march 2015 aim prospector
DESCRIPTION
Featuring five AIM companies: Juridica Investments, Solid State, StatPro, The Mission Marketing Group and Volvere.TRANSCRIPT
AIMprospector
five AIM companies profiled
Another levelHow one big contract transformed this AIM company
Issue 11 March 2015
leading niche software provider
repeatedly successful holding company
rapid turnaround marketing firm
free to private investors
specialist investment manager
Supported by
AIMprospector
2 www.aimprospector.co.uk
Welcome again to AIMprospector, the monthly online magazine from Blackthorn Focus. This month’s magazine again features five AIM-quoted companies.Recent months have been characterised by large commodity price declines. This has had a dramatic effect on the share prices of some AIM-quoted resources firms and the companies that service them.
Smallcap markets frequently overreact and this creates opportunities
for investors. Private investors possess a significant advantage over the fund
managers as they are able to quickly move in and out of smaller company shares.
This month’s Top Pick is engineering firm Solid State plc. Investors have
become more aware of the company in recent months, following a game-
changing contract win with the UK government.
The offender tagging contract is time-limited. However, as governments come
under pressure to save costs by not imprisoning offenders, demand for this type
of solution will likely increase globally. If Solid State can establish itself as the
go-to supplier for such a solution, then there would be significant further uplift
in the share price.
In fact, there are two stories here. Even before the tagging contract win, Solid
State had already established itself as one of the most successful companies on AIM.
Elsewhere, since the last AIM Prospector, July’s Top Pick, Wynnstay Group, has
reported full year results for the year ending 31st October 2014. Sales, profits
and EPS were approximately level on the prior year. However, total dividends for
the year were 9.7% ahead and net assets showed an 8% increase.
Remember, to make sure that you get AIM Prospector 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.
The Volvere article was shared with an
expert shareholder in the company during
drafting. Unless stated otherwise, I do not have
any financial exposure to the shares of any of
the featured companies.
“Enjoy this month’s AIM Prospector and good luck with your AIM endeavours.” David O’Hara, Editor, AIMprospector
ContentsWelcome ..............................p2
The Mission Marketing Group ...................................p3
Top Pick: Solid State ............p5
Executive Insight ..................p7
Juridica Investments ................. p8
StatPro ..................................p9
Volvere ...............................p10
Contacttwitter: @aimprospectoremail: [email protected]
Published by:Blackthorn Focus Limitedwww.blackthornfocus.com
AIMprospector
five AIM companies profiled
Another levelHow one big contract transformed this AIM company
Issue 11 March 2015
leading niche software provider
repeatedly successful holding company
rapid turnaround marketing firm
free to private investors
specialist investment manager
Supported by
AIMprospector
www.aimprospector.co.uk 3
of an ‘Asian-focused digitally-led
marketing services agency group,
Splash Interactive’. This was followed
in November by the acquisition
of London-based PR firm Speed
Communications.
In late January, The Mission
provided a trading statement for
the full year ending the previous
December. Management expressed
its expectation for the year to be
in-line with the market’s (which AIM
Prospector takes to be consensus
of 5.0p EPS and a dividend of 1.1p).
The Mission also confirmed that debt
levels had been further reduced.
Another acquisition followed in
February as specialist digital agency
The Weather Digital and Print
Communications joined the group.
The business textbook says that
marketing firms such as The Mission
do well in economic recovery, as
companies begin to feel more confident
that there is value in promoting their
products again. The Mission’s current
share price rating suggests that the
market retains some worries over the
company’s long-term health. Any such
fears appear to be overdone.
After struggling under heavy
borrowings in the depths of the
financial crisis, The Mission has been
paying down debt fast. At the end of
Shares in The Mission Marketing Group (‘The Mission’) have risen sharply since the financial crisis. The company is now paying dividends and group debt has been reduced significantly.The Mission is a collection of marketing communications and advertising companies. The group employs a total of 850 staff in the UK, Asia and San Francisco.
The Mission has been built via a
series of acquisitions. The group now
comprises twelve operating companies.
Announcements from the company
are frequently littered with the type of
patter that seems (exclusively) popular
among marketing professionals. Recent
interims touched upon a small change
in the company’s acquisition strategy,
articulated as a ‘plan to step up the
introduction of tautoousian Agencies
that can work alongside our existing
[agencies]’. My dictionary defines
‘tautoousian’ as ‘being identically of
the same nature’.
