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AIM prospector five AIM companies profiled An outstanding AIM share The niche firm that attracted top investors Issue 10 December 2014 fast-paced rollout cash-rich caterer recovering manufacturer free to private investors big dividend payer

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Featuring five AIM-quoted companies: Burford Capital, Chamberlin, GLI Finance, Journey Group and Patisserie Holdings.

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Page 1: December 2014 AIM Prospector

AIMprospector

five AIM companies profiled

An outstanding AIM shareThe niche firm that attracted top investors

Issue 10 December 2014

fast-paced rollout

cash-rich caterer

recovering manufacturer

free to private investors

big dividend payer

Page 2: December 2014 AIM Prospector

AIMprospector

2 www.aimprospector.co.uk

Welcome again to AIMprospector, the monthly online magazine from Blackthorn Focus. To make sure that you get AIMprospector first, register your email address at www.aimprospector.co.uk to receive a pdf link 24 hours before the magazine goes live to the public.

This month’s Top Pick is Burford Capital. The company is a very distinctive type of business,

making its money from, pretty much, investing in other organisations’ lawsuits. Furthermore,

the company’s market cap and dividend yield are such that Burford is among the top 10% of

all AIM stocks on both measures. Burford has already won some impressive backers. I hope you

agree that the company deserves highlighting.

A quick mention of two other firms that have previously featured.

November was a big month for housebuilder/regeneration specialist Sigma Capital. First

came the announcement on the tenth, of a ‘strategic partnership to deliver regional Private

Rented Sector developments’ with blue-chip property firm Grainger. Here, Grainger will have

the exclusive option to buy sizeable chunks of land that Sigma has secured for development.

Sigma followed this nine days later with the announcement that after receiving £67m of

financing from Barclays, construction has begun on a collection of sites in Greater Manchester

and Liverpool. 927 homes will be built under this phase of the scheme.

Manufacturer Tricorn announced results earlier this week. AIM Prospector featured Tricorn

in the July edition. The results had a strange feeling to them. A small pre-tax loss was reported

and management warned that another, larger loss is expected for the second half. A significant

reduction in debt was achieved thanks to the sale of the group’s aerospace division and there

is no dividend. However, Tricorn seems to be aiming at something bigger than a 2015 or 2016

profit figure. For some time now, Tricorn’s long-term strategy has been to become a tubing

supplier to global blue-chip customers, serviced through an intercontinental manufacturing

base. The China part of this equation appears to be going to plan, with Tricorn’s wholly owned

facility ‘extremely busy managing the in load of further new work’. A good report was also

delivered on the company’s joint venture in China. However, the US operations remain a

disappointment. Acquired in March 2013, this division must start delivering soon. There are

some encouraging signs that things may be turning around stateside, with Tricorn saying that

the division’s ‘new management team has made an encouraging start in creating a solid

platform from which the business can develop’. The investment case remains unchanged:

if Tricorn can deliver a level of sales appropriate for the manufacturing capacity that it

possesses, at a profit margin in-line with what the group has

achieved in the past, then I expect that the shares would more

than double from here.

Please note that there will be no AIM Prospector next

month due to Christmas/New Year. That just leaves me to say

good luck for the holiday period and see you in 2015.

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

ContentsWelcome ..............................p2

GLI Finance ........................p3

Top Pick: Burford Capital ....p4

Chamberlin .........................p6

Journey Group ........................ p7

Patisserie Holdings ...............p8

Contacttwitter: @aimprospector

email: [email protected]

www.aimprospector.co.uk

Published by:Blackthorn Focus Limited

www.blackthornfocus.com

AIMprospector

five AIM companies profiled

An outstanding AIM shareThe niche firm that attracted top investors

Issue 10 December 2014

fast-paced rollout

cash-rich caterer

recovering manufacturer

free to private investors

big dividend payer

Page 3: December 2014 AIM Prospector

AIMprospector

www.aimprospector.co.uk 3

After first coming to AIM as T2 Income

Fund in 2005, the company was

renamed Greenwich Loan Income

Fund (as in Greenwich, Connecticut)

in 2009. To better reflect the more

geographically diverse nature of its

lending activities, the name was

changed again in April 2013 to GLI

Finance Limited.

