AIMprospector
Issue 3 May 2014
Market’s most wanted AIM Prospector’s No 1 takeover candidate
another five AIM companies profiled recovery stock paying dividends again reappraisal of a cut-price blue-chip the microcap with brands free to private investors
Supported by
AIMprospector AIMprospector
Issue 1 May 2014
Market’s most wanted AIM Prospector’s No 1 takeover candidate
another five AIM companies profiled recovery stock paying dividends again reappraisal of a cut-price blue-chip the microcap with brands free to private investors
Supported by
Welcome to AIMprospector, the Blackthorn Focus publication dedicated to bringing investors analysis on five AIM-quoted companies a month.
First, a small celebration. April 28th marks the day when stamp duty is abolished on trading AIM shares. Hoorah! This is a great victory for AIM companies, their investors and everyone that lobbied for the change. Special congratulations to The London Stock Exchange, the Quoted Companies Alliance and the Tax Incentivised Savings Association who undertook considerable spade work to secure the change. What will it mean? That investors will have more money left to buy more AIM shares with, that’s what! This will further boost liquidity on the Exchange. Investors that have previously cited a lack of liquidity as an excuse for not participating will see that argument weaken. While the new rules will bring little observable change to dealing spreads in the likes of ASOS, it may provide some relief to the large numbers of AIM companies that do not see dozens of trades in their shares go through each day. As for the AIM story of the month: the dramatic decline in the share price of Quindell Portfolio following a US blog attack. Many shareholders have been questioning the blogger’s identity and motivations. That misses the point. The number one issue for shareholders is the veracity of Gotham City Research’s claims. We now have Quindell’s response. I expect trade in the shares to continue to be volatile. Following publication of the April AIM Prospector, Christie Group, a company covered in the March edition, reported final results. Christie’s Professional Business Services division saw operating profits increase nearly 50%. Organisational changes are immediately bringing significant savings though there has been a one-off hit to group profits. The company has demonstrated how well it is positioned for expected continued improvements in its markets. If you value hearing directly from management of AIM-quoted companies, then you should join the next AIM Investor Focus event on April 30th. Six AIM companies are signed up to participate, they are: Alternative Networks, Brooks Macdonald, Gooch & Housego, IndigoVision, LiDCO and Share plc. You can apply to attend this Blackthorn Focus event here. Finally, make sure you sign up to the email list for AIM Prospector. Registered readers get AIM Prospector 24 hours before it goes public. You can sign up for free here. “Have a great month with AIM” David O’Hara, Editor, AIMprospector 2
Contents Blavod..............................p 4 Bond International...........p 5 K3 Business Technology.....p 8 Majestic Wine...................p9 WYG..............................p 10 next month.....................p 11
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Blavod Wines & Spirits is a rare thing, an AIM microcap with brands AIM microcaps normally don’t hang around for long. If they fail, they disappear and if they succeed, they are bought out. Blavod looks to be the exception. Listed since 2001, Blavod Wines & Spirits is an alcoholic beverages company with a £5.4m market capitalisation. The company is headed by Executive Chairman Don Goulding. Mr Goulding was previously managing director of Diageo’s UK operations. He is a past chair of industry body The Portman Group.
trading statement revealed a significant upturn in business Diageo is, of course, a business that is famed among investors for its unswerving dedication to building brand strength. And so anyone looking at Blavod shares has to consider the likelihood that the company can successfully establish its own brands, and deliver a reliable stream of earnings and profits. Blavod’s brands are primarily spirits with one liqueur. The spirits are Blavod Original Black Vodka, Blackwood’s Vintage Gin and Vodka, RedLeg Spiced Rum and Diva Vodka. The Blackwood’s brands are the company’s number one profit contributor. Blavod owns, markets and sells its brands in the UK, continental Europe and the US. In May 2013, Blavod announced that for the next three years, its products would be 4
distributed in the UK and Ireland by Hi-Spirits Ltd. Blavod is yet to demonstrate that its business model can deliver sustained shareholder returns. The company’s best year of recent times came in 2010 when it reported sales for the year of £8.3m and an operating profit of £70k. Since then, sales and profits have been far lower. According to Stockopedia, Blavod has reported a positive EPS figure in just one of the last five years.