The Mission duly delivered
on this promise, with further
acquisitions announced in October
and November of 2014. The first of
these was the acquisition of 70%
The Mission Marketing Group (LON:TMMG)
FOR
Positive momentum in the business
Undemanding valuation
AGAINST
Acquisitions present integration risk
Sentiment overhang needs to clear
Market cap £34m
Bid:offer 40p:42p
P/E (forecast) 8.4
Yield (forecast) 2.7%
52week low:high 37p:57p
Rescued marketing company is now thriving
further acquisitions announced in
October and November of 2014
June, the balance sheet showed a net
current liability of £1.5m and a further
£7.0m of bank debt. In aggregate,
this was around £2m better than six
months previous.
Another £2.4m was raised via an
equity placing in October.
Four years ago, The Mission’s
EBITDA was £5.5m. Debts were more
than three times this. The company’s
market capitalisation was around
£10m. A dramatic turnaround has
been achieved. 2014 is now expected
to be the fourth successive year of
EPS increases at the company. A 14%
increase in EPS is expected in 2015.Since preparing this article its author, David
O’Hara, has purchased shares in The Mission
Marketing Group.
expectation for the year to be in-line
would be the fourth successive
year of EPS increases
AIMprospector
4 www.aimprospector.co.uk
walbrook pr has a strong reputation for working with smaller growth companies and has clients ranging from £5m mkt cap to £250m mkt cap covering a wide variety of sectors.
walbrook pr provides financial public relations and investor relations to small cap. and aim listed companies.
focussing on communicating to four key groups: 1. the financial media; 2. sell-side research analysts;3. private client brokers; and 4. private shareholders.
for further information please contact paul mcmanus
walbrook pr limited4 lombard streetlondon ec3v 9hd
poultry
cornhill
prin
ce’s st
king w
illiam st
wal
bro
ok lombard st
old
jew
ry
geo
rge
yard
bank
cannonstreet
queen victoria st
queen victoria st
opposite exit 5 of bank tube station
T: +44 (0)20 7933 8780F: +44 (0)20 7933 8781www.walbrookpr.com
INVESTOR RELATIONS
AIMprospector TOPpick
www.aimprospector.co.uk 5
Crook tag win gives Solid State big liftSolid State is one of AIM’s most up-and-coming smallcap stocks. Last year, the company secured a large contract with the UK’s Ministry of Justice (MoJ) that has taken the company (and the shares) to a new level.Solid State is frequently described as a provider of ruggedised computer equipment. Typically, customers approach Solid State when they require a technological solution to operate in a harsh environment. Solid State will then produce bespoke hardware with attributes that could not be matched by an off-the-shelf solution.
Solid State is a group of two
companies: Solid State Supplies and
Steatite.
Solid State Supplies is a distributor
of specialist electronic components.
Steatite is the main trading division
and participates at all levels of the
process, working with the customer
from design and specification through
to manufacture and deployment.
Steatite solutions include
computers, batteries, radio equipment,
antennae and electronic monitoring.
It is the electronic monitoring side
of operations that delivered the
transformational contract win, an
offender tagging order from the MoJ.
Steatite applications include
military, industry and emergency
services. For example, Steatite
manufactures computer servers that
are designed to continue operating
The group has positioned itself
mid-market. Volumes in the company’s
application area are typically too
small to attract the like of Siemens
and Philips, while smaller operators
are unable to establish themselves
with the customers worth chasing e.g.
governments.
The specifics of the products being
supplied also creates a significant
barrier to entry. Solid State has
ISO and AS approvals that cannot
be secured without significant
design and specification through to
manufacture and deployment
a member of ‘List X’, an elite
group of companies
even through the shock that would
be expected from a torpedo strike.
Other solutions include in-vehicle
communications and location systems
for fire departments and police. In
these areas Solid State’s strategy is to
be a small but important part of big
budget projects.
Another high profile example of
Steatite’s work is the Avantix Mobile,
the mobile ticket dispenser carried by
guards on the national rail network.
Rail is an attractive niche for the
company, with moves being made
into the manufacture of in-station
ticket machines and cellular routers
delivering passenger WiFi.
Solid State designs and manufacturers equipment for heavy industry and harsh environments
AIMprospector TOPpick
6 www.aimprospector.co.uk
investment. Solid State is a member
of ‘List-X’, an elite group of companies
permitted to work on UK government
work at confidential level.
The application area frequently
means that the cost of equipment
failure is vastly greater than purchase
cost. One example is Steatite’s
provision of downhole oil and gas
probes, where the value of accurate
reading and reports can be immense.
Here, a company can be ‘reassuringly
expensive’ and satisfied customers are
reluctant to switch provider.
