December 2015 AIM Prospector

AIMprospector

Issue 15 December 2015

Swim against the tide Is this AIM’s top contrarian stock?

Five AIM firms featured recruiter trading near a year low Supported by

successful retailing rollout top software provider dividend-paying marketer

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Welcome to AIMprospector, the online magazine from Blackthorn Focus, dedicated to AIM companies and their investors.

Issue 15 December 2015

Swim against the tide Is this AIM’s top contrarian stock?

Five AIM firms featured recruiter trading near a year low Supported by

successful retailing rollout top software provider dividend-paying marketer

This month’s AIM Prospector could not have happened without the support of City PR firm KTZ Communications.

KTZ Communications joins Walbrook PR in the list of industry sponsors of this publication. For AIM Prospector to remain free to readers, more industry support is essential.

AIM Prospector articles are conceived a long way ahead of publication and naturally that affects the publication’s ability to respond to news and share price changes. There are a collection of companies where recent price moves have made the shares particularly interesting.

First is Juridica, the lawsuit investment company. Following some disappointing recent outcomes, Juridica announced on November 18th that it would not be making any further new investments and would set about returning cash to shareholders as cases concluded. A 5 pence per share dividend was promised, to be paid at the end of December. At the time of writing, the shares trade at around 45p. This is a strange situation where it appears, most simply, that management have lost heart for the fight. Plenty of investors have headed for the exit, leaving an interesting situation for anyone that has the confidence to place a value on the shares and the patience to wait for cash to be returned.

Shares in Jarvis Securities have also been in decline recently. That’s surprising, given the outlook for the business. First, its stockbroking division should be a significant beneficiary of higher interest rates as the returns being made on customer deposits increases. Second, there remains the government sales of Lloyds and RBS still to come. This should be a bonanza for online stockbrokers such as Jarvis. Admittedly, there is not a lot of liquidity in the shares but one would expect that recent selling would make it easier for those on the buy side of the trade.

In September, recruitment software firm Dillistone warned of increased competition in its markets and that product investment would result in 2015 pre-tax profits being behind the prior year. Nevertheless, a 4% dividend increase was announced and management reaffirmed their commitment to a progressive payout policy. At the time of writing, the shares trade at 11.7 times 2014 earnings, with the prospect of a 5.3% dividend.

“Enjoy this AIM Prospector and good luck with your AIM endeavours.” David O’Hara, Editor, AIMprospector 2

Contents Welcome ........................p2 Matchtech Group...........p3 Top Pick: Northbridge Industrial Services..........p4 BrainJuicer.....................p6 Crawshaw.......................p7 First Derivatives.............p8

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Is it time to sign up shares in this recruiter?

Matchtech is a “specialist Engineering, IT and Telecoms recruitment agency”. The company has been quoted on AIM since October 2006.

Recruitment consultants operate in a competitive and cyclical marketplace.

Reliance on business confidence and economic growth leads to most recruiters living a feast or famine existence.

Matchtech’s niche appears to have made the company less vulnerable than its peers. That makes some sense, as the tech demands of companies of all sizes continues to grow.

tech demands of companies of all sizes continues to grow Of all the recruitment companies that have come and gone on AIM, Matchtech is the one that I have most confidence in. As ever, this is evinced by dividend payments to shareholders. After reporting a 14% dividend hike for 2008, the payout was maintained through the financial crisis and recession. Matchtech traded each year of this period profitably and the dividend was covered throughout. The payout at Matchtech has now been increased every year since 2012.

In April 2015, Matchtech acquired AIM-quoted telecoms and technology recruiter Networkers International. This deal enhanced Matchtech’s offering in the telecoms space and also enhanced group margins, thanks to Networkers’ www.aimprospector.co.uk

payout was maintained through the financial crisis and recession

stronger pricing. Networkers’ existing international presence was also a considerable attraction, assisting Matchtech’s overseas ambitions.

Better still, Matchtech expects to be able to remove £1.3m of duplicated costs including management, property and costs associated with maintaining two stock market listings. Matchtech expects to have extracted full synergies by the end of the 2017 year (July). Accompanying the acquisition notice, Matchtech announced the retirement of Chief Executive Adrian Gunn, replaced by Executive Chairman Brian Wilkinson.

The last balance sheet was skewed by the Networkers International acquisition, which resulted in a £30m increase in debts to £33.6m.

This is little over twice the adjusted EBITDA for the year, with most of those adjustments relating to the acquisition. The enlarged company reported net cash inflow of £20.8m for the year ending July 2015. Given that the Networkers acquisition only completed in April 2015, the expected financial performance of the new group suggests that the debt should

not hold back the company’s growth, dividend or valuation.

