Progressive Equity Research Event - April 2018

In mid-April I attended an excellent investor event hosted by PIWorld at the offices of MHP Communications. All of the companies presenting caught my interest and I've been meaning to write up my thoughts since then - despite being interrupted by Mello 2018!

Benchmark Holdings

Prior to this event I had no idea what Benchmark did and couldn't have guessed from their name. As explained by Malcolm Pye (CEO) and Mark Plampin (CFO) they are in the business of aquaculture with the specific goal of increasing yields through improvements in health, genetics and nutrition. The reason this is worth doing is that a growing global middle-class are pushing up protein consumption and putting real pressure on food production. Other areas of agriculture have spent time raising yields to deal with this but apparently fish farming has only taken off in the last 20 years, for most species, and is behind the curve. As such there's a real need for proven solutions across the fish life-cycle and that's where Benchmark come in with their history of R&D, patents and pipeline of products.

On the genetics front they are creating breed stocks with the very desirable traits of improved growth rates, better disease resistance and higher product quality. Right now salmon is the main focus but shrimp and tilapia have been added to appeal to the Asian and American markets. Then comes nutrition and here Benchmark apparently have preferential access to artemia, a shrimp food-stock which is in short supply, and they use this to create products that promote growth and immune system strength. Then there's the health aspect and this is all about creating vaccines and putting them through trials (much like any other pharma company). As such I imagine that a successful vaccine creates a barrier to entry for competitors and Benchmark have over 25 years experience in this market.

Now this all sounds great but it would be remiss of me to ignore the fact that the company hasn't made a profit since listing in 2013. This is probably a result of high capex and R&D demands, as the company has acted to take market share and reinforce customer relationships, but at some point all of this investment needs to pay off. Analyst forecasts suggest that the company will hit break-even in 2019/20 with earnings of 4.5p (equating to a P/E just over 11) and cash-flow will turn positive as capex and acquisition activity declines. It's all a bit early-stage for me but I can see the attraction of both the business and the growing market that it serves.

Video here: Benchmark Holdings

Miton Group

I've known about Miton ever since seeing star fund manager Gervais Williams present at Mello 2014. Apparently he joined the company in 2011, along with other new shareholders, in a bid to tidy up the group and reinvigorate it after the financial crisis. This fresh start appears to have done the trick as Miton is very active with quite a few new funds on the go and a much broader fund range. Good performance has led to net inflows (over the last 5 quarters if I heard correctly) and with a fixed cost base this improvement really boosts profits due to operational gearing.

Talking of profits these are forecast to improve by 15% in each of the next two years and this implies that Miton isn't too expensive on a P/E ~14 despite recent share price strength. Of course it's tricky to see that a fund manager should ever deserve a high rating for a couple of reasons. There's the fact that inflows/outflows are geared to performance and that clients are sensitive to fees. On the first point performance has been good lately and the company aims to keep good managers by allowing them the freedom to act while tying their remuneration to performance. With the second the headline management fee is 0.75%, with no performance fee, while founder investors in new funds have their fee reduced to 0.5% - which should encourage them to stick around. This all seems very sensible and with Gervais owning just over 8% of the company I doubt that he'll be getting itchy feet any time soon.

Video here: Miton Group

IG Design

Without really thinking about it I've been aware of IG Design for around 5 years courtesy of Paul Scott's reports on Stockopedia. If I'd been smarter I could of had a 10-bagger by investing in 2013, when things looked a bit bleak, or even a 4-bagger if I'd waited until 2015 when the business really started to get going. I didn't, of course, and since then the company has gained real momentum with double-digit earnings growth becoming commonplace. The reason for this, according to Paul Fineman (CEO) and Giles Willits (CFO), is that the group has transformed itself over the last decade. It used to be very gift wrap and UK (80% of sales) orientated but now it has diversified into other products and regions (UK is down to 27% of sales). Really they do almost everything in the gift line apart from greetings cards!

What's interesting is that Christmas remains the peak season (accounting for 57% of sales, although this concentration is reducing) and this means that it's absolutely critical for retailers to get the product they want when they want. This plays into IG Design's hands because they manage the complexity for customers with designs that sell and make absolutely sure that these customers are satisfied. This service doesn't come cheap though and the ability of the company to provide manufacturing capacity, and finance peak working capital requirements, is a real barrier to entry for competitors. So while operating margins are low, at just under 5%, the company does have a little more leverage with clients than this ratio would suggest.

From a financial perspective the company works hard to manage its working capital exposure and level of net debt. The latter has been reasonably high, due to acquisitions, but solid cash-flow means that leverage is coming down from 2.3x to around 1.5x this year. Also there are quite a few freeholds on the balance sheet and so this is able to support a reasonable amount of debt. There are plenty of risks though ranging from suppliers and customers to cost headwinds and FX volatility (although the board do turn down business which feels too exposed - such as supplying Woolworths). The UK is also challenging in that discount retailers negotiate very hard on price and there's little room for growth given their high market share. Nevertheless Paul seemed optimistic that they'd be able to mitigate these issues and I can't deny that their track-record so far supports this optimism!

Video here: IG Design

The author holds none of the shares discussed in this article.

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