The MoJ contract is for a 3
year minimum term and valued at
approximately £34m. Margins of 25%
are forecast. Revenues are expected
from the fourth quarter of the
company’s 2015 year (Solid State has
a March year-end).
Considering full year revenues for
2014 were £32m for the entire group,
the significance of this contract win
is clear.
Management invested considerable
resources to win the business. The entire
bid process stretched over three years.
Solid State took a charge of £244k for
sunk costs associated with the contract
process in the first half of 2015.
Solid State’s superior technical
capability was decisive in securing the
contract. The new equipment to be
supplied has more sophisticated features
than the current generation of tags.
The share register and management
of Solid State mean that it could
reasonably be described as a listed
family business. The founders of the
company, Gordon Comben and William
Marsh, own 19.8% and 13.8% of the
company respectively. Mr Marsh’s son,
Gary, is today CEO of Solid State. Gary
Marsh owns 5.3% of the company.
Messrs Comben and Marsh retired
from the board at the end of 2014.
The company’s success is not new.
Solid State has been dividend paying
since 1999. The payout increased from
2p a share for 2008, to 8.5p for 2014.
During the last five years, sales and
operating profit at the company have
increased year-on-year.
Before the MoJ contract was won,
Solid State was already one of the very
most successful companies on AIM.
The contract has now moved Solid
State up a division. Fund managers
have been buying in, encouraged by
the enhanced scale of revenues. This
has taken the shares to a fairer rating.
Although the shares have already
three-bagged in the last 12 months,
the existing growth being delivered
by other parts of the business shows
that the company is growing fast even
outwith the MoJ work. The possibility
that Solid State could export its
offender tagging capability to other
jurisdictions is particularly exciting.
If this were achieved, it is difficult to
imagine that the company would not
receive a takeover approach. Investors
with the intention of holding for the
long-term should take encouragement
from the fact that no transaction
could happen without the assent of
a founding family that are already
proven stewards and managers.
Solid State (LON:SOLI)
FOR
Long-term success
Products serve broad industrial base
AGAINST
Any MoJ errors will cause damage
Shares no longer cheap
Market cap £61m
Bid:offer 735p:760p
P/E (forecast) 24.1
Yield (forecast) 1.6%
52week low:high 312p:874p
sales and operating profit have
increased year-on-year
MoJ offender tagging contract takes Solid State to a new level
already proven stewards and
managers
AIMprospector
www.aimprospector.co.uk 7
Peel Hunt and Extel have recently published an excellent piece of research looking into the potentially damaging effects that changes to the way investment research is paid for may have on coverage of small and mid-cap quoted companies. The views of both institutional investors and quoted companies were sought. It makes very interesting reading.
In this report Steven Fine, Managing Partner of Peel Hunt, says: ‘Such changes are likely to have a considerable impact on the UK Small & Mid-Cap market and equally soon the quoted companies, the brokers and the asset managers investing in these stocks.’ The Quoted Companies Alliance shares this concern. We note from this report that 85% of the responding companies think that small and mid-size quoted companies will be impacted.
So what is going on? Well, currently brokers get paid for research after they have produced it. Fund managers assess who has produced valuable research and allocate the dealing commission that they have spent to be shared between the broker who did the transaction on their behalf and the broker who generated the research. The choice is discretionary so that in theory anyway, brokers feel incentivised to produce quality, accurate and useful research as part of a trusting, long-term
relationship with institutional investors. The European regulators and the Financial Conduct Authority (FCA) do not like this as they believe that there is little transparency for the asset owners to determine whether they are getting value for money. We do not necessarily disagree with that view, particularly in the large stocks which can be covered by dozens of analysts. In the small and mid-cap quoted company world, changes need to be considered very carefully.
What the FCA would like to see is investors subscribing up front for research so that there is more transparency about the process. Policies which improve transparency at the top of the market could create opacity at the other end.
However, in an ever shrinking world where information is already at a premium, we fear that research will end up produced mainly by the large investment banks and that most of it will be focused on the largest stocks. So what little research that currently exists in the small and mid-cap world
could completely or substantially die out. The FCA and others suggest that this will lead to innovation in the research world, but someone ultimately has to fund that innovation and be able to pay for the resulting service. The small and mid-cap world is not blessed with deep pockets.
Independent research contributes to consensus forecast and helps create differences of investment opinion which leads to trading in shares. Our concern is that without this, there could well be fewer liquid stocks and more volatility of share prices due to information being held by a select few. Market abuse could well result.
Peel Hunt and Extel’s report is well timed and, we hope, will contribute to a reassessment by the FCA of the impact that this could have on small and mid-cap quoted companies.
