ShareSoc Company Seminar - March 2016

Almost every month ShareSoc organises a central London seminar bringing interesting growth companies to the attention of private investors. Obviously these companies all have a story that they want to tell/sell but even so I find the experience of seeing directors in the flesh a positive one. It's surprising just how variably executive board members (usually the CEO and/or FD) from different companies come across. Beyond this the room is packed full of investors with decades of experience and they're not afraid to pose searching questions; just listening to these provides a valuable lesson in how to approach and understand companies.

If you've never been to one these seminars then I recommend heading to the ShareSoc Events page and signing up. Everyone is very friendly (unless you're a director trousering too many nil-cost options) and the buffet at the end is excellent!

Arria NLG

A small company (£25M) with a short listed history (2 years) Arria NLG is a fairly typical loss-making start-up. However their key product, the NLG platform, may actually change the world and they have patents in place to protect their IP. In a nutshell they automatically convert structured data, such as a hospital chart, into a human-readable report which can make expert recommendations. This has the dual benefit to clients of allowing reporting to be scaled up massively (e.g. the Met Office has multiplied its 3-day forecast output by 100x) whilst ensuring that the 'expert' never has an off-day.

However Arria NLG suffered a huge setback a year ago when their main customer Shell (90% of revenue) terminated their contract. This wasn't down to the software not being fit for purpose, apparently, but either way the company looked in danger of collapse. Fortunately the fairly unusual shareholder base of HNWIs, hedge funds and founders enabled the firm to survive and broaden their customer base. One key outcome of this near-death experience is that the board decided to push towards a SaaS solution and the potential for a smoother revenue stream.

An example of this is the RECOUNT product which hooks into on-line accounting packages and provides a virtual accountant for SMEs. Priced at $35/seat/month this is due for imminent launch in May 2016 and has the potential for huge growth. Longer term the company is providing a platform for individual developers to use the NLG service (think Apple App Store) and enhance their applications. As far as I can tell this is slated for launch in the second half of the year and it seems that two paying clients have already signed up to a pre-release version of the system.

From an investor's perspective Arria NLG looks very exciting but they're not the only player in this field and growing competition is inevitable. As such they're looking to grab market share and become the dominant player in the NLG space (isn't everyone?) and so they explicitly won't be hitting cash break-even any time soon (despite several questions on this front). In fact it's likely that a £7-10M fundraising will take place soon to keep the show on the road. For me this is much too early stage to be worth investment but it'll be interesting to see where they've got to in 5 years time.

Stadium Group

At the opposite end of the spectrum Stadium Group has traded successfully for over a century in a variety of contract manufacturing niches and did well to survive given its small size (£46M). Unfortunately the commodity electronics market has become increasingly cut-throat over recent decades and this is just one reason why the share price of Stadium is yet to return to a level last witnessed in 1998! I get the feeling that previous management lost their way and hence found themselves being replaced by more dynamic versions in 2012/13 - and the CEO, Charlie Peppiatt, certainly presents as a man on a mission.

In the last few years the group has transitioned, via acquisition and organic change, to a high-tech focus on power supplies and wireless connectivity. Apparently the margins achievable in these sectors are decent and that's a relief given that the company is down at the 5% operating margin level at the moment (or 7-8% if you're happy with the board's adjustments). The plan is to hike this into double-digits through a design-led proposition for clients - which translates as Stadium Group's scientists partnering with customers to enhance the end product - and manufacturing taking place in a recently relocated facility in Dongguan, China.

On the face of it the board have a real handle on the operational issues facing Stadium Group and are implementing a credible plan for moving the business towards a more profitable, higher growth future. Certainly the results reflect this with both EPS, and the share price, tripling since 2012 and yet the shares are not markedly expensive (if the 2016 forecast of almost 11p in earnings is met). There still remains some execution risk though as the company is small and actively looking for further acquisitions (in complementary specialisations/locations) and these will likely require new fund-raising (as happened in 2015). That said they are the sole supplier for Raspberry Pi 3 power units so they must be doing something right. Thus an interesting possibility for investors who aren't too exposed to the Industrial sector already (which I am!).