Since the year ended, Matchtech has confirmed progress within its infrastructure division and a stronger position in the renewables sector.

Shares in Matchtech traded near a two year low for the year before the recent results announcement.

According to Stockopedia, a 30% increase in earnings per share is forecast for the full year ending July 2016, assisted by a full year contribution from Networkers International.

net cash inflow of £20.8m for the year Matchtech’s quality has previously carried the company through economic disaster. While recently reported growth from the business has been modest, the P/E discount to both the market and sector peers seems mean.

Matchtech Group (LON:MTEC) FOR Modest valuation Solid track record AGAINST Vulnerable sector Acquisition needs integrating Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£150m 485p:500p 10.2 4.7% 484p:588p

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TOPpick

Is this former AIM star a recovery play?

Northbridge is an equipment hire business.

Customers include large energy users and the oil and gas sector. The first half loss and an indebted balance sheet recently pushed the stock to an all-time low.

Shares in Northbridge trade at around 20% of their price just over a year ago. Value has evaporated as earnings have collapsed and management have been forced to warn that the company is in danger of breaching the agreements that it has with its bank, the ‘covenants’, that are essential to the bank’s ongoing support.

It will take more than just a recovery in oil and gas prices for Northbridge shares to trade for over five pounds again. Any recovery in energy markets would have to feed through to confidence among producers, sufficient to push them into spending money with Northbridge again. With investors hurt so badly by the share price fall over the last 12 months, any improvement would have to be sustained for investor confidence to return.

The likely covenant breach is frightening. However, management have given assurances that they expect to successfully renegotiate covenants and that the group is still delivering positive cashflows.

The challenge for investors is to weigh the probabilities. The answers are probably best derived from current trading, historical trading and the 4

Northbridge’s equipment is used in heavy industry, frequently the oil and gas sector

balance sheet.

Northbridge Industrial Services came to AIM in 2006 with the shares priced at around 100p.

The announcement issued on the first day of dealings summed up directors’ ambitions for the business. Management declared that Northbridge “was incorporated for

the purpose of acquiring companies that hire and sell specialist industrial equipment such as generators, load banks... Northbridge will seek to acquire specialist niche businesses that have the potential for expansion into complete outsourcing providers; capable of supplying a non-cyclical customer base

including utility companies, the public sector and the oil and gas industries.”

Northbridge immediately announced the acquisition of Crestchic, a manufacturer of electrical load bank equipment. A load bank is a special piece of electrical apparatus that is used to test a generator or backup power system. Another ten acquisitions followed. The most significant of these were the two ‘Tasman’ businesses. The first, Tasman Oil Tools Pty, was acquired for a total of A$16.9m in June 2010. Based in Perth, Australia, Tasman Oil Tools was described as a specialist “in the

rental of equipment for the onshore

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AIMprospector and off-shore industry throughout Australia.” Northbridge followed this up in September 2014 with the £13m acquisition of the Tasman business in New Zealand.

any improvement would have to be sustained Before the oil price decline, Northbridge’s strategy worked to perfection. Between 2006 and 2014, the dividend to shareholders increased year-on-year, at an average rate of 15.2% per annum. The shares peaked in September 2014 at a price of 600p.

The first sign that earnings were at risk came with a trading statement issued by the company in January this year. Here, Northbridge warned that although a sustained lower oil price would likely harm trading, 2014 results were still anticipated in-line.

In following days, Northbridge spent around £160k buying back shares in the company at a price of just under four pounds.

A fortnight later, Northbridge warned that rental visibility in the oil sector, via the Tasman business, was ‘noticeably lower’. Load bank business Crestchic was performing better, thanks to a customer base more

Load banks operate as the circuit load in a generator test www.aimprospector.co.uk

TOPpick focused on shipbuilding in SE Asia.

Nevertheless, management lowered 2015 profit expectations.

The April announcement of results for the year ending in December saw Northbridge warn again that revenue visibility was down, particularly within the Tasman business. However, management continued to show confidence, pushing through a 2.5% dividend increase.

By the end of May, the situation had worsened further, with Crestchic operations in Singapore and Dubai highlighted as having been severely affected by the downturn. A sale of all operations other than Crestchic and Tasman was announced. Shareholders were warned to expect a loss for the first half of the year but that Northbridge was expected to report a profit for the full year.

likely covenant breach is frightening A flurry of director purchases followed in June this year, priced between 216p and 180p.

September’s results announcement for the first six months of the year showed a pre-tax loss of £2m. The interim dividend was cut from 2.2p to 1.0p. Liabilities, minus cash and receivables, amounted to £18.1m – a significant increase from twelve months previous, when that figure was £11.3m.