Watch this space.
Tim Ward is Chief Executive of the Quoted Companies Alliance, the independent membership organisation that champions the interests of small to mid-size quoted companies.
Executive Insight One of the biggest complaints we hear about in the world of small and mid-caps is that there is little or no reliable information about the companies on the market. Yes, companies produce annual reports and RNS announcements, but there is little independent comment and research on those companies. That position looks set to get worse.
Tim Ward,
Chief Executive,
QCA
AIMprospector
8 www.aimprospector.co.uk
Quoted on AIM since late-2007, Juridica is a company that invests in litigation and arbitration claims. In broad terms, Juridica uses its capital to back a party that is going through proceedings, in exchange for a portion of any award.Juridica restricts itself to corporate
disputes. It is not involved in claims for
personal injury, class action etc.
As business disputes can be
complex, the frequency of wins and
losses is difficult to predict. To date,
however, Juridica claims a gross
internal rate of return of 66.7% on
completed cases.
Juridica has more than $200m of
assets under management. It is the
responsibility of its investment team
to see that this is deployed in such a
way that an acceptable rate of return
is made for the risk being taken.
Juridica’s positions are managed by
Juridica Asset Management Limited.
Here, a collection of expert litigators and
risk managers examine the opportunities
presented and decide if Juridica should
be involved and at what scale.
Juridica does not get involved
in a case unless an amount greater
than $25m is being argued over.
Claims investment firm with big dividend prospects
at around that time. Since July 2013,
the stock has traded between 120p and
160p. That is steadier than many.
‘Quality of earnings’ is a key plank
of equity valuations. Just as there is
risk that Juridica might back the wrong
cases, some investors also fear that its
business model could face regulatory
threat. A small number of US states
prohibit outside parties bankrolling
litigation. Investors will have to decide
whether the actions of a firm like
Juridica could face curtailment in the
longer term.
In the meantime, the shares are an
opportunity to grab a high yielding AIM
share, whose earnings should be broadly
uncorrelated with most AIM companies.
Juridica Investments Limited (LON:JIL)
FOR
Litigation more diverse than most asset classes
Large dividend yield
AGAINST
Possible regulatory threat to activities
Key-person risk in case selection
Market cap £139m
Bid:offer 124p:126p
P/E (forecast) 12.6
Yield (forecast) 15.9%
52week low:high 111p:151p
According to the company website, its
investment size in any case typically
ranges from $2m to $10m.
Time is one of the key issues that
Juridica considers before supporting a
case. For this reason, Juridica seeks
to invest in claims that are likely to
be resolved through settlement in a
reasonable time frame.
Unlike many quoted companies,
Juridica does not have to worry
about investing in stock, software or
machinery. Therefore, the company
should be able to support a high
dividend payout ratio, depending on
management views on how capital
should be deployed.
Since listing at around 110p, 58.6p
of dividends have been paid out.
This includes the 20p final dividend
declared in November.
Shares in Juridica fell from around
110p at the end of 2009 to a low of 75p
in 2012. Many shares fared much worse
more than $200m of assets under
management
should be able to support a high
dividend payout ratio
its business model could face
regulatory threat
AIMprospector
www.aimprospector.co.uk 9
StatPro produces portfolio analysis
software for fund managers. Its
products deliver risk statistics and
performance data. This information
is used to determine if portfolio
allocation is appropriate and which
decisions have led to the fund
performance being delivered.
The company’s flagship product is
Revolution. According to the company,
this product helps clients ‘increase
their sales, enhance their client service,
meet tough regulations and reduce
costs.’ StatPro demonstrates well that
where there is regulation, there is
revenue. Such regulations can involve
the way that fund performance is
reported, with rules and standards
varying between jurisdictions.
Like many software companies, in
recent years, StatPro has moved to
a cloud-based service, with a rental
pricing model. This makes comparisons
with past years difficult.
Recent announcements from
the company highlight StatPro’s
continued standing in the market.
In the first week of January, a three
Wimbledon-based StatPro is a software provider to the fund management industry. The company has been quoted on AIM for more than ten years. StatPro enjoys a strong position in its markets and is a longstanding dividend payer. Today, StatPro is one of AIM’s mature mid-sized companies.
for StatPro. The company will be
releasing StatPro R+, the cloud-based
version of its installed StatPro Seven
product. Customer migration will
be a considerable challenge: StatPro
Seven has around 250 current clients.
Although the migration process will
take years to complete, the success
of Revolution gives considerable
encouragement.