With companies still complaining

of the difficulty of achieving bank

finance, lenders such as GLI have

moved to meet the demand. GLI

does this through its relationships

with a number of lending platforms,

each having a particular focus. For

example, fundingknight.com is a

public platform for UK SME lending

and borrowing. Once the relevant

checks have been passed, anyone with

a UK bank account can be a lender

through fundingknight. Businesses

applying for funding are then given

a rating by fundingknight, with loans

to apparently riskier businesses

paying more interest. Like many

such platforms, a lender’s funds are

spread across a portfolio of borrowers,

reducing the risk of wipeout.

Other GLI platforms offer invoice

discounting, where cashflows are

provided in exchange for the lender

becoming the payee of the business’

debtors.

GLI’s ambition is to re-orientate

the business away from simply being

an owner of loans originated by third

parties, to becoming both an SME

lender itself and an equity owner of

the lending platforms conducting

SME financing. The goal is to become

a unique SME financing business by

‘combining traditional SME finance

disciplines with the fast-growing online

alternative finance providers, many of

whom would be described as “peer to

peer” (“P2P”) or marketplace lenders.’

GLI is keen to stress that the

platforms that it takes a stake in are

complimentary to traditional bank

lending rather than competing. That

is important because if appetite for

SME lending did return among the

mainstream banks, they could quickly

undermine the next-generation

lending platforms.

GLI believes that cultural changes

in the banking sector toward an

exclusively quantitative approach to

lending decisions (computer says no)

GLI Finance is a provider of loan financing to small and medium-sized businesses in the US and UK. Historic and forecast dividends make the company one of the highest yielding shares on AIM today.

GLI Finance (LON:GLIF)

FOR

Operations in sweet spot

Huge yield

AGAINST

Banks could up competition

Platform business v. competitive

Market cap £82m

Bid:offer 57.75p:58.5p

P/E (forecast) 12.9

Yield (forecast) 8.9%

52week low:high 50p:63p

Big dividends from SME funder

goal is to become a unique SME

financing business

make it impossible for many young

SMEs to borrow. Furthermore, new

capital rules are forcing banks to hold

more reserves against certain types

of lending. GLI is keen to point out

that neither of these are short-term

trends: both would take many years to

reverse.

Having paid a 5p dividend last year,

GLI again declared a 2.5p payment

at the six month stage. GLI Finance

looks a remarkable proposition: a

high-yielding AIM share operating in a

fast-growing industry.

Unfortunately, as a lending

company, shares in GLI Finance would

likely not qualify for Business Property

Relief and would attract inheritance

tax if they were part of an estate.

GLI Finance looks a remarkable

proposition

Page 4: December 2014 AIM Prospector

AIMprospector TOPpick

4 www.aimprospector.co.uk

Niche player attracting income investors Burford Capital is one of the most remarkable companies on AIM. Founded just five years ago, Burford has evolved into an AIM-quoted company able to win the backing of one of the UK’s most celebrated investors.

The company is ‘the world’s largest

provider of investment capital and

risk solutions for litigation’. Put simply,

Burford provides money to organisations

that are seeking damages from others,

in exchange for a fee, interest, share

of the award or a combination of the

three. This makes Burford an extremely

rare type of company, with Juridica

Investments the only company on AIM

that comes close to this sort of activity.

Burford has found some fame as one

of star fund manager Neil Woodford’s

few AIM holdings. Mr Woodford built

his reputation as an income investor

at Invesco over a period measured in

decades. The fact that his new fund

owns over 7% of Burford should be

reason enough for income investors to

take a look.

Burford Capital was incorporated

in 2009 and the shares began trading

on AIM in October of that year. The

company was formed from Burford

Group, an organisation that dates

back to 2007. Today, Christopher

Bogart is Chief Executive Officer of

the business. Mr Bogart is one of the

founding principals of the business and

has enjoyed a long career as a litigator.

Burford’s Chief Investment Officer,

Jonathan Molot, was also closely

associated with the company from the

early days, having been investment

committee chairman of the company’s

US subsidiary.

Burford can become involved in the

litigation process from different stages

and perspectives.

Classic litigation funding is the

provision of funding to a plaintiff that

simply cannot afford the lawyers they

need to effectively prosecute. Here,

Burford’s support is required to get the

case off the ground.

In other instances, Burford are

approached part-way through the

process, such as when the plaintiff

realises that more finance is needed to

secure victory. This frequently occurs

as the cost and duration of the process

is underestimated (q.v. Jarndyce v

Jarndyce).