Berkeley Energia

It's fair to say that you never quite know what you're going to get at these seminars and Berkeley Energia is right out of left-field. In simple terms it's a mining company that doesn't even have a hole in the ground to point at - although it possibly might one day if all goes to plan. The deal is that it's in the process of developing Europe's largest uranium mine with the results of a feasibility study due within the next couple of months. Subject to the usual caveats development will start this year, and complete in 2017, allowing the mine to ship out fuel in 2018 and continue in this vein until 2028 at least.

Sounds pretty impressive doesn't it? The CEO, Paul Atherley, certainly comes across as very excited by the prospect available (as he does in these videos) and yet not too much of a salesman. In plain terms the Salamanca project offers a large, shallow ore body (which minimises opex) in a location that already has excellent infrastructure (keeping capex low) and a willing workforce of unemployed workers. Current shareholders are very supportive, and clamouring to stump up the $100M required to get the mine into production, with management looking to avoid both taking on debt or diluting existing stakeholders; which implies some sort of farm-out to a strategic partner.

So what's not to like? Well a cynic might say that Berkeley Energia has been listed for a decade with not much to show for it and that exploration companies have a poor track record of getting over the finishing line. Still Paul Atherley waxes lyrical about the proven abilities of their Spanish managers (with previous projects) and this does feel like a company in the right place at the right time. Even so getting, and keeping, permits is a never-ending task for miners and there's ample scope for expensive delays. Just look at Atalaya Mining (formerly EMED Mining) which also listed around a decade ago and has been tied up in red tape ever since! Still I find myself rather liking Berkeley Energia which probably means I should go and take a cold shower right now.


Arriving at the end of the seminar Waterman feels like a slightly different class of company (despite being a £28M minnow) in that it generates profits and has done so since 1952. Its line of business is to provide consultancy advice to property companies in areas such as structural engineering, environmental concerns and transportation. As such the company gets involved in big-name projects like the Westfield shopping mall and the Battersea Power Station residential development. As explained by the CEO, Nick Taylor, the aim of Waterman is to be the "go-to" consultant for clients and a quick look at their project list suggests that they are succeeding in this ambition.

That said this enterprise is typical of most consultancies in that it's sensitive to the economic state of clients and only achieves low margins (less than 5%) even when there's plenty of work to go around. Part of the problem here is that labour costs make up around 60% of turnover and, not surprisingly, tend to be relatively inflexible with such a skilled staff and prone to increase faster than fees. To offset this Waterman places a premium on staff retention, promotion from within and providing a decent career path. This long-term view ties in nicely with the fact that client relationships are a valuable, intangible asset for the company and act as a conduit for many of their new contracts (and 80% is repeat business).

From an investing point-of-view it's clear that over the long-term the share price tends to move sideways (it hit the current level of 92p back in 1999 and has spent more time below this price than above it over the last 15 years) and that it's best to buy when pessimism is high. In some respects that label applies to the present day as folk worry about Brexit, tax changes and the economy in general; from Nick Taylor's viewpoint he sees a few more good years in the pipeline at least and thinks we're far from the top of the cycle. Given his long experience in the industry I give his opinion a lot of credence but I'm still not certain that I want to get on board with Waterman.

One of these days the industry will come to a grinding halt and I'm not sure that I'm smart enough to take my money off of the table before that happens. On the other hand the management team have disposed of the 35% of the business which was in dodgy jurisdictions in 2007, concentrated their focus on the UK, balanced the business across sectors which are strong at different times and ensured that they're not carrying debt. So investors could hardly expect them to be more in control of the operational side of the business; it's just that Waterman's destiny is outside of their control and I find that a risky prospect.

Disclaimer: the author does not hold shares in any of these companies.

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