margins improved and group overheads were reduced by 44% However, a recent trading statement revealed a significant upturn in business. Net revenues from Blavod brands were reported as 43% higher than in the final quarter of 2013. Margins improved and group overheads were reduced by 44%. The key Blackwood’s brands delivered month-on-month volume growth following a redesign of packaging. A successful placing in October helped the company to significantly reduce its borrowing costs. Management now reports that it expects to return to break-even imminently. Since the trading update, Blavod announced cessation of its agreement to distribute the Mickey Finn brand on behalf of Babco Europe. Although Mickey Finn made a large contribution to Blavod sales (over one third), the net contribution to the bottom line equated to a margin of around 5%. By comparison, margins on Blavod’s own brands recently hit 47%.
At the beginning of 2014, Blavod announced that it had secured a new Spanish distribution agreement for its RedLeg Spiced Rum and Blackwood’s spirit brands. Spain is Europe’s largest gin market and the biggest rum market in the world. The success or otherwise of this deal will be crucial in Blavod’s future success.
strong sales momentum among its brands Blavod is not a successful smallcap — yet. However, there is strong sales momentum among its brands and a clear management strategy. If management can force just one of the company’s brands into a strong position in the quirky spirits market, profitability could increase dramatically. Meanwhile, shareholders can continue to enjoy the strong growth that Blavod’s brands are already enjoying, led by an expert management team.
Blavod Wines and Spirits (LON:BES) FOR Good progress being made Experienced management AGAINST Yet to demonstrate success Shares illiquid Market cap Bid:offer
£5.4m 1.40p:1.55p
P/E
no forecast available
Yield
no forecast available
52week low:high
0.6p:2.1p
www.aimprospector.co.uk
AIMprospector
TOPpick
TOPpick: Improved trading and an acquisitive major shareholder mean that Bond International Software is looking ripe for a takeover. Bond Adapt is a leading product for recruiters globally
At the close of 2013, Bond comprised three divisions: recruitment software (50% of revenues), outsourcing services (35%) and HR & payroll software (15%). Recent results confirmed that Bond’s markets are improving worldwide. The presence of acquisitive investors Constellation Software on the shareholder register with 21% (plus another 10% set to acquire voting status in 2015), along with a Chief Executive aged 62 possessing a 15% stake suggests that ownership change may not be far off.
recruitment software sales moved to a ‘Software as a Service’ (SaaS) model Before the global financial crisis, Bond was one of those exciting AIM technology companies characterised by five successive years of sales growth. www.aimprospector.co.uk
The company was predominantly a recruitment software business, with sales being made on a licensing plus maintenance (capital sales) basis. Today, the group also includes an outsourcing division (comprising Strictly Education and Bond Payroll Services) recently enlarged by the acquisition of Eurowage, and an HR and payroll software division. Strictly Education is an outsourced education services firm. Bond Payroll Services delivers outsourced payroll solutions for SMEs wishing to completely, or partly, outsource the management of their payroll function. Eurowage transforms Bond’s outsourced payroll offering, catapulting it into becoming an international force. When the recent economic disaster unfolded, Bond began to transform into a rather different company. Its
traditional recruitment software sales moved to a ‘Software as a Service’ (SaaS) model. High growth from the recently acquired Strictly Education business and a surge in the payroll bureau business due to the shift to HMRC’s RTI significantly altered the sales and profit mix at the company. For 2013, Bond’s outsourcing division reported sales of £12m — almost four times the amount delivered in 2009. Strictly Education alone accounted for 81% of the division’s revenues in 2013 — over 27% of group sales. The move to SaaS, along with economic decline, significantly slowed revenue growth in the traditional software business. In the four years to 2013, sales of both recruitment software and HR & payroll software declined. A fall in sales is often immensely damaging for software
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Bond headquarters in Goring, West Sussex
companies as many of their costs are fixed. However, from the recent final results, it is now apparent that Bond is set for a new growth phase. This will be only partly a reflection of the manifest recovery in the world economies, and is more the result of the strategic transformation of the company’s software sales business model.