With the shares at an all-time low, directors purchased more shares in the company in the first week of November. This announcement led to a large share price rise.

After many years of success, Northbridge management have fallen

hard. Tasman’s tool rental business does not resemble a business that is supplying ‘a non-cyclical customer base’. Businesses have been sold for a loss and the balance sheet is now perilously stretched.

In the year before the acquisition of Tasman, Northbridge made 19p of EPS and a net profit of £1.6m. For 2014, Northbridge made a net profit of £5.1m and EPS of 31p.

The last balance sheet showed current assets plus property, plant and equipment totalling £56.3m.

ten acquisitions followed Directors appear confident that Northbridge will ride out the cyclical downturn. If Northbridge can get back to delivering the kind of profitability it enjoyed before the oil price collapse, I would expect a share price of around three pounds at a minimum.

Recovery in the oil and gas sector feels a long way off but that is usually the case with the best contrarian investments.

Note that the earnings and dividend forecasts may not yet reflect the latest trading news.

Northbridge Industrial Services (LON:NBI) FOR Cyclical low Longstanding market position AGAINST Balance sheet worries Lack of earnings visibility Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£16m 86p:90p 7.8 5.7% 60p:562p

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BrainJuicer: facing up to new technology BrainJuicer is a technical market research agency that joined AIM in December 2006. The company is a notable success.

BrainJuicer is one of just 62 AIM shares that have been increasing shareholder dividends for the last five years. After paying a total of 1.5p per share for 2008, BrainJuicer went on to increase its dividend every following year, paying shareholders 4.3p for 2014. Even better, BrainJuicer has paid a collection of large special dividends. A special dividend of 1.7p was paid in October 2008. This was eclipsed by a 12p special dividend in October 2013, followed by another 12p special dividend in May 2014.

observer is studied to evaluate the emotions provoked In the last five years at BrainJuicer, revenues have increased from £11.8m to £24.6m. In that time, net profit has grown from £1.2m to £2.9m.

Better still, this growth has been delivered organically, and the company has enjoyed a net cash position throughout this time.

So what does BrainJuicer do?

The company’s quirky animated website describes its business as “accelerating profitable brand growth”.

One example of BrainJuicer’s work is described by the company as Predictive Markets. This is a concept testing methodology that taps into 6

the most frequently used decision making process – the intuitive method (a gut reaction) rather than the more laborious calculating method (considered judgement). BrainJuicer’s analysis then delivers a numerical appraisal of the concept/product.

enjoyed a net cash position throughout Another product that BrainJuicer sells to clients is ComMotion. Here, BrainJuicer measures the emotional response to an advertisement, rather than attempt to measure its effectiveness at persuasion or brand linkage. This is achieved through what it calls a ‘face trace’ technique, where the reaction of the observer is studied to evaluate the emotions provoked by the campaign.

qualitative brand strategy service to a more scalable and predictive quantitative service.”

Encouragingly, BrainJuicer H1 results showed 7% revenue growth from the core quantitative services.

While the quantitative services are typically lower priced, they are also more scalable, giving the possibility of enhanced margins.

BrainJuicer is actively seeking out acquisition opportunities and has relocated its London office to a much larger site. The current share price rating demonstrates the market’s confidence in BrainJuicer’s ability to get back to earnings growth. While the decline in qualitative work is affecting profits, there are clear signs that the predictive offering has momentum.

BrainJuicer Group (LON:BJU)

possibility of enhanced margins

FOR Strong balance sheet

Despite the track record of success, BrainJuicer shares trade close to their lowest price since the beginning of 2014. Interim results, announced in September, showed a 4% decline in revenues and a 25% drop in earnings per share. Management is currently pursuing a shift “from a predominantly

New products started well AGAINST New products unproven Strong growth absent Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£45m 351p:360p 15.0 1.3% 343p:435p

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Butcher chain fattens up with successful roll out Crawshaw is a meat retail business, retailing in Yorkshire, Derbyshire, Lincolnshire, Humberside and around Greater Manchester/ Merseyside. Shares in Crawshaw Group have been traded on AIM since 2008 and today the company runs 39 shops.

Management ambition is to reach 200 stores.

In the last five years, turnover has increased 25% as Crawshaw has successfully increased its store portfolio. Net profit raced ahead in that period, from £0.2m for 2010, to £0.9m for the year ending January 2015.