Other examples include funding

pending an appeal (when the judgement

has been won but an appeal is launched)

or simply funding a plaintiff that is

awaiting cashflow at the end of the

process.

In addition, Burford provides

financing to law firms, such as those

that have arranged not to be paid until

the case has concluded, or a firm that is

simply waiting to receive the fee that it

has been promised.

The contract that Burford may

agree with plaintiffs is not necessarily

Burford provides financing to law

firms

not necessarily a straightforward

‘percentage of win’ agreement

Christopher P. Bogart, Chief Executive Officer

Page 5: December 2014 AIM Prospector

AIMprospector TOPpick

www.aimprospector.co.uk 5

a straightforward ‘percentage of win’

agreement. Cashflows to Burford will be

determined by a number of factors, such

as the amount that is paid out, or the

time taken before payment is received.

As above, Burford can profit even if a

case is lost.

Burford’s job, therefore, is to first

identify good litigation prospects and

good borrowers and then negotiate a

deal. A 2012 Forbes article illustrates a

large number of examples of Burford’s

work very well. While backing losers

could result in Burford’s investment

being wiped out, a winner could (for

example) result in Burford getting back

three times their original investment.

The selection and management of

Burford’s portfolio is therefore a critical

part of the business. Typically, Burford

will be involved with around 35 cases at

any one time.

Many AIM shares are highly

correlated with each other, such as the

junior oil shares. A large number are

young ventures exploring immature

industries and niches. This means that

when investors’ attitude to risk adjusts,

AIM shares can fall or rise sharply as

investors’ perceptions change.

However, I expect that due to

the nature of its revenues, a share

like Burford Capital will be much less

buffeted in bear markets and neither

would it spike upwards when investors

switch to ‘risk-on’ mode.

It is the distinct nature of Burford’s

business that forms the base of the

investment case. You don’t need to have

been investing in smallcap companies

for too long before experiencing the

frustration that engulfs AIM stockpickers

when the asset class is out of favour. On

the other hand, it is not uncommon for

AIM shares to multibag in a broad-based

smallcap recovery.

The nature of Burford’s operations

suggest to me that it is less likely to

suffer from dramatic changes in investor

sentiment. The shares, therefore, could

play a vital role in a diversified AIM

portfolio.

According to Stockopedia, Burford is

forecast to report EPS of $0.12 for this year

and pay a dividend of around half of that.

A quick search shows just how far

Burford Capital stands out from most

AIM companies. Across all of AIM, only

58 companies have a larger market

capitalisation than Burford. I estimate

that around 90 AIM companies are

trading on a higher dividend yield today.

According to the statistics, there are

only nine AIM companies with both a

larger market capitalisation and a higher

dividend yield being traded on the

market today.

Even better, Burford again beats

most companies on the market when

profitability metrics such as Return

on Equity and Return on Capital are

examined. Together, these statistics

put Burford Capital among some of

AIM’s most highly-regarded companies,

such as James Halstead and Alternative

Networks.

One potential negative comes from

uncertainty over whether the nature of

the business would disqualify the shares

for business property relief i.e. they

would be included as part of an estate

for inheritance tax purposes.

However, if you are not planning on

dying anytime soon, Burford is clearly an

outstanding proposition.

identify good litigation prospects and good borrowers and then

negotiate a deal

forecast to report EPS of $0.12

for this year and pay a dividend of

around half of that

Burford Capital (LON:BUR)

FOR

Strong shareholder register

Good yield

AGAINST

Opaque asset base

Key manager risk

Market cap £249m

Bid:offer 120p:122p

P/E (forecast) 16.4

Yield (forecast) 3.1%

52week low:high 108p:137p

Jonathan Molot, Chief Investment Officer

clearly an outstanding propositionclearly an outstanding proposition

Page 6: December 2014 AIM Prospector

AIMprospector

6 www.aimprospector.co.uk

The company runs foundries in

Scunthorpe, Leicester and Walsall,

while the two engineering businesses,

Exidor and Petrel, are based in Cannock

and Birmingham respectively.

The Walsall foundry manufactures

light castings and components,

principally for automotive and hydraulic

applications. This business currently

delivers around half of group sales. It is

prospects for these operations that are

key to the investment case.

The Leicester business produces

medium castings for end use in

construction and mining equipment,

power generation and defence.

