conviviality. Booze is becoming uncool. According to ONS numbers, in 2005, 19% of adults in the UK were teetotal. By 2013, this figure had reached 21%. Most worrying is that a large lump of that increase comes from young adults aged 16 to 24 swearing off alcohol. While the craft beer trend is strong, it is not enough to stop pubs closing at pace across the UK. The Matthew Clark acquisition is transformational. It broadens Conviviality’s revenue base, reducing earnings risk. The expected dividend yield and current market capitalisation would, in cash terms, see Conviviality become one of AIM’s biggest dividend payers. The Bibendum acquisition augments the positive story further still.

Conviviality (LON:CVR) FOR Rule changes will help Good yield AGAINST Alcohol trends bad Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£323m 208.75p:210.25p 15.0 4.1% 141p:239p



Executive Insight Private investors are an important segment of the UK equities market. We are generally longer term holders and therefore good sources of capital for quoted companies. Our importance will continue to increase as government reforms to pensions and ISAs take effect. As we take on more responsibility over our savings, we need the right tools to invest effectively.

Private investors are bigger owners of UK plc than UK institutions Ownership of listed UK shares by retail investors has ranged between a material 11% and 12% over the last 5 years, far higher than the share held by the UK institutions, making them the largest investor group other than foreign investors. This shows the importance to UK plc of the retail investor base and it is a fact that is often not appreciated. Furthermore, despite perceptions, private investors are longer term sources of capital for companies according to Capita Asset Services:

“On average, retail shareholders hang on to a share for five years, much longer than the two year holding period of institutional and foreign investors”

ISA and pension reforms will maintain trend of growing retail ownership In 2013, George Osborne made it possible to pick AIM shares in your ISA. According to research by TD Direct in late 2014, in that year alone this led to a 76% increase in AIM share ownership by private investors on its platform. Trading AIM shares no longer incurs stamp duty. ISA allowances have increased from £7k pa before 2010 to £15k today and will be £20k from next year. All of this has driven, and will continue to drive, capital into equities as private investors take advantage of the tax benefits. Quantitative easing has kept short, medium and long-term interest rates so low that annuities offer deeply unattractive yields. Fortunately pension/SIPP reforms in 2014/15 have given greater freedom to individuals. Rather than choosing annuities and locking in awful yields based on current fixed income products, people can now take more control of their savings. This has resulted in capital flowing to asset classes with far more attractive yield potential, e.g. equities, where decent returns on investment can still be made. This trend will continue.


Robert Mundy, CEO at Research Tree

Greater active management will make retail investors increasingly important As individuals take more control of their savings there will, in our view, be a continuing rise in the number of private investors managing their own assets:

At the small-to-mid-cap end of the market, retail investors often comprise the lion’s share of the liquidity and share register of quoted companies.

Demand for the tools necessary to manage your own investments has risen strongly (eg Research Tree’s professional equity research platform, Stockopedia’s screening tools and blogs, and Investors Chronicle’s financial journalism).

Share societies and forums set up to educate and protect private investors (such as ShareSoc and BlueShare) have seen impressive growth in members in recent years.

There are numerous examples of private investors building up material equity stakes, some (such as this example) to the point where they must be declared.

Many of these investors are sophisticated, and many are high net worth. Although there is admittedly a lot of white noise on the internet forums, there is also a decent amount of rigorous, high quality dialogue and written research. Smart quoted companies are looking for ways to better engage with this growing set of investors, and ensuring that they are better informed. This can only help liquidity, price volatility, market efficiency and therefore fair valuations.

Robert Mundy is CEO at Research Tree, an investment research distribution platform.


Products firm is an AIM income play Returning to the market in July 2014, Epwin is a longestablished provider of specialist building products, mostly to the residential construction/ maintenance industry. Epwin sells the type of products that people expect to buy just once. This includes guttering, window frames, door frames and composite doors. Epwin is a business-to-business company, not a retailer. Customers include private residential developers, housing associations and contractors. The company employs 2,600 people in the UK, with its head office in Solihull and largest site at Tamworth.

significant operating margin improvement was delivered For the year ending 2015, Epwin reported profit before tax of £18.6m on revenues of £256m. While this was broadly flat on the previous year, a significant operating margin improvement was delivered, rising from 7.1% to 7.9%. Further progress in 2016 has already been signposted, thanks in part to the acquisitions of Stormking (entrance canopies, bay window roofs, chimneys) and Ecodek, a manufacturer of composite decking materials. These two acquisitions are expected to deliver

around £30m of revenue in 2016. Epwin ended 2015 with £14.4m of net debt, as a result of a total cash spend of £20.9m on Ecodek and Stormking. Further acquisitions remain part of management’s growth strategy. Both debt and paper were used to finance Ecodek and Stormking. Epwin has a £60m debt facility through to December 2019.

