december 2014 aim prospector
DESCRIPTION
Featuring five AIM-quoted companies: Burford Capital, Chamberlin, GLI Finance, Journey Group and Patisserie Holdings.TRANSCRIPT
AIMprospector
five AIM companies profiled
An outstanding AIM shareThe niche firm that attracted top investors
Issue 10 December 2014
fast-paced rollout
cash-rich caterer
recovering manufacturer
free to private investors
big dividend payer
AIMprospector
2 www.aimprospector.co.uk
Welcome again to AIMprospector, the monthly online magazine from Blackthorn Focus. To make sure that you get AIMprospector first, register your email address at www.aimprospector.co.uk to receive a pdf link 24 hours before the magazine goes live to the public.
This month’s Top Pick is Burford Capital. The company is a very distinctive type of business,
making its money from, pretty much, investing in other organisations’ lawsuits. Furthermore,
the company’s market cap and dividend yield are such that Burford is among the top 10% of
all AIM stocks on both measures. Burford has already won some impressive backers. I hope you
agree that the company deserves highlighting.
A quick mention of two other firms that have previously featured.
November was a big month for housebuilder/regeneration specialist Sigma Capital. First
came the announcement on the tenth, of a ‘strategic partnership to deliver regional Private
Rented Sector developments’ with blue-chip property firm Grainger. Here, Grainger will have
the exclusive option to buy sizeable chunks of land that Sigma has secured for development.
Sigma followed this nine days later with the announcement that after receiving £67m of
financing from Barclays, construction has begun on a collection of sites in Greater Manchester
and Liverpool. 927 homes will be built under this phase of the scheme.
Manufacturer Tricorn announced results earlier this week. AIM Prospector featured Tricorn
in the July edition. The results had a strange feeling to them. A small pre-tax loss was reported
and management warned that another, larger loss is expected for the second half. A significant
reduction in debt was achieved thanks to the sale of the group’s aerospace division and there
is no dividend. However, Tricorn seems to be aiming at something bigger than a 2015 or 2016
profit figure. For some time now, Tricorn’s long-term strategy has been to become a tubing
supplier to global blue-chip customers, serviced through an intercontinental manufacturing
base. The China part of this equation appears to be going to plan, with Tricorn’s wholly owned
facility ‘extremely busy managing the in load of further new work’. A good report was also
delivered on the company’s joint venture in China. However, the US operations remain a
disappointment. Acquired in March 2013, this division must start delivering soon. There are
some encouraging signs that things may be turning around stateside, with Tricorn saying that
the division’s ‘new management team has made an encouraging start in creating a solid
platform from which the business can develop’. The investment case remains unchanged:
if Tricorn can deliver a level of sales appropriate for the manufacturing capacity that it
possesses, at a profit margin in-line with what the group has
achieved in the past, then I expect that the shares would more
than double from here.
Please note that there will be no AIM Prospector next
month due to Christmas/New Year. That just leaves me to say
good luck for the holiday period and see you in 2015.
“Enjoy this month’s AIM Prospector and good luck with your AIM endeavours.” David O’Hara, Editor, AIMprospector
ContentsWelcome ..............................p2
GLI Finance ........................p3
Top Pick: Burford Capital ....p4
Chamberlin .........................p6
Journey Group ........................ p7
Patisserie Holdings ...............p8
Contacttwitter: @aimprospector
email: [email protected]
www.aimprospector.co.uk
Published by:Blackthorn Focus Limited
www.blackthornfocus.com
AIMprospector
five AIM companies profiled
An outstanding AIM shareThe niche firm that attracted top investors
Issue 10 December 2014
fast-paced rollout
cash-rich caterer
recovering manufacturer
free to private investors
big dividend payer
AIMprospector
www.aimprospector.co.uk 3
After first coming to AIM as T2 Income
Fund in 2005, the company was
renamed Greenwich Loan Income
Fund (as in Greenwich, Connecticut)
in 2009. To better reflect the more
geographically diverse nature of its
lending activities, the name was
changed again in April 2013 to GLI
Finance Limited.