The Scunthorpe site produces heavy

castings for applications such as railways

and construction. Past customers include

Crossrail, where heavy castings were

used to support some of the more

complex areas of tunnelling.

Exidor manufactures escape door

equipment (such as the bar you

would push to open a door) and door

closing mechanisms. Petrel is a lighting

and control business, with products

designed for hazardous environments.

The current Chief Executive, Kevin

Nolan, has been in place for just over

one year. Finance Director David

Chamberlin is a group of foundry and engineering businesses operating from five sites. Recent results showed an improvement in performance as the company returned to profitability. Two recent contract wins highlight the opportunity that exists for Chamberlin’s automotive business.

Turbo-charged recovery at Chamberlin

In the longer term, the prospect of

increased proliferation of turbo-charged

petrol engines constitutes a company-

changing possibility.

While there is some debt in the

business, Chamberlin has significant

headroom to its facilities. The current

market rating suggests that there is

not much more to come from the

company’s recovery. To me at least,

the contract wins and recent results

suggest that the turnout may be more

positive than the share price suggests.

Chamberlin (LON:CMH)

FOR

Modestly priced v. forecasts

Petrol opportunity could be bonanza

AGAINST

Leicester division holding company back

Current structure sub-optimal

Market cap £8m

Bid:offer 98p:106p

P/E (forecast) 10.6

Yield (forecast) 0

52week low:high 65p:112p

new team is making significant

progress

cost reductions in the first half

saw the company move to an

underlying profit

Roberts assumed his role in July 2013.

Half-year results from the company,

issued in November, showed that

this new team is making significant

progress. Huge cost reductions in the

first half saw the company move to an

underlying profit of £0.4m from a loss

of £0.6m in the previous year. While

problems remain at the Scunthorpe

site, a return to profitability is expected

by Q4. Significant challenges remain

at Leicester however, with aged

infrastructure holding back attempts at

margin improvement.

New contract wins for the Walsall

foundry point to a more prosperous

future for the company. In October,

Chamberlin announced a €6.7m, four-

year contract to supply turbo-charger

parts for diesel passenger cars. This

contract helped underpin full-year

forecasts.

Chamberlin topped this in

November with the announcement

of an eight-year automotive parts

contract worth €26.0m, again won by

the Walsall operations.

Management believe that it is the

broadening of the engineering skill base

in the Walsall business that helped

Chamberlin win this large contract.

Page 7: December 2014 AIM Prospector

AIMprospector

www.aimprospector.co.uk 7

Journey sells through two operating

companies: Air Fayre (catering) and

Watermark (products).

In the first half of the year,

revenues were roughly split two-thirds

catering : one-third products.

Although nearly all of Journey’s

revenues are in dollars, the company

reports in sterling. As a result,

Journey’s numbers can swing with

the exchange rate. Furthermore, like

any supplier, Journey needs strong

customers. This leaves the company

exposed to the notoriously cyclical

airline industry.

The Group took on its current form

following significant restructuring. In

2010, Journey disposed of its joint

venture with Alpha Flight at London

Heathrow, taking the company almost

to a net cash position. More favourable

banking facilities were then secured.

Operations were streamlined further

with disposals in 2011 and 2013.

These changes mean that

comparisons with past years lose

meaning.

Most of Journey’s business today

and its future prospects, are centred

on meal supplies to US airlines in

America. This is a $2bn market

dominated by two players: Gate

to secure contracts at other American

hubs in 2015 and 2016.

At the end of August, Journey

Group reported a net cash position of

almost £4m. This cash buffer means

that Journey could easily add new

hub operations without requiring

significant new finances.

In the meantime, the company is

profitable and management intends

to increase shareholder dividends with

time.

As the US airline industry picks

up in a strengthening economy, I

would expect margin improvement as

utilisation increases. Any new hub wins

would take profits to another level.

Journey Group provides in-flight catering and on-board products to airlines. The company is cash-rich and has significant opportunities for growth.

Journey Group: high-flying food

Journey Group (LON:JNY)

FOR

Real opportunities to double/triple sales

Possibly a mini-Compass Group

AGAINST

Small number of current customers

Patent must hold up

Market cap £17m

Bid:offer 123p:125p

P/E (forecast) 12.9

Yield (forecast) 2.2%

52week low:high 113p:167p

centred on meal supplies to US

airlines in America

Gourmet and LSG Sky Chefs. Journey

Group currently makes annual sales of

around $40m into this market.

