november 2015 aim prospector

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: [email protected]

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

www.aimprospector.co.uk

www.blackthornfocus.com/contact

www.blackthornfocus.com/contact

mailto:[email protected]


www.blackthornfocus.com

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


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


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


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


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



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


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


NWF (LON:NWF)

Market cap £80m

Price (p) 170p

P/E (forecast) 12.5



AIMprospector


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


The Mission Marketing Group (LON:TMMG)

Market cap £39m

Price (p) 47.5p

P/E (forecast) 8.4


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


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



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


AIMprospectorA Blackthorn Focus publication


http://www.aimprospector.co.uk

november 2015 aim prospector

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