ShareSoc Company Seminar - November 2016

It's been a good year for company seminars and I'm pleased to report that this is my 7th seminar of 2016. I may not have invested in all of the companies that have presented but I've certainly learnt a lot about them and worked out which ones tick the box for me as an investor. While this is the final Sharesoc seminar of the year I'm already looking forward, in anticipation, to any companies which the small but effective Sharesoc team manage to sign up.


Smart buildings are the future, according to CEO Mark Braund, and following his presentation I can see why they're attractive to clients. The problem with ordinary buildings is that they're a fixed asset designed for a relatively static workforce living in a cheaper world. Now, with employees much more mobile and networked across larger organisations, the inefficiencies of the old model are apparent. Redstoneconnect solve this with OneSpace; an end-to-end space utilisation, management and analytics platform that allows customers like UBM to reduce energy consumption by 57% while increasing their headcount by 28% in the very same floor space. That'll be why top-name clients like JP Morgan, Goldman Sachs and Amazon are using their software.

Now this glowing picture is somewhat at odds with the share metrics available on Stockopedia. This is a proper penny-share which has existed for over a decade without turning much of a profit or building a viable business. This is why Mark Braund, along with CFO Spencer Dredge, found himself brought in to turn it all around in July 2015. A two-pronged approach involved ridding the company of legacy issues, such as an unrelated animation outfit and an onerous lease, while focusing on a future involving system integration and managed services in the smart building sector niche.

So far the plan appears to be working with customers coming on board and margins improving. The latter is a clear target for Redstoneconnect as 60% of their revenue derives from system integration, which is both lumpy and low margin, while the remainder comes from services and software - both of which generate high margin, recurring revenue. So the business plan is to create a more profitable mix, rather than go for revenue growth, with the entire company being taken over in 2-3 years by a competitor in this fragmented market. To achieve this Mark Braund needs to both execute and deliver direct/indirect sales sufficiently reliably to convince investors that this is a revitalised business. I can see it happening with this management for sure.

Inspiration Healthcare

Curiously Inspiration Healthcare looks like another turnaround situation, especially if you're familiar with its precursor Inditherm, but the situation is wholly different here. In this case the company has existed, and been profitable, since 2003 and completed a reverse takeover of Inditherm in order to acquire its medical technology and move to a public listing. This makes a lot of sense as Inspiration Healthcare is a global supplier of medical technology for critical care solutions that covers non-invasive respiratory management, thermoregulation and patient warming for newborns through to adults in intensive care and the operating theatre. According to CEO Neil Campbell the firm has a good record of growing organically, re-investing profits and identifying viable medical technologies - while also generating cash - and the Inditherm product fits right into their portfolio.

Financially the firm has a strong balance sheet, with £3M of cash, and the means to raise additional funds for acquisition purposes. In terms of revenue the split is 69% from critical care, which is growing but niche, 14% from operating theatres (competitive but stable) with the remainder down to home healthcare (also stable). From this the business generates a blended gross margin of ~45% with own-brand kit retailing at a 60% margin while third-party hardware, which they distribute, comes in at a 35% margin. After costs this led to an 8% operating margin in the recent half-year results but new CFO Mike Briant indicated that they'd like to lift this to the mid-teens (although this depends on how much they choose to invest in research).

So there's no doubt that this is an established business with an excellent reputation (they will deliver anywhere in Mainland UK within 6 hours) and that Neil Campbell knows this field inside-out. He was happy to elaborate on the reasons why Inditherm failed (too many products being poorly marketed) and has a sensible strategy of continuing to bring in new technology aimed at neo-natals while expanding into new markets globally. However there's possibly an element of naivety in their public-market dealings in that a hefty secondary market placing occurred at a big 15% discount on the day of this meeting and they've failed to organise a share premium account reduction (required to allow dividend payments) for undisclosed technical reasons. So I see the operational future for Inspiration Healthcare as being bright but it might be a slightly frustrating ride for shareholders.

Evgen Pharma

Biotechnology outfits are often popular with private investors and in some respects it's a perfect marriage: the companies need to raise money, often repeatedly, to fund their development pipeline while investors are offered an investment that could multiply dramatically if it all goes right. So CEO Stephen Franklin got off to a good start by tacitly acknowledging this relationship and that he might have a tough story to sell! Ironically Evgen Pharma have a convincing story in that their compound, sulforaphane, has over 20-years of peer-reviewed research attesting to its anti-cancer and neuroprotective properties. The difficulty with this molecule has always been its inherent instability and delivering it into a patient; Evgen Pharma's proposition is that they've solved this with a technology that makes the compound stable and safe while being cheap to manufacture.

Right now the company has one Subarachnoid Haemorrhage Phase II trial in progress and another Metastatic Breast Cancer trial about to start - with both completing H1 2018. There's enough money in the bank to finish both of these and Evgen Pharma only need one of them to succeed to hit the jackpot. In support of these Stephen Franklin presented a raft of convincing and easy to understand data; there's no doubt that sulforaphane acts on some critical, chemical pathways in the body. The problem is whether the Sulforadex technology will actually work in humans and then, even if it does, whether it can be safely scaled out to much larger groups. There is clear risk here, as Stephen Franklin charmingly pointed out, and doubly so with the shorter trial period that they've chosen. Still if each pill stops you needing to eat 2.6kg of broccoli then that can only be a positive outcome!

Gresham House Strategic

When it comes to investment companies one measure that ranks above all others is their Net Asset Value (NAV) and whether the share price is at a discount (or a premium) to the underlying assets. In this case the discount is a hefty 25% (41% if you exclude cash) and if you like the portfolio constituents (there aren't many) then Gresham House Strategic could be at something of a sale price right now. Certainly Graham Bird, Head of Strategic Investment at Gresham House, feels that this discount is unwarranted with a few factors acting against them: they've only been investment managers for a year and so their approach is untested; just over a third of the portfolio, £14.6M, is in cash and fees are charged on this uninvested money; their largest holding, IMImobile, is about half of the invested portfolio and that's quite the concentration risk.

Set against this Graham Bird pointed out that after taking over from New Media Spark they have established a solid strategy which applies private equity techniques to small, cash-generative companies. This means that they look for firms with high organic growth and recurring revenue figures who are, despite this, struggling to access growth capital. Following extensive due diligence Gresham House Strategic takes a minority stake and steps in as a provider of both capital and advice - much like a wealthy mentor with a healthy contact list! This input should, it is hoped, be mutually beneficial for both the company and Gresham House Strategic.

Beyond the concentrated portfolio and engaged investment approach there are a few other aspects worth mentioning. One of these is that the fund has £150M of tax losses in hand to set against future profits - all courtesy of poor investments made by a previous manager. This helps to offset the TER of ~3% where the management fee is ~1.5% of NAV with a 15% performance fee being applied above a 7% return hurdle (although the fund is currently below its high-water mark of ~1100p and so performance up to that level doesn't count). Also the fund has a policy of returning 50% of all realised gains to investors with ~15p per share currently available; so there's an income element to this investment. Finally the manager and team own ~20% of the fund, and re-invest half of any performance fees, which aligns them nicely with holders. All in all an appealing investment I feel.

Disclaimer: the author holds none of the shares discussed here.

comments powered by Disqus