With companies still complaining
of the difficulty of achieving bank
finance, lenders such as GLI have
moved to meet the demand. GLI
does this through its relationships
with a number of lending platforms,
each having a particular focus. For
example, fundingknight.com is a
public platform for UK SME lending
and borrowing. Once the relevant
checks have been passed, anyone with
a UK bank account can be a lender
through fundingknight. Businesses
applying for funding are then given
a rating by fundingknight, with loans
to apparently riskier businesses
paying more interest. Like many
such platforms, a lender’s funds are
spread across a portfolio of borrowers,
reducing the risk of wipeout.
Other GLI platforms offer invoice
discounting, where cashflows are
provided in exchange for the lender
becoming the payee of the business’
debtors.
GLI’s ambition is to re-orientate
the business away from simply being
an owner of loans originated by third
parties, to becoming both an SME
lender itself and an equity owner of
the lending platforms conducting
SME financing. The goal is to become
a unique SME financing business by
‘combining traditional SME finance
disciplines with the fast-growing online
alternative finance providers, many of
whom would be described as “peer to
peer” (“P2P”) or marketplace lenders.’
GLI is keen to stress that the
platforms that it takes a stake in are
complimentary to traditional bank
lending rather than competing. That
is important because if appetite for
SME lending did return among the
mainstream banks, they could quickly
undermine the next-generation
lending platforms.
GLI believes that cultural changes
in the banking sector toward an
exclusively quantitative approach to
lending decisions (computer says no)
GLI Finance is a provider of loan financing to small and medium-sized businesses in the US and UK. Historic and forecast dividends make the company one of the highest yielding shares on AIM today.
GLI Finance (LON:GLIF)
FOR
Operations in sweet spot
Huge yield
AGAINST
Banks could up competition
Platform business v. competitive
Market cap £82m
Bid:offer 57.75p:58.5p
P/E (forecast) 12.9
Yield (forecast) 8.9%
52week low:high 50p:63p
Big dividends from SME funder
goal is to become a unique SME
financing business
make it impossible for many young
SMEs to borrow. Furthermore, new
capital rules are forcing banks to hold
more reserves against certain types
of lending. GLI is keen to point out
that neither of these are short-term
trends: both would take many years to
reverse.
Having paid a 5p dividend last year,
GLI again declared a 2.5p payment
at the six month stage. GLI Finance
looks a remarkable proposition: a
high-yielding AIM share operating in a
fast-growing industry.
Unfortunately, as a lending
company, shares in GLI Finance would
likely not qualify for Business Property
Relief and would attract inheritance
tax if they were part of an estate.
GLI Finance looks a remarkable
proposition
AIMprospector TOPpick
4 www.aimprospector.co.uk
Niche player attracting income investors Burford Capital is one of the most remarkable companies on AIM. Founded just five years ago, Burford has evolved into an AIM-quoted company able to win the backing of one of the UK’s most celebrated investors.
The company is ‘the world’s largest
provider of investment capital and
risk solutions for litigation’. Put simply,
Burford provides money to organisations
that are seeking damages from others,
in exchange for a fee, interest, share
of the award or a combination of the
three. This makes Burford an extremely
rare type of company, with Juridica
Investments the only company on AIM
that comes close to this sort of activity.
Burford has found some fame as one
of star fund manager Neil Woodford’s
few AIM holdings. Mr Woodford built
his reputation as an income investor
at Invesco over a period measured in
decades. The fact that his new fund
owns over 7% of Burford should be
reason enough for income investors to
take a look.
Burford Capital was incorporated
in 2009 and the shares began trading
on AIM in October of that year. The
company was formed from Burford
Group, an organisation that dates
back to 2007. Today, Christopher
Bogart is Chief Executive Officer of
the business. Mr Bogart is one of the
founding principals of the business and
has enjoyed a long career as a litigator.
Burford’s Chief Investment Officer,
Jonathan Molot, was also closely
associated with the company from the
early days, having been investment
committee chairman of the company’s
US subsidiary.
Burford can become involved in the
litigation process from different stages
and perspectives.
Classic litigation funding is the
provision of funding to a plaintiff that
simply cannot afford the lawyers they
need to effectively prosecute. Here,
Burford’s support is required to get the
case off the ground.
In other instances, Burford are
approached part-way through the
process, such as when the plaintiff
realises that more finance is needed to
secure victory. This frequently occurs
as the cost and duration of the process
is underestimated (q.v. Jarndyce v
Jarndyce).