leading position in American recruitment software market Bond now offers best-of-class web-based software to an expanding global recruitment and HR market. The group’s flagship software, Bond Adapt, is designed specifically for small to mid-size recruitment organisations and is recognised as a world-leading platform and multi-lingual staffing solution. Adapt is used by more than 100,000 staffing professionals in over 40 countries worldwide. Adapt offers a highly flexible solution for firms specialising in personnel recruitment. Already dominant in its UK market, the 2010 acquisition of VCG in America (financed by an equity issue
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TOPpick to Constellation Software at a 50% premium) gave Bond leading position in American recruitment software market. The biggest single software market in the world, the US, is now entirely SaaS while the UK remains a mixed capital sales/SaaS market. The company followed the VCG acquisition with significant maiden sales to the Japanese market. Bond regards Japan as the most promising market of all due to its size (second only to the US globally) and lack of up-to-date solutions. Post year-end, Bond announced the acquisition of HR and payroll provider Eurowage Limited. The acquisition is expected to be immediately earningsenhancing. Eurowage will take Bond’s outsourced payroll services business to a more substantial level, facilitating sales to overseas and multinational organisations. This step moves Bond to a higher proportion of recurring rental-type revenues and away from the chunky capital sales model. The acquisition demonstrates a significant change in strategy. If the acquisition completes as planned, Payroll Services will become the biggest contributor to 2014 group EBITDA.
best-of-class web-based software to an expanding global recruitment
transaction is immediately earningsenhancing for shareholders. The purchase price flags the severe undervaluation of the core software business.
Seven investors together own 80% of Bond’s voting equity Based on the 2006 valuation multiples of 1.4 times sales paid by Bond, Strictly Education alone would be worth just under £14m against the current market cap of Bond at £48m. If the recent purchase price of Eurowage is used to value Bond Payroll Services, then this division could similarly be valued at £15m. This means that the two staffing software divisions, which delivered a combined operating profit of £5.4m for 2013, are being valued together at just £29m. This is surely a harsh valuation for a company offering market leading products in a reviving global economy. The potential of the Japanese staffing software market being unlocked by Bond is hard to quantify but must not be ignored. The effect on revenues of the switch to SaaS is now unwinding. Bond is growing new business and increasing recurring revenues. Bond International Software (LON:BDI) FOR
Seven investors together own 80% of Bond’s voting equity. A shareholding standstill agreement with Constellation expires in 2015. Two executive directors own nearly 18% of the company. Any takeover of Bond could happen very quickly with the assent of just a small number of people. The structure of the Eurowage
Sum-of-parts value higher than share price Industry outlook still favourable AGAINST Yet to demonstrate value in EPS Has suffered in a previous downturn Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high
£45m 121p:127p 14.4 2% 56p:132p
www.aimprospector.co.uk
Event - April 30th The Blackthorn Focus event will again be showcasing six AIM-quoted companies on April 30th at the offices of finnCap
Return from companies presenting at past AIM Investor Focus events: April 2012 AIM Investor Focus: mean average +41%, median average return +66%. April 2013 AIM Investor Focus: mean +57%, median +56% October 2013 AIM Investor Focus: mean +17%, median +24%
Presentations begin at 10am on Wednesday, April 30th. The event is free for private investors. To apply for your place at the event click on the button below: Apply
Fund managers and private client wealth managers who would like to meet the management of any of these companies should contact Blackthorn Focus here: Contact Media should contact Vicky Watkins at MHP Communications (020 3128 8100).
AIMprospector
Technology provider in a sweet spot for economic recovery In the last three months, shares in K3 Business Technology have outperformed the AIM UK 50 index by 65% as improved trading flows through to profits. K3 Business Technology (K3) is a £72m market cap provider of software systems to retailers, distributors and manufacturers. The company’s key offering is to take Microsoft based business planning and management software and add the bespoke functionality that a customer requires for their own business. In addition to Microsoft’s ERP offering, the company is a long-time distributor of Syspro’s popular ERP product.
grown sales significantly in the last five years Today, K3 has around 3,000 customers, including high street retailers such as Jigsaw and The White Company. K3’s software goes beyond Point of Sale (the till) to include multichannel retail (e.g. mail order, internet) and stock control. K3 has grown sales significantly in the last five years. Profits and dividends have also advanced significantly in that time. In 2007, K3 made sales of £34m and reported EPS of 13.5p. Dividends were 0.5p per share. By 2012, sales had reached
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£68m, normalised EPS hit 21.1p and dividends were 1p a share. 2013 was a much tougher year for the company, as weaker retail markets combined with multi-million pound investment in a new Microsoft solution hit both the top and bottom line.