17% EPS forecast increase for 2016 The acquisitions, plus margin improvements, have inspired a 17% EPS forecast increase for 2016. Growth is forecast to moderate in 2017, with EPS advancing 6%. Perhaps the most notable point is Epwin’s status as an AIM income play. The 50% increase in dividend announced with final results puts Epwin among a small number (sixteen at the last check) of AIM companies that combine modest size (over £100m market cap) with a dividend yield greater than 4%. It is obvious from the product range that Epwin is sensitive to the number of new homes being built in the UK. Second, the improvement market is driven by consumer confidence and the housing market — conservatories etc. are more likely to be added if it is believed that they will add value to the home. That leaves Epwin shares looking

less geared effect on profits than housebuilders a light play on the UK housing market, with a less geared effect on profits than housebuilders. The debt position is modest and Epwin has firepower to secure further growth through acquisition. The acquisition history also demonstrates the value of Epwin’s stock market listing, with shares having been used to fund both Stormking and Ecodek. Althought recent results highlighted tougher market conditions experienced in the second half of 2015, management confirmed that trading thus far was in line with expectations and that Epwin is well set for ‘further advances in 2016’. The shares have fallen slightly in the last month, pushing the valuation to a level that may attract traditional value investors. Epwin Group (LON:EPWN) FOR Large scale Strong market position AGAINST Modest growth sector Commoditised products Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£176m 125p:128.75p 9.2 5.3% 112p:155p



Event Review AIM Investor Focus ran on April 12th at the offices of Edison Investment Research. Management from Nichols, K3 Business Technology Group, Mattioli Woods and idox all presented to an audience of investors.

Nichols It was difficult for investor sentiment not to be positively influenced by the bright, almost fluorescent, colours of the free Vimto drinks supplied by the Nichols management team at AIM Investor Focus. However, there is no getting away from the fact that Vimto’s home UK market poses challenges to investors in Nichols due to intense supermarket pricing pressure. Nichols continues to enjoy growth in the Middle East, despite continuing conflict in Syria and Iraq. Nichols’ position in the UK drinks market means that the shares can piggyback on the hefty PE ratings of other listed drinks groups such as Britvic and Fevertree. This could be useful currency for potential acquisitions. The eighty years of the Vimto licensing relationship and close family ties with the Aujan Group is a solid foundation for Nichols’ overseas expansion in Africa and the Middle East. Nichols (LON:NICL) International business accounts for 50% of Nichols profits Market cap £483m from just 22% of the revenues. 1,311p:1,324p The Nichols cash pile of £35m will either be applied to a Price (p) P/E (forecast) 20.0 strategic acquisition or returned to shareholders through a special dividend or share buyback.

Yield (forecast)


K3 Business Technology Group K3 sells enterprise resource planning software to multi-outlet retailers and manufacturing firms with annual turnover of £50–100m. Growth in hosting services (now centred in the recently acquired Starcom) and increasing internal IP content are driving margins higher, more than offsetting the changing structure of software revenues from lump sum to consumptionbased licensing. Whilst initial income may be lower, recurring revenues are already becoming a larger proportion, now at 50%, and could lead to enhanced customer lifetime valuations. Current H1 new business pipeline of £56.5m (2015: £56.7m) is healthy although there have been delays in closing some deals due to uncertainty arising from the imminent EU referendum. K3 is expecting to soon close a major contract with an international fashion retail group. K3 shares started to perform in line with the technology sector during the past year after a period of underperformance. The market may have already discounted the effects of K3 Business Technology Group (LON:KBT) the change in nature of K3’s licensing revenue stream. The £127m shares currently trade at a significant discount to software Market cap 345p:353p peers. Any upside appears dependent on improved investor Price (p) sentiment toward the UK retail and manufacturing sectors. P/E (forecast) 14.7 Yield (forecast)




