Yellowstone Advisory Investor Evening

Last week I managed to attend the first private investor event (I think) put on by investor relations specialist Yellowstone Advisory. I hadn't heard of this consultancy before but the company line-up looked great and they were planning to hold the event within walking distance of my office - two very important considerations. As it happens it was lucky that I signed up early since the venue was packed out and I'm sure that they had to turn a few people away.

In fact I've just looked at their blog and the event was over-subscribed! So it's fortunate for anyone who couldn't attend that Five Minute Pitch TV were there filming and that Yellowstone have added all of the slide decks to their website. If that's insufficient detail I've also written up my notes from the event and hopefully these add some colour to the raw presentations. If there are any errors or omissions then the responsibility is mine as all of the presenters were excellent and able to answer the many questions thrown their way!

Volex (VLX)

As a supplier of power cords and cable assemblies Volex has been through the wars (literally as it was founded over 125 years ago) with revolving-door management and disappointing profits. Around 5 years ago things changed with financier Nat Rothschild taking control of the company and bringing along Daren Morris, FD, for the ride - as this article explains. Since then they have restructured the business away from commodity products into sustainable, profitable niches such as complex harness and electronic sub-assembly manufacture. This has taken them away from fighting low-cost competition, and supplying a small number of dominant customers, into a more diversified space where they partner with quality customers (Apple, Dyson, Nespresso) at a reasonable margin. The regeneration of Volex isn't over yet, as some legacy contracts remain, but the company is no longer on life-support and dependent on the goodwill of its bankers.

As of today Volex has two divisions: Power (sales of $180m) and Complex Assemblies ($220m sales, 2/3 medical and 1/3 data centres). In the first area Daren came across as particularly excited about the potential of electric vehicles with Tesla as a major customer. The key attractions here are that the EV market is in secular growth mode, with China in particular driving this, and that Volex are trusted to deliver high-end plugs which are rugged, waterproof and sophisticated enough to stop your house from burning down. In the assemblies area the medical harness business is key in that the products are expensive, regulated (by the FDA) and sticky once they've been designed into a machine. Similarly it turns out that Hyperscale data centres are also a market that isn't wholly price sensitive in that they require thousands of miles of cabling that won't fail and the demand for new data centres is only increasing. By focusing squarely on these areas management have improved margins and cash generation and moved Volex well away from the commodity arena of high volume and low price.

An interesting side effect of this transition is that Volex have ended up relocating and diversifying their manufacturing capability. Five years ago all of their factories were in China but customers wanted production to move elsewhere because of tariff and IP concerns. Fortuitously this has been a tailwind for the business and now they manufacture in Indonesia, Vietnam, Europe and Mexico with the aim being to support their customers on a global basis. Only commodity cables are now made in China, which is reducing, and customers are happy because they no longer have to fly halfway around the world to visit the nearest Volex facility. Overall it appears that the management team have done a grand job in reshaping the company and they have a clear road-map for the next 5 years - which should take them to total revenues of $650m with profits further increased by rising margins. Still it's worth remembering that this is a low-margin sector with lots of competition and the business has a very dominant shareholder (Rothschild owns a quarter of the shares and is still buying). So it all looks pretty good but the investment is not without risk.

Allergy Therapeutics (AGY)

It's fair to say that biopharmaceutical companies aren't a sector that I like to invest in and Neil Woodford hasn't covered himself in glory here either. Nevertheless Nick Wykeman, CFO, put forward a decent case for Allergy Therapeutics being an exception to the rule with his presentation. The fact is that the business has generated 9% compound annual revenue growth over the last 20 years, after being spun out of GSK, and provides treatments that address a defined and growing need to deal with allergies. Right now they have a profitable business in Europe, with almost 2/3 of sales in Germany, that they're looking to expand by taking market share and registering additional products. However Europe is mature and the board want to break into the largest allergy market which is the US. According to Nick the treatment regime in the States is both old and quite onerous although the medical model seems to be quite different - so AGY need to change the environment over there in order to gain traction. So that's a bit of a hurdle and they haven't got any products licensed by the FDA yet anyway. This is an obvious path to tread, and success in the US would transform the company overnight, but I think that it'll be a struggle.

Fortunately Allergy Therapeutics have another string to their bow and that's a strong pipeline of new treatments (which is one reason for the lack of bottom line profits - R&D costs are sucking up all of the cash generated from sales). First up is Grass MATA MPL which is heading to a Phase III trial in late 2020 and is a key product for the US market. Apparently a successful trial and safety database completion would make this product ready for filing with the FDA. Then there's Birch MATA MPL which did fail in its Phase III trial; work is being undertaken to understand the result and it could partly be down to symptom reduction being a subjective measurement, by patients, rather than an objective one that can be clinically measured. In addition the company has a peanut treatment in the works which uses a virus-like particle as its vaccine in order to avoid triggering anaphylaxis when injected (since it's not a good idea to kill your customers!). This sounds like a clever approach to a deadly allergy and with luck there will be in-human trials in mid-2020. Sadly none of these trials come for free but there's around £27m in the bank which is enough to fund the next few trials for grass and peanut products, I believe, but further trials or allergy targets will need additional funding. So while this isn't a sector for me it seems that Allergy Therapeutics has a lot of potential, with its advanced studies and growth opportunities, and yet the share price is at a 5-year low. It'll be interesting to see how events pan out in 2020 that's for sure.