Syspro and Sage offering is the bedrock of the operation K3’s Syspro and Sage offering is the bedrock of the operation, delivering high levels of recurring income. This has helped K3 make significant reductions to group debt — recent interim results showing a £2.5m reduction in 12 months to £9.9m. The same results showed an adjusted EPS figure of 7.7p for the half year. Including amortisation of acquired intangibles of £1m and reorganisation costs of £0.5m, brings EPS down to 2.9p. The launch of K3’s Microsoft Dynamics AX solution to the retail market is creating significant excitement. This product accounted for £8.3m of major new contracts announced at the interim stage. The aggregate amount of all new contracts totalled £12.7m, an enormous improvement on the £3.1m managed in the same period one year ago. The company hopes to secure more significant contracts with the AX solution in the second half. Fashion retailers are a high-priority target. This product is the crux of the investment case for K3 shares.
Sentiment in the retail sector appears to be improving at a pace and K3 are perfectly positioned to benefit from a new investment cycle. The big prize for K3 is Europe, which the company hopes to exploit via the Netherlands.
K3 are perfectly positioned to benefit from a new investment cycle According to Stockopedia, 2014 EPS is set to hit 15.9p for FY 2014, rising to 20.8p next year. K3 is a real business with 15 years of trading behind it. The previous success and improvement in trading are clear, yet the shares trade at a significant discount to many comparable technology shares. K3 Business Technology (LON:KBT) FOR Strong sales of new products Consistently profitable business AGAINST More cost needed to support growth Recurring revenues little over half of sales Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high
£72m 227p:230p 14.4 0.5% 93p:240p
www.aimprospector.co.uk
AIMprospector
The case for Majestic Wine Listed for nearly fifteen years and with a market capitalisation around £300m, Majestic Wine is an AIM blue-chip. What opportunities do recent share price falls present? Ten years ago, Majestic Wine ran 115 stores and made total sales of £148m for the year. Pre-tax profits were £10.7m. Today, the company has more than 200 stores in the UK and plans to eventually reach 300. Majestic is a great AIM success story. Since 1998, the company’s dividend to shareholders has increased in every year but one (when it was held). Sales for 2013 reached £274m and the company made a pre-tax profit of £23.6m.
more than 200 stores in the UK Majestic Wine’s sparkling success earned the company a premium stock market rating. However, a recent trading statement from the company confirmed that the next set of fullyear results will show profits broadly in line with the last twelve months. This caused the shares to fall 20% over the course of a few trading days. When such a popular and successful stock suffers a setback on this scale, the investment proposition deserves reappraisal. www.aimprospector.co.uk
To do that we must revisit the company’s trading statement from March 20th. Here, the company reported decent sales growth leading up to Christmas followed by ‘challenging conditions’. Further information in the announcement suggested that Majestic is now struggling to support future expansion. More investment in office space and larger distribution facilities are being planned. These costs will hold back earnings growth in the current financial year.
investment proposition deserves reappraisal One year ago, analysts were forecasting 2014 EPS of 30.1p per share. The March profit warning has seen this figure fall to 26.9p. The 2015 forecast is for EPS of 27.8p. As a result, Majestic Wine shares still trade on a premium P/E. To decide whether this is deserved, we need to make a call on the long-term prospects of wine retailing. First, we can expect more sales to move online. Despite its large network of stores, this is not necessarily bad news for Majestic. The stores give the company customer recognition, point of contact and brand strength. The bricks and mortar presence complements any online offering. There are signs that this is already playing out. The interim stage saw Majestic report 8.3% online sales growth. With a case of wine being so heavy, many customers will prefer to collect than pay postage. My concern is that just as wine
became very fashionable in the last decade, its popularity could turn. Rarely a month goes by without publication of a worrying study on the long-term effects of regular alcohol consumption. Add the growing trend for a post-Christmas ‘dryathlon’ and we have a scenario whereby future growth could be significantly curtailed. To the bear case add the growth of upmarket retailer Waitrose, which has now added free delivery to its offering.
