november 2015 aim prospector
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AIMprospector
*NINE* AIM firms featured
Valuation challengeCan this stellar stock keep rising?
Issue 14 November 2015
modestly rated marketer
property franchisor
top software exporter
free to private investors
plus SIX more AIM companies
AIMprospector
2 www.aimprospector.co.uk
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 write-ups plus a bonus four that all featured
at the recent AIM Investor Focus event.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.
“Enjoy this AIM Prospector and good luck with your AIM endeavours.” David O’Hara, Editor, AIMprospector
ContentsWelcome .......................p2
Fulham Shore ................p3
Top Pick: ASOS ............p4
Cello ..............................p6
Craneware .....................p7
AIM Investor Focus .......p8
MartinCo ....................p10
Contacttwitter: @aimprospectoremail: editor@aimprospector.co.ukwww.aimprospector.co.uk
Published by:Blackthorn Focus Limitedwww.blackthornfocus.com
AIMprospector
*NINE* AIM firms featured
Valuation challengeCan this stellar stock keep rising?
Issue 14 November 2015
modestly rated marketer
property franchisor
top software exporter
free to private investors
plus SIX more AIM companies
AIMprospector
www.aimprospector.co.uk 3
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.
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
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
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.
Fulham Shore (LON:FUL)
FOR
Top management
Expanding fast
AGAINST
High valuation
Unproven outside South-East
Market cap £97m
Bid:offer 16p:16.5p
P/E (forecast) 31.7
Yield (forecast) 0
52week low:high 7.8p:24p
3 roll outs on menu at Fulham Shore
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.
UpdateOn 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. Fit-
out costs for the new site will be £500k.
Bukowski also enjoys strongly positive
reviews on TripAdvisor.
distinctive in having a very short menu
a proven restaurant roll out winner
AIMprospector TOPpick
4 www.aimprospector.co.uk
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 boo.com.
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.
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
switched to general fashion retail
and rebranded to ASOS
ASOS leads on the online market among 15-34 year old comsumers
AIMprospector TOPpick
www.aimprospector.co.uk 5
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.
over old-economy retailers such as
Debenhams and M&S.
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.
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.
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.
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
Nearly half of all orders are placed on mobile
platforms
ASOS (LON:ASC)
FOR
Strong market position
Great track record
AGAINST
High valuation
Competitive landscape
Market cap £2,702m
Bid:offer 3,268p:3.270p
P/E (forecast) 60.4
Yield (forecast) 0
52week low:high 2,146p:4,259p
the darling of fund managers
enormous premium over
old-economy retailers
frequently cited as the paradigm
of AIM investments
ASOS is a fantastic company
deserving of a premium valuation
AIMprospector
6 www.aimprospector.co.uk
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.
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.
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. Is it dividends you’re looking for?
Cello Group (LON:CLL)
FOR
Successful firm
Discount rating
AGAINST
Modest growth forecast
VAT issue not finalised
Market cap £71m
Bid:offer 82p:85p
P/E (forecast) 10.0
Yield (forecast) 3.3%
52week low:high 79p:107p
VAT issue should not be expected
to worsen further
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 pre-
clinical 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, 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
Cello Signal is a more typical
general marketing agency
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 pre-
tax profit. Cello is not the first company
to have fallen foul of a change of
judgement/opinion at HMRC.
Disappointments at quality
AIMprospector
www.aimprospector.co.uk 7
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.
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
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.
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.
Edinburgh firm moves beyond AIM fringe
Craneware (LON:CRW)
FOR
High earnings visibility
Essential product
AGAINST
Operates in narrow niche
High valuation
Market cap £190m
Bid:offer 700p:730p
P/E (forecast) 26.6
Yield (forecast) 2.2%
52week low:high 473p:730p
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.
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.
just two modest acquisitions in
the last five years
significant premium rating is
deserved
ticks many boxes for textbook
investors
AIMprospector
8 www.aimprospector.co.uk
Event Review
NWF GroupNWF 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.
Keywords StudiosKeywords 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!
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 plc (LON:KWS)
Market cap £103m
Price (p) 215p
P/E (forecast) 23.9
Yield (forecast) 0.5%
NWF (LON:NWF)
Market cap £80m
Price (p) 170p
P/E (forecast) 12.5
Yield (forecast) 3.4%
AIMprospector
www.aimprospector.co.uk 9
The Mission Marketing Group*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 GroupAfter 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.
Miton Group (LON:MGR)
Market cap £46m
Price (p) 28p
P/E (forecast) 22.5
Yield (forecast) 2.6%
The Mission Marketing Group (LON:TMMG)
Market cap £39m
Price (p) 47.5p
P/E (forecast) 8.4
Yield (forecast) 2.6%
Event Review continued…
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 www.blackthornfocus.com/contact.
AIMprospector
10 www.aimprospector.co.uk
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.
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
Lettings franchisor is growing up fast
MartinCo (LON:MCO)
FOR
Dependable cashflows
Supportive demographics
AGAINST
Interest rate risk
Possible EU out vote
Market cap £44m
Bid:offer 193p:198p
P/E (forecast) 19.7
Yield (forecast) 2.8%
52week low:high 85p:200p
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.
the fourth largest property group
in the UK
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.
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.
a longstanding and dependable
income stream
increased the skew toward sales
AIMprospector
www.aimprospector.co.uk 1
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www.aimprospector.co.uk
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