Mirriad (MIRI)

At first glance Mirriad isn't the sort of company that normally interests me either: it's a micro-cap at just over £36m, it's never made a profit and it's only been listed for two years. Nevertheless it appears to have some unique, proprietary technology and I wanted to hear Stephan Beringer, CEO, tell me why he was so excited to join the company a year ago. Essentially, as I understand it, Mirriad can analyse video footage and automatically detect elements in each frame that can be seamlessly modified. I suppose that this would be useful for all sorts of FX work but Mirriad is focused on advertising and their ability to inject brands into entertainment content. It's quite remarkable to see this in action (Stephan played some clips) but it's also a little shocking as you realise that real-world brands are very actively toned down in most programmes and films - at least for now. Beyond this amazing technology the company is also doing something else quite clever. Rather than show their product to the million and one clients who might wish to advertise they are, instead, looking to partner with the content producers themselves. In this way they're offering another revenue stream to these producers (with Mirriad taking a cut) without having to do the leg-work of finding brands that might want to advertise in this manner.

This is a smart approach but there remains a chicken-and-egg problem in that brands aren't really aware of his new channel (so don't demand it) and content producers are rightly worried about the quality of their material (and so perhaps don't push it so hard). There's also the balancing act of making sure that any brand injection is subtle as viewers are already fatigued by ads and won't react positively to product placement destroying their sense of the theatrical. To address this Mirriad have employed independent analysts to survey the impact on brand awareness with Mirriad in place. Remarkably awareness can increase by 10% or more which is huge when you're talking about already known brands such as T-Mobile and Seat. Right now it feels as though media companies are slow moving, and late to adopt such technology, but Mirriad have contracts with 4 supply partners. They are also making a big push in the UK & US with 7 deals on the negotiating table. Even more exciting they have a new partnership with Tencent Video that runs for 2 years, initially, with some form of minimum guarantee. I can see why Tencent are interested when Mirriad can show different content to different viewers at the same time and really personalise the consumer experience. I don't know enough to say whether Mirriad really are the only player in this space, or whether their potential patents around cataloging content and dynamic insertion are worth protecting, but they are far more than smoke and mirrors. I imagine that they need just one big contract and the company could take off (or be taken over).

Checkit (CKT)

Last up came Keith Daley, Executive Chairman of Checkit. From the off it was quite obvious how proud he is of the progress made at Checkit (formerly Elektron Technology) and rightfully so. Looking at the historic financials it was a right basket case with profits all over the shop and a share price that reflected this underlying volatility. Even so progress was being made and earlier in the year an unsolicited indicative offer for Bulgin, their cash-cow business, became public. This didn't proceed but in July we learnt that Bulgin was up for being sold at £105m (rather more than the value of the entire business) and that Keith was going to remain to focus all of this energies on Checkit and the acquisition of Next Control Systems. A wholesale change then but one which makes Checkit a well-funded SaaS outfit that supplies real-time operations management software. What this means for customers is that their business processes are analysed and digitised in order for them to remotely monitor and verify that teams are actually following the best-practice processes. A big stamp of approval emerged recently when BP signed a framework deal to put Checkit into 320 of their UK sites. It's not easy to reel in this sort of customer (apparently three other firms have been talking for around 3 years and are only now prepared to sign up) and so this deal concretely validates the software business case.

Actually it's a little unfair to portray the BP deal as make or break since Checkit already service a wide array of customers in a variety of sectors. For example you've got Center Parcs in Leisure, the NHS in Healthcare, British Land in the buildings sector and Abellio in Industrial & Infrastructure. The one customer that Keith covered in more depth is Waitrose. Here they operate in all branches and provide data that allows Head Office to analyse store profitability. Some of this comes down to monitoring refrigeration, ensuring that ambient temperatures are correct, with an obvious bearing on food safety. There's also the angle of monitoring checklists and ensuring that they are completed on time, every time. Keith definitely has plans to move beyond this though with sensors that tie into energy consumption and building management - along with the acquisition of data that can feed into analysis and reporting. A slight issue is that an awful lot of wireless sensors are involved in keeping Checkit running and engineers have to install these sensors - which is a costly process. If this can be streamlined, cutting costs, and a few more customers bought on at £100-200 per month per site, then it's reasonable to see the company moving towards break-even. However there's no doubt that the board want to invest and grow at some pace (and they've got the cash to do this) which implies that profits lie some way off in the future. Frankly this is the right approach to take with a fast-growing business but I'm not sure that I could live with this level of risk/reward!

Disclaimer: the author holds some of the shares discussed here

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