Other examples include funding
pending an appeal (when the judgement
has been won but an appeal is launched)
or simply funding a plaintiff that is
awaiting cashflow at the end of the
process.
In addition, Burford provides
financing to law firms, such as those
that have arranged not to be paid until
the case has concluded, or a firm that is
simply waiting to receive the fee that it
has been promised.
The contract that Burford may
agree with plaintiffs is not necessarily
Burford provides financing to law
firms
not necessarily a straightforward
‘percentage of win’ agreement
Christopher P. Bogart, Chief Executive Officer
AIMprospector TOPpick
www.aimprospector.co.uk 5
a straightforward ‘percentage of win’
agreement. Cashflows to Burford will be
determined by a number of factors, such
as the amount that is paid out, or the
time taken before payment is received.
As above, Burford can profit even if a
case is lost.
Burford’s job, therefore, is to first
identify good litigation prospects and
good borrowers and then negotiate a
deal. A 2012 Forbes article illustrates a
large number of examples of Burford’s
work very well. While backing losers
could result in Burford’s investment
being wiped out, a winner could (for
example) result in Burford getting back
three times their original investment.
The selection and management of
Burford’s portfolio is therefore a critical
part of the business. Typically, Burford
will be involved with around 35 cases at
any one time.
Many AIM shares are highly
correlated with each other, such as the
junior oil shares. A large number are
young ventures exploring immature
industries and niches. This means that
when investors’ attitude to risk adjusts,
AIM shares can fall or rise sharply as
investors’ perceptions change.
However, I expect that due to
the nature of its revenues, a share
like Burford Capital will be much less
buffeted in bear markets and neither
would it spike upwards when investors
switch to ‘risk-on’ mode.
It is the distinct nature of Burford’s
business that forms the base of the
investment case. You don’t need to have
been investing in smallcap companies
for too long before experiencing the
frustration that engulfs AIM stockpickers
when the asset class is out of favour. On
the other hand, it is not uncommon for
AIM shares to multibag in a broad-based
smallcap recovery.
The nature of Burford’s operations
suggest to me that it is less likely to
suffer from dramatic changes in investor
sentiment. The shares, therefore, could
play a vital role in a diversified AIM
portfolio.
According to Stockopedia, Burford is
forecast to report EPS of $0.12 for this year
and pay a dividend of around half of that.
A quick search shows just how far
Burford Capital stands out from most
AIM companies. Across all of AIM, only
58 companies have a larger market
capitalisation than Burford. I estimate
that around 90 AIM companies are
trading on a higher dividend yield today.
According to the statistics, there are
only nine AIM companies with both a
larger market capitalisation and a higher
dividend yield being traded on the
market today.
Even better, Burford again beats
most companies on the market when
profitability metrics such as Return
on Equity and Return on Capital are
examined. Together, these statistics
put Burford Capital among some of
AIM’s most highly-regarded companies,
such as James Halstead and Alternative
Networks.
One potential negative comes from
uncertainty over whether the nature of
the business would disqualify the shares
for business property relief i.e. they
would be included as part of an estate
for inheritance tax purposes.
However, if you are not planning on
dying anytime soon, Burford is clearly an
outstanding proposition.
identify good litigation prospects and good borrowers and then
negotiate a deal
forecast to report EPS of $0.12
for this year and pay a dividend of
around half of that
Burford Capital (LON:BUR)
FOR
Strong shareholder register
Good yield
AGAINST
Opaque asset base
Key manager risk
Market cap £249m
Bid:offer 120p:122p
P/E (forecast) 16.4
Yield (forecast) 3.1%
52week low:high 108p:137p
Jonathan Molot, Chief Investment Officer
clearly an outstanding propositionclearly an outstanding proposition
AIMprospector
6 www.aimprospector.co.uk
The company runs foundries in
Scunthorpe, Leicester and Walsall,
while the two engineering businesses,
Exidor and Petrel, are based in Cannock
and Birmingham respectively.
The Walsall foundry manufactures
light castings and components,
principally for automotive and hydraulic
applications. This business currently
delivers around half of group sales. It is
prospects for these operations that are
key to the investment case.
The Leicester business produces
medium castings for end use in
construction and mining equipment,
power generation and defence.