Crawshaw began paying a dividend of 0.2p for 2013, increasing each year to reach 0.57p for 2015.

cash of £6m, receivables of £1m and total liabilities of £6m In July 2014, Crawshaw successfully completed an £8.8m placing at 42p, an approximate 25% discount to the share price at the time. Around £4m of this was used to purchase Gabbotts Farm, an 11 store butcher chain and meat mart in the North West. Gabbotts was purchased on a cash-free, debt-free basis and was www.aimprospector.co.uk

forecast to become immediately earnings enhancing for Crawshaw.

At the end of July 2015, the Crawshaw balance sheet showed cash of £6m, receivables of £1m and total liabilities of £6m.

6.7% like-for-like increase on the same period last year Two new stores were opened in the first half of the financial year (Crawshaw has a January year end).

Bolton and Worskop were added and both reported trading ahead of expectations. Management announced that these new stores were trading ahead of ‘base case’ profitability assumptions for the group.

Like any roll out, profits are depressed as new sites are opened. Crawshaw addressed this effect with their last results. The legacy business delivered a 14% increase in adjusted EBITDA and adjusted earnings per share was 27% ahead. Gross profit increased by 44%, assisted by the acquisition of Gabbotts.

Impressively, management reported that sales in the first seven weeks of H2 2016 showed a 6.7% like-for-like increase on the same period last year.

Despite these positives, it is a struggle to look at the shares and regard them as anything other than overpriced. My first area of concern is the business itself. Other than niche premium firms, the consumer seems

to have moved meat purchasing to the supermarket twenty years ago.

The only other listed meat chain that I recall was Dewhurst, which entered administration in 2006.

It also appears from the balance sheet that further fundraisings will be required if management is to succeed in expanding the chain to 200 stores.

Much of the forecast growth for 2016 will come from a full year’s contribution from Gabbotts.

every one of its stores trades profitably I’m reluctant to go against what is already a successful format, led by experienced retailers. Crawshaw is proud of the fact that every one of its stores trades profitably but the valuation is extremely demanding and could respond nastily to any setback.

Crawshaw Group (LON:CRAW) FOR Proven format Distinct offering AGAINST High valuation Competitive environment Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£73m 91p:94p 221.3 0.6% 36p:96p

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Fintech winner keeps programming the profits For all of its scale and success, First Derivatives is perhaps the most underacknowledged of all AIM companies.

First Derivatives is a remarkable AIM company. Headquartered in Newry, it is one of just three Northern Irish companies on the stock market.

That’s not where you might first look for a successful provider of financial software. Founder and Chief Executive Brian Conlon owns 33.4% of the total equity. Do not be frightened by Mr Conlon’s control. Shareholders have been well-rewarded by his leadership.

The dividend payout has been increased every year since 2004, rising from 1.1p for 2004 to 13.5p for 2015.

revenue from two channels: consulting and software First Derivatives’ success is primarily derived from financial institutions’ increased desire to apply computational procedures to their business activities. This can range from large scale data warehousing, to algorithmic trading and trade analysis.

Of any AIM-quoted company, First Derivatives is most worthy of the ‘Big Data’ crown. First Derivatives has been delivering without pumping out the ‘Big Data’ hype that less substantial companies have engaged in.

First Derivatives reports its revenue from two channels: consulting and software. In the consulting side of the 8

business, First Derivatives provides technology expertise to financial institutions on a contract basis. Due to the lower barriers to entry, consulting is more competitive and vulnerable to any downturn. In the software side of the business, First Derivatives develops its own systems and products. In the six months ending 31 August, First Derivatives’ consulting revenues were double those earned from software.

In recent months, First Derivatives has moved into the digital marketing industry, where its technology is used to analyse large data volumes in real time.

A number of leading companies are already signed up as pilot customers.

Most of First Derivatives’ software revenues come from its ‘Delta’ stable of products. Delta AlgoLab and Delta Surveillance are two examples.

AlgoLab is used to test trading algorithms, while Surveillance is used by regulators to identify suspicious trading patterns.

technology is used to analyse large data volumes in real time First Derivatives’ growth, assisted in part by a series of modest acquisitions, has seen revenues in the last five years increase from £25.5m in 2010 to £83.2m for 2015. Further strong

growth is forecast this year and next.

The most recent interim results, released in November, showed a 44% increase in revenues, with adjusted EPS rising by the same amount. The dividend was increased by 52%.

dividend was increased by 52% First Derivatives looks well set to grow at the rate expected for the year ending February 2016. Although the valuation currently reflects much of the company’s success and forecast growth, First Derivatives is an established winner, occupying a leading position in markets benefitting from strong long-term growth drivers such as regulation and automation.

First Derivatives (LON:FDP) FOR Growing markets Longstanding success AGAINST High valuation Shares tightly held Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£370m 1,550p:1,575p 35.2 1.0% 1094p:1598p

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