Event Review Mattioli Woods It cannot be an entirely random circumstance that since May 2012, the 129% jump in revenues and more than threefold surge in the share price of Mattioli Woods coincided with the implementation of the Financial Services Authority’s ‘RDR’ changes. Mattioli Woods, specialising in employee benefits and wealth management, is positioned to exploit new rules liberalising access to personal pension pots. Mattioli Woods shares are on the expensive side but management have made good use of the shares’ premium market valuation to raise cash to fund acquisitions, actions that put the company in a strong position for further growth. As at H1 2016, the company retains a healthy cash pile of £22.6m, earmarked for further acquisitions as smaller IFA/SIPP operators are compelled to join up with larger firms by higher regulatory capital requirements and compliance costs. Interims were strong with revenues and adjusted Mattioli Woods (LON:MTW) EBITDA growth rates in the high teens (20% and 18%). Market cap £160m The strength of the Mattioli Woods’ business model, centred around quality financial advice, is evidenced in Price (p) 633p:640p the high level of recurring revenue at over 80%. P/E (forecast) 22.2 Yield (forecast)


idox Over 90% of UK local governments use Idox software for core functions of planning, building control, environmental health and licensing. With only 18% penetration of internal customer needs, further growth is expected. The Idox application for election management is used in UK local elections and has been used in the Scottish parliamentary elections and the recent Scottish referendum. Idox also develops document control software for the global engineering sector. At its peak, the oil & gas sector accounted for 30% of Idox revenues but after the oil price decline in recent years, this segment contribution is now down to around 20% of group total. The Idox share price has clawed back most of the losses in 2013/14 that were suffered due to the oil price decline and uncertainty resulting from the lengthy hospitalisation of the CEO (who is now fully recovered and has completed a significant management restructuring). Market estimates Idox (LON:IDOX) for a rise in both revenues and earnings of over 20% for Market cap £202m the current financial year come from the acquisitions of Cloud Chamber and Reading Room. Single digit organic Price (p) 55.75p:56.5p annual growth in revenue and profit is expected as Idox P/E (forecast) 15.6 increases its recurring UK local government business. Yield (forecast) 1.8%

If you have not previously attended AIM Investor Focus and would like to in future, please contact the organiser here.



AIM star has bags of class

Few listed companies can claim to produce anything with as much cache as a Mulberry handbag. Known the world over, manufacturer Mulberry plc is part of AIM royalty. Headquartered outside the village of Chilcompton in Somerset, approximately 10 miles from Bath, few AIM companies could be located more remotely. Mulberry produces leather goods, predominantly ladies handbags for the seriously solvent. Put simply, Mulberry successfully sells handbags for the kind of money that a lot of people would only spend on a car. A quick look at Mulberry’s website shows a ‘Blossom Pochette’, no larger than a DL envelope (but at 6.5cm, significantly fatter) priced at £275. That’s the cheap option. If you really want to splash out, go for the £7,500 ‘Bayswater’ handbag.

dividend paying since 2006 Mulberry is what you buy if you think that Gucci is getting a bit common. Nevertheless, Mulberry plc doesn’t make as much as might be expected. Indeed, the last two years have been 12

pretty rotten and no recovery to the level of earnings enjoyed four years ago is expected soon.

period) and wholesale delivering 26%. Among the three channels, digital grew most quickly. Wholesale revenues were 11% lower, due to tougher trading conditions in Asia. Despite all of the effort that goes into supporting an online sales channel, digital revenues will be significantly higher margin that retail/wholesale. The rate of growth here is encouraging. Mulberry has been dividend paying since 2006, although no growth has been forthcoming for the last four years. Consensus forecasts are for EPS of just 5.2p this year, rising to 10p. That puts the shares on a massive rating, that could only be justified by a return to profits at a level not delivered since 2011.

forecasts are for EPS of just 5.2p last two years have been pretty rotten While Mulberry established itself as the must-have handbag manufacturer, it appears that management may have gotten ahead of itself, grossly overestimating the size of the market for handbags priced into four figures. This overpricing led to a near double-digit decline in shop sales in the 2014 financial year. Subsequent trading statements have referred to a refocussing on women’s handbags priced £500–800. The company sells through three channels: retail (its own stores), wholesale (to other stores, such as Harrods) and digital (online). The last results showed digital sales accounting for 12% of total group sales (up from 10% in the previous

The apparently elevated share price can perhaps be explained by the concentrated ownership of the company, with three holders accounting for 90% of the equity between them. Challice Limited, a company controlled by Singaporean businesswoman Christina Ong, owns 56% by itself. Mulberry Group (LON:MUL) FOR Strong brand Trophy asset AGAINST High valuation Vulnerable to fashion change Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£622m 1,025p:1,040p 198.9 0.5% 825p:1050p


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