The Scunthorpe site produces heavy
castings for applications such as railways
and construction. Past customers include
Crossrail, where heavy castings were
used to support some of the more
complex areas of tunnelling.
Exidor manufactures escape door
equipment (such as the bar you
would push to open a door) and door
closing mechanisms. Petrel is a lighting
and control business, with products
designed for hazardous environments.
The current Chief Executive, Kevin
Nolan, has been in place for just over
one year. Finance Director David
Chamberlin is a group of foundry and engineering businesses operating from five sites. Recent results showed an improvement in performance as the company returned to profitability. Two recent contract wins highlight the opportunity that exists for Chamberlin’s automotive business.
Turbo-charged recovery at Chamberlin
In the longer term, the prospect of
increased proliferation of turbo-charged
petrol engines constitutes a company-
changing possibility.
While there is some debt in the
business, Chamberlin has significant
headroom to its facilities. The current
market rating suggests that there is
not much more to come from the
company’s recovery. To me at least,
the contract wins and recent results
suggest that the turnout may be more
positive than the share price suggests.
Chamberlin (LON:CMH)
FOR
Modestly priced v. forecasts
Petrol opportunity could be bonanza
AGAINST
Leicester division holding company back
Current structure sub-optimal
Market cap £8m
Bid:offer 98p:106p
P/E (forecast) 10.6
Yield (forecast) 0
52week low:high 65p:112p
new team is making significant
progress
cost reductions in the first half
saw the company move to an
underlying profit
Roberts assumed his role in July 2013.
Half-year results from the company,
issued in November, showed that
this new team is making significant
progress. Huge cost reductions in the
first half saw the company move to an
underlying profit of £0.4m from a loss
of £0.6m in the previous year. While
problems remain at the Scunthorpe
site, a return to profitability is expected
by Q4. Significant challenges remain
at Leicester however, with aged
infrastructure holding back attempts at
margin improvement.
New contract wins for the Walsall
foundry point to a more prosperous
future for the company. In October,
Chamberlin announced a €6.7m, four-
year contract to supply turbo-charger
parts for diesel passenger cars. This
contract helped underpin full-year
forecasts.
Chamberlin topped this in
November with the announcement
of an eight-year automotive parts
contract worth €26.0m, again won by
the Walsall operations.
Management believe that it is the
broadening of the engineering skill base
in the Walsall business that helped
Chamberlin win this large contract.
AIMprospector
www.aimprospector.co.uk 7
Journey sells through two operating
companies: Air Fayre (catering) and
Watermark (products).
In the first half of the year,
revenues were roughly split two-thirds
catering : one-third products.
Although nearly all of Journey’s
revenues are in dollars, the company
reports in sterling. As a result,
Journey’s numbers can swing with
the exchange rate. Furthermore, like
any supplier, Journey needs strong
customers. This leaves the company
exposed to the notoriously cyclical
airline industry.
The Group took on its current form
following significant restructuring. In
2010, Journey disposed of its joint
venture with Alpha Flight at London
Heathrow, taking the company almost
to a net cash position. More favourable
banking facilities were then secured.
Operations were streamlined further
with disposals in 2011 and 2013.
These changes mean that
comparisons with past years lose
meaning.
Most of Journey’s business today
and its future prospects, are centred
on meal supplies to US airlines in
America. This is a $2bn market
dominated by two players: Gate
to secure contracts at other American
hubs in 2015 and 2016.
At the end of August, Journey
Group reported a net cash position of
almost £4m. This cash buffer means
that Journey could easily add new
hub operations without requiring
significant new finances.
In the meantime, the company is
profitable and management intends
to increase shareholder dividends with
time.
As the US airline industry picks
up in a strengthening economy, I
would expect margin improvement as
utilisation increases. Any new hub wins
would take profits to another level.
Journey Group provides in-flight catering and on-board products to airlines. The company is cash-rich and has significant opportunities for growth.
Journey Group: high-flying food
Journey Group (LON:JNY)
FOR
Real opportunities to double/triple sales
Possibly a mini-Compass Group
AGAINST
Small number of current customers
Patent must hold up
Market cap £17m
Bid:offer 123p:125p
P/E (forecast) 12.9
Yield (forecast) 2.2%
52week low:high 113p:167p
centred on meal supplies to US
airlines in America
Gourmet and LSG Sky Chefs. Journey
Group currently makes annual sales of
around $40m into this market.