costs will hold back earnings growth The shares have made up much of the ground lost following the profit warning. While economic recovery will help consumer confidence, Majestic’s premium rating now looks at risk. Majestic Wine (LON:MJW) FOR Successful market-leader Business still growing AGAINST Expensive given reduced growth forecasts Increasing regulatory risk to alcohol sales Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high
£308m 467p:471p 17.4 3.4% 380p:590p
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AIMprospector
Good times return to WYG and Asia brought in 31% of sales, with Middle East and North Africa (MENA) delivering the rest.
turnaround that has been achieved at WYG is massive
Back in profit and declaring a dividend, the recovery at engineering consultant WYG looks confirmed. Shares in WYG perked up at the end of March following the release of encouraging trading news. This statement ticked all of the boxes for investors. WYG announced that its order book was 13% ahead of the same point last year. The full year profit before tax is now expected to come in more than 10% ahead of the market’s expectations at the time (i.e. a profit upgrade). To cap it, WYG confirmed that it would be paying shareholders their first dividend after more than four years of no payouts.
role included work on planning and project management Headquartered in Leeds, WYG brings together design, engineering, plan and project management expertise for large-scale infrastructure projects worldwide. At the halfway stage, the UK accounted for just over half WYG’s revenues. Europe, Africa 10
One example of WYG’s work is the ambitious Liverpool Waters regeneration project. This is a multidecade scheme dedicated to the regeneration of Liverpool’s historic dockland and is second in scale only to London’s Olympic project. Here, WYG worked with developer Peel Holdings over a five year period. WYG’s role included work on planning and project management, energy and flood protection. Planning permission was granted by the Secretary of State in 2013. The MENA division provided infrastructure planning and design for Murooj Jeddah, an ambitious new eco-city in Saudi Arabia. WYG’s contribution here ranged from social and environmental work to transport and waste planning. Liverpool and Murooj Jeddah are useful examples of how WYG’s expertise is used to turn major infrastructure initiatives into firm plans. The recent newsflow is even more commendable when you consider where the company was just a few years ago. The turnaround that has been achieved at WYG is massive. Previously named White Young Green, WYG was formed after its parent company encountered serious financial
difficulties in the depths of the financial crisis. Saving White Young Green required a significant debt-forequity swap and a covenant deferral. WYG moved from the Main Market to AIM in February 2010. The company delivered another significant step toward rehabilitation in August 2012 by winding-up its Irish operations. The cost in this business was anchoring WYG’s recovery. Since this decision, shares in the company have more than doubled.
shares in the company have more than doubled WYG’s most recent profit upgrade is the third that management have delivered for the financial year just closed. This has seen EPS expectations for the full year rise from 3.6p 12 months ago to 4.4p today. Since its successful restructure, WYG now enjoys a significant net cash position. As the economy improves both at home and abroad, WYG now has the footing necessary to continue delivering significant growth. WYG (LON:WYG) FOR Position with MoD promises further large sales Balance sheet supports acquired growth AGAINST Progress appears priced in Any slip will be punished Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high
£71m 106p:112p 22.4 0.3% 74p:120p
www.aimprospector.co.uk
AIMprospector
Next month: AIMprospector will again be bringing you five more AIM-quoted companies, each worthy of further
research and investigation.
June’s Top Pick is a tightly-held company operating in a niche industry that has a genuine opportunity to reward investors with a tenfold gain. Despite being incredibly well-known around the world, this business receives little coverage in the financial press or among the UK’s investor community. I am especially excited to be reviewing the incredible possibilities within this business. The stamp duty and ISA changes, along with extremely favourable market conditions have created a smallcap boom. We will also be featuring one AIM-quoted company that is uniquely positioned to profit from some of these changes. We look forward to bringing you the next edition as we enter what could be a golden age for London’s junior market.
AIMprospector
digging for dividends - panning for profits
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