After a very pleasant summer off, mostly ignoring my portfolio, it was a pleasure to attend another ShareSoc growth seminar in this autumnal month. This time the event relocated to Edison Investment Research in Holborn and yet, fortunately, remained within walking distance of my office! This certainly makes the difference as it's nigh on impossible for me to attend company meetings within the working day, without taking leave, so well done ShareSoc.
Before Mark Scanlon, CEO, stood up to present I knew nothing about Personal Group but it turns out their proposition is simple. They provide a way for companies to outsource the provision of employee benefits to an expert supplier and so reap a couple of major advantages: employees are happier as they get to save money without much effort and HR are happy because they don't have to administer childcare vouchers, cycle to work schemes, gym memberships and so on. In time Personal Group are looking to expand into areas such as salary sacrifice and workplace loans, and other industry verticals, so there's plenty of opportunity for growth.
A key driver behind this growth is, hopefully, the company's recent partnership with Sage Group and the fact that Sage are bundling Personal Group's SaaS product (Hapi) under their own name as Sage Employee Benefits. Up to now the group has mainly targeted large corporate and public sector clients, as it's expensive to acquire customers, but piggybacking on Sage Group's dominant penetration within the SME space and their strong brand name should provide plenty of leverage. Obviously a cut of revenue is sacrificed here but if all goes well there should be plenty of up-selling opportunities down the road.
Talking of up-selling the business started out with an insurance product sold directly, face to face, to employees and this remains the largest source of revenue by far. Here Personal Group take on the risk, hold solvency capital and pay all claims. While this sounds potentially challenging in reality clients hold their policies for 5 years on average and the combined ratio is 60-65%; so it's a real cash-cow which is still growing. On the other hand employees have only one chance to sign up forever and that makes me a little uncomfortable - although it also explains why ~50% of people actually take a policy when it's offered! So there's lots to get excited about here although personally the company doesn't float my boat.
This is a company which I always imagined to be one of those high-tech, niche engineering outfits that Britain does amazingly well, on occasion, and the presentation by Tim Rogers, CEO, fully confirmed my hunch. AB Dynamics is a global leader in the testing and simulating of new car designs with this allowing customers to improve their vehicle dynamics, make steps towards driver-less technology and so on. As such all of the top 25 global automobile manufacturers use AB Dynamics kit and the revenue base is very diversified: 30% Europe, 25% China, 17% Japan, 15% USA etc. Clearly this is a well supported business with valuable IP - apparently each employee generates ~£250K of turnover!
However with such a lock on the global market one wonders where future growth lies? Apparently the company has been somewhat capacity constrained for many years but they're just now settling into a brand-new factory - so there's a decent chance of R&D accelerating somewhat. At the same time Tim Rogers sees the global market continuing to grow steadily, particularly in China, with a special focus in the area of virtual testing. Given the track record of AB Dynamics as they've pivoted from consultancy to machine supply/services it would seem foolish to bet against them.
That said Tim Rogers is leaving at the end of this year, after 5 solid years of growth, as he feels that the company needs a different type of leader to take it forward (and maybe he's achieved all that he wanted?). At the same time the founder, Tony Best, still holds ~35% of the shares and while he's still active in the business he is 80 years old now. So there's executive risk here never mind the backdrop of Brexit - although AB Dynamics are setting up a German business to offset the chance of them being shut out of contracts. Actually on the contract front the business has very little recurring revenue (<10%) as they mainly sell capital purchase items and I imagine that this is the first thing to get chopped in a downturn. So while I like the look of this business I think that I'll wait until the new CEO gets settled before committing myself.
From one high-tech company to another. In this case Cap-XX is all about prismatic, high-power super-capacitors and their energy storage capabilities in a variety of products. From a technical perspective Cap-XX have, over the last 20 years, generated good IP that is both patent-protected and able to be licensed to global players. In this area Anthony Kongatts, CEO, talked about two key customers - Murata and AVX - and the fact that licence fees and royalties from both of them are expected to grow significantly in the near future.
In one respect this is rather a good thing as Cap-XX have been listed for over a decade and have yet to make a profit - although annual losses are narrowing. At the moment they have A$3.9M in the bank, a cash-burn rate of ~A$1M per year and a hot pipeline of R&D projects. In fact, in some ways, the company is all about R&D as there are only 25 employees and they intentionally outsource tasks like manufacturing, sales and product integration. This allows them to concentrate on their nanotech/electrochemistry niche but does perhaps leave them at the mercy of other players.
On one hand I like the fact that Cap-XX are engaging in real, cutting-edge research and making inroads into areas as diverse as wearable tech, energy harvesting, metering and RFID tags. However none of this has, yet, translated into a business which makes consistent cash profits and while break-even may be achieved in a couple of years it's hard to get too excited right now. Add on the fact that this is a wholly foreign outfit that just happens to be listed on AIM (for the benefit of liquidity, decent research and institutional support) and I'm hard pressed to see Cap-XX as the best home for my investing funds.
With the final company of the evening Steven Powell, CEO, ably laid out their key strength - which is that they provide brain-testing software that is clinically proven, hard to game and applicable to many different domains. In the beginning they started in the Alzheimer/dementia space and found themselves installing software onto an awful lot of iPads; a big drain on resources from both the hardware and support angles. Still I guess that this proved the technology because Cambridge Cognition have been able to migrate to a cloud-based solution that cuts costs massively and centralises the analysis of all data collected.
This change in focus appears to have sparked a real acceleration in growth as the company have branched out into wider drug trials and general cognitive research. On these fronts the software sounds rather impressive in being able to test both for degenerative disease and the impact of long-term drug use on the patient brain. It is this flexibility which seems to hold out the promise of breaking into a new market - that of digital health where patients are personally mapped to the most efficacious medicine and able to assess their cognitive health on an ongoing basis. It sounds as if this would be a game-changer for the company.
From a financial perspective the first-half of the year saw Cambridge Cognition moving towards break-even with cash in the bank and big hopes for an improved second-half. This would seem to validate the cloud-based approach and a migration of revenue away from lumpy, one-off projects although, to be fair, this is all in the share price so far as I can tell (i.e the forward P/E is ~75). Still there's lot's to like about this business and it does look to be on the cusp of becoming a bona-fide success.
Disclaimer: the author holds none of the shares discussed here.