ShareSoc Company Seminar - November 2015

I started attending the ShareSoc growth seminars last year and the line-up presented in November is pretty typical in that all of the presenting companies are small but promising. However with five presentations on the bill it was a pretty intense evening and I'm glad that I took some notes even if it's taken me six months to write them up! What is interesting is how well a couple of the companies have done since then and none have disgraced themselves in the intervening period.

IS Solutions

IS Solutions is a specialist in data that has, somewhat surprisingly, been listed on AIM since 1997 (having formed in 1985). So they rode the dot-com bubble and hit an all-time high of 280p way back in 2000! Since then it's been a long slog back from a low of 5p in 2003 with real excitement only hitting the shares in September 2015 when the impact of acquiring Celebrus (earlier in the year) led to an outperform trading statement being issued. Apparently this new division offers much higher margins than the traditional business and thus a step change in profits; analyst forecasts are for £2.5-3.5M in 2016/17 compared to £500-800K in previous years. No wonder the share price has nearly tripled since Celebrus came on board!

The market for business intelligence and analytics is fast growing; companies have too much data and need help to analyse it. So IS Solutions provide impressive multi-channel collection and analysis in real time through a patented "tag free" collection technology. This "big data" can then be analysed to drive marketing campaigns, identify potentially fraudulent activity and otherwise engage with customers. However, like many tech firms, IS Solutions would like to generate more recurring revenue - at the moment this is only a quarter of sales with project work accounting for over half of all revenue. It does seem that analytics is helping to drive this change though and the new focus now provides 72% of revenue (and hopefully 100% in future?).

Covering the six month period to September 2015 what really impresses is the turn-around of the business; from a net loss in H1 2014 to a net profit in H1 2015 which out-stripped the whole of 2014! This is definitely an improving business and back in November the 5p forecast looked too low (against even just doubling the H1 profit of 3.3p to get 6.6p for the year). Since then the forecasts have been raised twice and are up by over 50% at 7.59p with the share price up by over 60%. This is above the previous 2017 forecast too and so a lot of profit has been brought forward. I guess that the day of the seminar was a good time to buy!

In addition the quality of the business has improved since November with liquidity moving from a worrying level of 1.0 to something more healthy and the Piotroski F-Score jumping from 2 to 5. Of course the forward P/E is now anticipating growth (at just under 20) but this isn't outrageous and falls to 16.8 in 2017. It all seems eminently achievable with profits significantly ahead of market expectations, according to the excellent trading update in February, and as the board is also looking to pay a progressive dividend then cash generation must be good. Certainly the balance sheet supports this with positive cash-flow leading to a £2M cash position offsetting debt.


At first glance this company is all about graphene, the wonder material, and the commercial uses to which it can be put. However Versarien actually operates in three areas with two of these, copper foam thermal products and graphene products, seemingly on the verge of commercial breakthrough. The other area, hard wear products, does have clients but a lot of these are in the oil and gas industry and so the board are trying to diversify into less volatile sectors. So this still feels like an immature business although the board seem to be working hard to put it on a firmer footing - particularly through their involvement with the National Graphene Institute at the University of Manchester.

Neill Ricketts, the CEO, proved to be an engaging and enthusiastic presenter with the sense that he's an engineer first and a salesman second; which is probably why he handed out samples to the audience while describing the activities of the business. The key here is their creation of a process (patent protected) to produce graphene in commercial volumes since this has been the sticking point with this material so far; if they can convince customers of this and deliver quality product then the possibilities are vast. At the same time they're pushing forward with their thermal products and these seem to be gaining traction in the market-place; both segments are decently loss making though. Set against this the Hard Wear division generates real turnover and profits but it's been badly hit by the downturn in the oil & gas industry; even so it helps to balance the books and should bounce back in future.

From a financial perspective Versarien started out in 2011 with £0.25M fund raise and went to IPO in 2013 - raising £3M to keep the company going and finance the acquisition of Total Carbide. At this point thermal foams were the only focus of development. The big shift into graphene came in 2014 with a big placing for £5.5M and the acquisition of 2-DTech. So it's clear that the company is both opportunistic and acquisitive of companies which offer some form of compatible technology. At the moment there's enough cash in the kitty to last another year at least (depending if any grant money comes in) given the present burn rate of around £1M every six months; however Neill Ricketts mentioned that they would probably look to raise new funds for any further acquisitions. That said the share price is pretty beaten up, following the graphene-fuelled excitement of 2014, and the board are making tangible, commercial progress. So I can see Versarien surprising to the upside in the medium-term.

HarbourVest Global Private Closed Fund

An unusual entry at ShareSoc in that this is a specialist private equity (PE) investment fund which just happens to be listed. Knowing that this might be a tough audience to convince the presenter began with the case for PE which is essentially that it gives you access to a large pool of possibly undervalued investments but at the expense of liquidity and transparency. Historically PE returns have outstripped those from public markets but, as ever, the crux is that you need to access top-quartile funds and this is only easy in hindsight. This revelation led onto the point of this fund which is that it only invests in HarbourVest portfolios and this is a firm which has prospered in the PE space since being founded in 1982. In other words HVPE gives ordinary punters the opportunity to share in the very diversified and stable returns made possible through a wide spread of PE investments.

Unfortunately the launch date for HVPE of Dec 2007 could hardly have been worse with the closed-end fund quickly running into the GFC firestorm; a year after launch the NAV was down by over 25% while the share price looks to have fallen around 70%! However from this nadir the NAV has risen slowly but steadily with assets more than doubling over the last 7 years. The share price, meanwhile, has remained somewhat bruised and at a decent discount; even now it's at around a 20% discount despite some narrowing over the years. Still it seems likely that this gap will continue to narrow as the fund is run pretty conservatively (no more surprises then) and management have a plan to improve the profile of the fund (bringing in more investors). This plan involves cutting down the level of US investment to under 50% and preparing the fund for a main market listing with potential entry into the FTSE250 (which actually took place in Dec 2015).