Journey (through its subsidiary
Air Fayre) operates a different supply
model to its competitors. Rather than
being based on site at the airport,
where labour is deeply unionised,
Journey operates off-site, frequently
working in collaboration with hotels
and restaurants. By utilising the spare
capacity that typically exists in these
establishments at certain times of the
day, Air Fayre can negotiate a better
price with its suppliers.
After being prepared, the food is
packaged and delivered using a set of
processes that together are protected
by a business process patent registered
in North America. There are signs that
the patent has already proved to be
an effective barrier to entry, with one
US airline declining to talk further
with another provider that proposed a
similar solution.
A large proportion of Air Fayre’s
revenues are effectively a pass-through
on the food cost, with Journey making
its money on the handling fee.
In March this year, Air Fayre
secured a contract to serve a second
Los-Angeles airport from its local
hub. The success of this operation has
shown that Journey’s model is scalable.
Management now wants to prove that
it is transferable. The company’s goal is
patent has already proved to be
an effective barrier
AIMprospector
8 www.aimprospector.co.uk
Patisserie Holdings is a collection of food businesses. The group comprises three patisserie brands (Patisserie Valerie, Druckers Vienna Patisserie and Baker & Spice), one bakery (Flour Power City) and the Philpotts sandwich chain.At the end of September 2014, the
retail operations comprised 147 stores.
98 were Patisserie Valerie, 22 Druckers
Vienna Patisserie, four Baker & Spice
and 23 Philpotts.
The group is led by restaurant
roll-out legend Luke Johnson. Johnson
was the driving force behind the
early growth of Pizza Express and
Strada. During Johnson’s leadership,
Pizza Express expanded from twelve
restaurants to more than 250. Strada
was built from scratch to reach 30 units
before both were sold.
Mr Johnson first became involved
with the organisation in 2006, when
he led a private equity buyout of a
majority stake in Pattiserie Valerie. The
other group businesses were added
one-by-one and Patisserie Holdings
came to AIM via an IPO in May.
The group’s maiden results showed
the continued momentum of the roll-
out. Nineteen stores were opened in
the year. Two sites were closed, one of
Patisserie Valerie brand to the forefront
of its efforts.
Impressively, online sales doubled
in the year. The online market, serving
workplace or home parties, will
inevitably have some cannibalising effect
on store sales but I expect that it would
mostly add new sales and enhance
operational efficiencies within kitchens.
According to Stockopedia, a 22%
increase in net profit is forecast for
2015 before moderating slightly the
next year.
Although the stock-market rating is
high, a successful roll-out from a winner
such as Mr Johnson was always going
to be richly valued. If cake is indeed the
new coffee, in five years time we could
be looking at a vastly larger business.
Patisserie Holdings: a rising roll-out
Patisserie Holdings (LON:CAKE)
FOR
Run by proven winners
Plenty of opportunities for expansion
AGAINST
Exposed to food fashion
Easily copied format
Market cap £199m
Bid:offer 200p:203.75p
P/E (forecast) 18.8
Yield (forecast) 1.8%
52week low:high 177p:215p
which was the only loss-making store
in the entire portfolio. 2014 was the
eighth consecutive year of organic
growth in the organisation. Since the
end of September, another three sites
have opened and management expects
to open another seventeen before end-
September 2015.
Growth flowed through to the
company’s reported figures. A 28%
increase in revenues produced a 27%
profit increase and a 32% increase in
diluted earnings per share (adjusted
for cost of AIM IPO and the Philpotts
acquisition).
Management reported how
efficiencies were gained from
ownership and operation of Flour Power
City. Further gains are expected from
the upmarket Philpotts (avocado &
crispy bacon sandwich: £3.50), which
has already incorporated Patisserie
Valerie desserts into its menu.
Patisserie Valerie has pole position
in a market that previously did not exist
on this scale. Following the cupcake
and Great British Bake Off phenomena,
Britons seem to have fallen back in love
with cakes. Patisserie Holdings looks
a great way to get exposure to this
trend and management has thrust the
online sales doubled in the year
group is led by restaurant roll-out
legend Luke Johnson
AIMprospector
www.aimprospector.co.uk 1
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