Journey (through its subsidiary

Air Fayre) operates a different supply

model to its competitors. Rather than

being based on site at the airport,

where labour is deeply unionised,

Journey operates off-site, frequently

working in collaboration with hotels

and restaurants. By utilising the spare

capacity that typically exists in these

establishments at certain times of the

day, Air Fayre can negotiate a better

price with its suppliers.

After being prepared, the food is

packaged and delivered using a set of

processes that together are protected

by a business process patent registered

in North America. There are signs that

the patent has already proved to be

an effective barrier to entry, with one

US airline declining to talk further

with another provider that proposed a

similar solution.

A large proportion of Air Fayre’s

revenues are effectively a pass-through

on the food cost, with Journey making

its money on the handling fee.

In March this year, Air Fayre

secured a contract to serve a second

Los-Angeles airport from its local

hub. The success of this operation has

shown that Journey’s model is scalable.

Management now wants to prove that

it is transferable. The company’s goal is

patent has already proved to be

an effective barrier

Page 8: December 2014 AIM Prospector

AIMprospector

8 www.aimprospector.co.uk

Patisserie Holdings is a collection of food businesses. The group comprises three patisserie brands (Patisserie Valerie, Druckers Vienna Patisserie and Baker & Spice), one bakery (Flour Power City) and the Philpotts sandwich chain.At the end of September 2014, the

retail operations comprised 147 stores.

98 were Patisserie Valerie, 22 Druckers

Vienna Patisserie, four Baker & Spice

and 23 Philpotts.

The group is led by restaurant

roll-out legend Luke Johnson. Johnson

was the driving force behind the

early growth of Pizza Express and

Strada. During Johnson’s leadership,

Pizza Express expanded from twelve

restaurants to more than 250. Strada

was built from scratch to reach 30 units

before both were sold.

Mr Johnson first became involved

with the organisation in 2006, when

he led a private equity buyout of a

majority stake in Pattiserie Valerie. The

other group businesses were added

one-by-one and Patisserie Holdings

came to AIM via an IPO in May.

The group’s maiden results showed

the continued momentum of the roll-

out. Nineteen stores were opened in

the year. Two sites were closed, one of

Patisserie Valerie brand to the forefront

of its efforts.

Impressively, online sales doubled

in the year. The online market, serving

workplace or home parties, will

inevitably have some cannibalising effect

on store sales but I expect that it would

mostly add new sales and enhance

operational efficiencies within kitchens.

According to Stockopedia, a 22%

increase in net profit is forecast for

2015 before moderating slightly the

next year.

Although the stock-market rating is

high, a successful roll-out from a winner

such as Mr Johnson was always going

to be richly valued. If cake is indeed the

new coffee, in five years time we could

be looking at a vastly larger business.

Patisserie Holdings: a rising roll-out

Patisserie Holdings (LON:CAKE)

FOR

Run by proven winners

Plenty of opportunities for expansion

AGAINST

Exposed to food fashion

Easily copied format

Market cap £199m

Bid:offer 200p:203.75p

P/E (forecast) 18.8

Yield (forecast) 1.8%

52week low:high 177p:215p

which was the only loss-making store

in the entire portfolio. 2014 was the

eighth consecutive year of organic

growth in the organisation. Since the

end of September, another three sites

have opened and management expects

to open another seventeen before end-

September 2015.

Growth flowed through to the

company’s reported figures. A 28%

increase in revenues produced a 27%

profit increase and a 32% increase in

diluted earnings per share (adjusted

for cost of AIM IPO and the Philpotts

acquisition).

Management reported how

efficiencies were gained from

ownership and operation of Flour Power

City. Further gains are expected from

the upmarket Philpotts (avocado &

crispy bacon sandwich: £3.50), which

has already incorporated Patisserie

Valerie desserts into its menu.

Patisserie Valerie has pole position

in a market that previously did not exist

on this scale. Following the cupcake

and Great British Bake Off phenomena,

Britons seem to have fallen back in love

with cakes. Patisserie Holdings looks

a great way to get exposure to this

trend and management has thrust the

online sales doubled in the year

group is led by restaurant roll-out

legend Luke Johnson

Page 9: December 2014 AIM Prospector

AIMprospector

www.aimprospector.co.uk 1

AIMprospectorA Blackthorn Focus publication

www.aimprospector.co.uk