The history of AIM abounds with
successful companies being bought
out. While the move to cloud services
creates significant uncertainty in the
short term for StatPro, it is not hard to
imagine that some potential acquirer
will be keenly waiting to see if the new
product is a winner.
StatPro will announce final results
for 2014 on March 10th.
Software firm with strong market position
StatPro Group (LON:SOG)
FOR
Market leader
Long-running successful team
AGAINST
R+ integration risk
Dividend cover appears thin
Market cap £51m
Bid:offer 73p:75p
P/E (forecast) 26.8
Yield (forecast) 3.9%
52week low:high 70p:92p
where there is regulation,
there is revenue
customer migration will be a
considerable challenge
year agreement with a European
asset manager was announced. This
deal is valued at around £3.1m for
the duration. The fact that a price
premium of 55% over the previous
contract was secured will encourage
shareholders.
As StatPro has matured and
secured a stronger position in its
marketplace, shareholders have been
rewarded along the way. The company
first paid a dividend of 0.5p for the
financial year 2005. Since then, the
payout has been increased year-on-
year, reaching 2.8p for 2013.
At the half-year stage, the dividend
was held. However, according to
Stockopedia, a 3.6% dividend increase
for the full year is still forecast.
The Q3 trading update exposed
the movement in revenues as clients
switch to a cloud provision. Recurring
revenues increased 35% versus the
previous nine months. Almost all of
this increase was delivered by StatPro
Revolution.
2015 is an important year
a price premium of 55%
over the previous contract
was secured
AIMprospector
10 www.aimprospector.co.uk
Volvere’s activities make it a rare
thing among AIM companies. The
shares are essentially a play on the
capability of its management. The
growth in the company in the last ten
years demonstrates how well Volvere’s
shareholders have done out of the
efforts of its director brothers Jonathan
and Nick Lander.
Volvere’s first acquisition, made in
2003, yielded a 40% annual IRR when
sold just three years after its purchase.
In March 2006, Volvere acquired
Sira Test and Certification, and Sira
Defence and Security (SDS). Sira Test
and Certification was sold to Canada’s
CSA Group for a total of £8.3m in July
2009. This price equated to an IRR of
80% per annum.
Volvere acquired JMP Consultants
for £0.4m in May 2013. At the time JMP
had approximately 150 staff. Volvere also
loaned JMP just under £1m. Remarkably,
JMP made an underlying profit of
£0.5m for the full year 2013, paying its
owners a dividend of £0.45m for the
year. By the end of 2013, JMP had also
returned £0.4m of its loan from Volvere.
However, not all of JMP still belongs to
Volvere today. 25% of the equity was
subsequently taken by management as
part of an incentive scheme.
The two other companies in
the portfolio are an 80% stake in
foods manufacturer Shire Foods (a
supplier of own-brand products to
the supermarkets) and the company’s
remaining investment in SDS, a provider
of video software to the police.
When last reported, SDS was
trading at around breakeven. The most
recent numbers from Shire showed a
£0.2m loss on £4.1m of sales in the six
months to June 2014. New business
wins at Shire are expected to deliver
stronger profits going forward.
Volvere’s last balance sheet showed
cash and marketable securities of
£12.2m. Current assets and current
liabilities were approximately matching.
There is £5m of property, plant and
equipment on the balance sheet, the
lion’s share of which is accounted for
by a factory.
Given that Volvere does not revalue
its investments upwards, it is left to the
reader to decide the real value in the
company.
Industrial group’s assets well ahead of share price
Volvere (LON:VLE)
FOR
Winning management team
Valuation well backed by assets
AGAINST
Key person management risk
No dividends
Market cap £12m
Bid:offer 300p:310p
NAVps 393p
Yield (forecast) 0
52week low:high 250p:335p
Volvere plc is an AIM-quoted investment firm. The company specialises in the type of activity that is frequently described as ‘turnaround’. Volvere generally acquires distressed, loss-making companies. Volvere will then apply restructuring techniques in the hope that value will be created.Volvere is an industrial holding
company. The company has a solid
record of selling acquired companies
after a turnaround has been secured.
The Volvere portfolio typically
comprises between three and five
companies. It is not an investment
trust. Volvere does not value their
companies upward but there is an
impairment test on the assets. This can
result in the market value of Volvere’s
assets being greater than the published
asset value. Investment trusts and some
other investing companies will typically
reappraise their portfolio each time an
asset value is published.
a 40% annual IRR when sold
activities make it a rare thing
Volvere does not revalue its
investments upwards
AIMprospector
www.aimprospector.co.uk 1
AIMprospectorA Blackthorn Focus publication
www.aimprospector.co.uk