The problem with fund-of-funds investments is that typically they wrap several levels of fee structure in an opaque wrapper. So while the management fee comes in at around 1.1% the performance fee is more variable; looking at the last annual report it looks like combined fees reduced the NAV by around 2%. This is a significant headwind but at the same time the NAV does keep ticking up so maybe it's worth paying the price for this performance? More significantly, to my mind, is the fact that while the fund is invested across 6812 companies there's a lot of sector concentration here: 34% of the fund is in consumer/financial, 31% in tech/telecom, 17% in biotech and 18% in industrial/other. These may well be the circles of competence for the manager but it does strike me that the underlying diversification isn't all it's cracked up to be (and the correlation with collapsing equity markets in 2008 anecdotally supports this). I can see a definite market for HVPE but I don't think that private investors are it unless they're either banking on the discount narrowing further or aspire to total diversification in their own portfolio.

Keyword Studios

With Keyword Studios the seminar returned to the more typical small-cap growth-stock story. This company provides out-sourced services for game development companies through the entire life-cycle (pre-production, development, additional content) and creates excellent relationships by doing good work at the right price. As such they are insulated from the success or failure of any particular game; they just get paid by the hour and hope to win repeat business if the game is successful. In addition to organic growth the company is also very acquisitive and acts as an aggregator of the small-scale businesses that are typically operating in this fragmented, localised market. Their track record so far is pretty good and the board are opportunistic: recently they took on a direct competitor called Babel Media quite cheaply when they hit internal problems (due to over-complicating the process) and now this team is operating very profitably. The downside of this approach is that fund-raisings are a regular feature, such as the £10.5M raised at the time of this meeting, because group cash generation can't match demand even though it's pretty good.

Looking at the H1 results the headline growth of 74% (of which 23% is organic) translating into 65% profit growth (to €2.2M) sounds pretty impressive; however this is before some chunky adjustments for acquisition expenses, share option charges, amortisation and FX (totalling to €600K or 25% of profit). So I think that the absolute numbers should be taken with a pinch of salt but even so the business trend is very positive. Surprisingly the stock market didn't take to Keyword Studios initially and from listing in Jul 2013 the shares didn't really go anywhere for two years. It's only since last August that the share price has caught up with expectations and the momentum shows no sign of slackening; the 2015 results came out on 5th April and in the fortnight since the share price is up by another 15%. Right now this makes the shares look expensive but if the 2016 forecast of 13p is met then that implies a P/E of around 20 for growth in excess of 50%. According to management comments the company is on track to hit this target so maybe it's not too late to join in.

My real concern with Keyword Studios, I think, is that it's hard to pull off the buy-and-build strategy successfully over a long period; either management take their eye off the ball, an expensive acquisition goes wrong or too much debt overwhelms the balance sheet. Right now the enthusiastic CEO, Andrew Day, appears fully in control and with 11% of the company at stake (worth around £15M at the current share price) he should be. Purchases are also congruent with the stated strategy: to deliver organic growth ahead of growth in the video games market (around 8% pa) with acquisitions (into different niches/geographies) providing step changes to profit year-on-year. The client list is very strong with Keyword Studios servicing 21 of the top 25 games companies by revenue worldwide (with the top 10 clients accounting for 50% of revenue but with no one client exceeding 15%) and standing as pretty much the only full-service provider for these clients. I think that the fact that they are the only one tells us something which is that this is a people business, like recruitment, and that it works best at a parochial, small-scale where creative people are not burdened by layers of management. If Keyword Studios can maintain this environment in all of their global operations then they'll do well but I sense that it's a tough business to scale.

Scientific Digital Imaging

To round off the evening ShareSoc found Scientific Digital Imaging - a very small company that no one will have heard of but all the more interesting for this very reason. The story here is that the company is an umbrella for a number of specialist, niche technologies that cater to real markets but are sub-scale in their own right. The ambition, since listing in 2008, has been to acquire and consolidate complementary businesses and to this end Mike Creedon (CEO) joined in 2010 as CFO to help the company grow. Unfortunately excess costs and poor sales scuppered this idea and less than 18 months later Mike stepped into the top job and has been turning the company around ever since.

I warmed to Mike Creedon from the off as he sketched out just how badly things had gone wrong at Scientific Digital Imaging and why it's taken him a good four years to steady the ship. Now the different business lines are all functioning well, with tight cost control (a huge focus for Mike), which means that the group can finally grow; hence the recent acquisition of Sentek Limited. The upside from this deal is exposure to a new business area, a broader investor base due to the related placing and a chance to capture some recurring revenues. The latter is a key win as generally the group sells capital equipment and this doesn't lend itself to reliable revenue growth.

On the face of it this is a strikingly cheap company with a P/S < 1 and a P/E of around 5 despite a 23% downgrade in 2016 forecast earnings to 1.67p late last year. It's definitely improving and Mike is keen to turn it into a £10M business making £1M profit each year - the level at which a listing is worthwhile. Set against this the operating margin is very low (< 5%), there's no liquidity to buy shares and the spread is terrible (nominally 20%). Which is a bit of a shame as Mike has gone above and beyond the call of duty in turning the company around (none of the original directors are left) and he demonstrably knows the business inside out. I definitely wish him well and look forward to hearing from Scientific Digital Imaging when it has slightly more presence in the market.

Disclaimer: the author does not hold shares in any of the companies mentioned here

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