December 2017 AIM Prospector by AIM Prospector

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Issue 17 December 2017

Britain goes global The AIM firm with 87% of sales exported

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*FIVE* AIM firms featured including... highly rated retailer fast growing housebuilder high yield insurer profitable, net cash tech firm

Welcome back to the pages of AIMprospector, the online magazine dedicated to AIM-quoted companies.

Five companies feature again this edition, with touch screen technology firm Zytronic this month’s Top Pick. I also cover online retailer MySale, a company where I have bet against the shares via a short with SpreadEx. Shorting is always a risk but I just think that MySale is being rated like a boohoo or Asos while it is instead a much lower quality company. Recent weeks have been characterised by significant pullbacks in the shares of some high-flying AIM companies of recent years. The ambitious valuations that the market has applied to decent AIM companies leaves many shares looking vulnerable to any broader market decline. Those words could have been written at any time in the past five years. Today though, valuations have become stretched even further, largely by market participants adjusting their valuation metrics and investment strategy to favour growth over value. It is not too farfetched to imagine the share prices of many of AIM’s most lauded high fliers crashing by half in a bear market. That said, I currently own more AIM companies than ever. In addition to long-time hold The Mission Marketing Group, I also own Patisserie Holdings, 600 Group, NAHL, Sigma Capital and Cohort. In the short term, my hopes are highest for NAHL and Sigma Capital. Patisserie Holdings looks on the road to becoming as ubiquitous as Greggs, an outcome that would see shareholders continue to thrive.

Contents Welcome ................................. p2 DotDigital............................... p3 Top Pick: Zyronic.................................... p5 Personal Group....................... p7 MySale.................................... p8 Telford Homes........................ p9

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Published by: “Enjoy AIM Prospector. I hope that you will be reading the pages of this publication again soon.” David O’Hara, Editor, AIMprospector 2

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Marketing services firm delivering dividends and growth DotDigital is a fast-growing provider of software services to digital marketing professionals. The company is rapidly emerging as one of AIM’s higher quality companies. DotDigital has been increasing its dividend to shareholders and the company enjoys a net cash position. DotDigital runs dotmailer, an online product used by firms to create and monitor email campaigns. A brief look at the product website illustrates how useful dotmailer would be to any commercial organisation of scale. dotmailer enables marketers to quickly put together a campaign that is specific and measurable. Paperchase, Screwfix and Barbour are just some of the customers listed.

marketing to existing contacts could deliver a significant increase in sales DotDigital also highlights its Magento connector product, a software tool that integrates Dotdigital technology with Magento, an opensource ecommerce platform. At the last update, DotDigital had 460 clients using this technology, each generating revenues averaging £1,420 a month. It is clear that any enterprise would struggle to succeed without a product like dotmailer. Further, it is clear how more effective marketing to existing contacts could deliver a significant increase in sales. Existing customers are more likely to respond to lower www.aimprospector.co.uk

24% increase in recurring revenues per customer discounts and response statistics are crucial in building a formal understanding of customer behaviours. DotDigital’s historic figures are typical of a smallcap high flyer. Sales in the last five years have increased on average by 27.3% per annum and that growth has been similar in each year. Net profit for the full year ending June 2018 is forecast to be more than twice the 2014 number. A modest dividend is now in place, with the most recent payment being 28% ahead of the prior period.

return in excess of £30 for every £1 spent on email marketing Results for the year to June 2017 showed a 24% increase in recurring revenues per customer. DotDigital claims that 81% of revenues are recurring. Revenues were 19% ahead and earnings per share was 32% higher. Email marketing may seem ‘old school’ but statistics quoted by the company appear compelling. Numbers attributed to the Direct Marketing

Association report more than half of marketers claim a return in excess of £30 for every £1 spent on email marketing. Even if we assume that £30 is revenue, not profit, that’s still a desirable return. DotDogital is forecast to report a 15% EPS hike for this full year, with another 23% increase the year after. Dividends are expected to increase at a similar lick. While I have some concerns as to the relevance of email to younger people (why check an email account if all your favoured communications are via social networks/messaging applications), DotDigital’s services are more relevant in a B2B environment and remains a vital means of identifying a customer. DotDigital’s share price valuation is punchy but its capital returns and track record are top drawer. Dotdigital Group (LON:DOTD) FOR Excellent growth Strong balance sheet AGAINST Old-economy offering High valuation Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£313m 95p:96p 32.5 0.7% 56p:99p

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TOPpick

Edison Investment Research Edison Advisors Free to read research, accessible to everyone Corporate client base of 400+ companies across 40+ countries Preferred partner with leading stock exchanges around the world Deep sector expertise â&#x20AC;&#x201C; 80+ analysts Market leading investment research platform Differentiated advisory offering, fully leveraging our research platform Strategic project work for both public and private companies

www.edisongroup.com 4

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TOPpick

High-tech manufacturer with dividends and cash Headquartered in Blaydon, Zytronic is a £73m designer and manufacturer of bespoke touchscreens. The company arose from a specialist glazing business at the end of the millennium and has been quoted on AIM since the summer of 2000. Zytronic stands out for three reasons: first it is an integrated technology firm, from design through to manufacture; second it has been an independent quoted company for seventeen years. Third, it is overwhelmingly an export business. To cap it, Zytronic is a success. As at the last balance sheet date, the company had net cash of £14.1m. The final dividend for the year ended September 2017 came in 39% higher than the same figure last year. 2017 was the

fourth straight year of profit increases. Dividends at the company have been rising every year since 2006, with the exception of one hold. Zytronic operates outside the massmarket for touchscreen displays. The company is not involved, for example, in providing screens for mobile phones or consumer tablet devices. Instead, it focusses on lower volume products which are developed for customers on a project-by-project basis.

outside the mass-market for touchscreen displays The company was using Projected Capacitative Technology (PCT) in its products long before the introduction of smartphones raised general awareness of the technology. Without getting too technical, PCT sensors

use a grid of conductors protected by a material, often glass, to detect the presence of an object such as a finger. Each vertical and horizontal electrode in the grid is oscillated at a known frequency and as the finger comes close to the grid, the frequency changes: the closer the finger, the greater the change. By analysing the location of the greatest frequency change, it’s possible to determine the finger’s position. Mass-market touchscreens, such as those used in smartphones and tablets, typically use Indium Tin Oxide (ITO) as the conducting medium. However, Zytronic’s technology is based on insulated copper micro wires, about 10 microns across. Copper has a lower electrical resistance than ITO which results in two key advantages: firstly, it enables production of larger sensors for a given operating voltage, perhaps as large as 2.5m across compared with about 0.5m for ITO; second, it is easier to pick out the proximity signal from background noise, meaning that sensors are more accurate, can operate with thicker glass and can detect gloved fingers.

can operate with thicker glass and can detect gloved fingers

Zytronic employed 146 in 2017 www.aimprospector.co.uk

Another advantage of copper micro wires over the mass-market alternative is that the production process can be adapted to different products without incurring high tooling costs. 5

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TOPpick

This makes low- volume production runs commercially viable for Zytronic. Customers are able to specify irregular shaped glass, for example with edges not parallel or with insteps. They can specify curved or flat glass, with or without surface printing. They can even choose to have the surface made from a polymer film.

plug-and-play interface to popular operating systems such as Windows, Linux and Android Control of the sensor is performed by Zytronic’s own system, which offers a plug-and-play interface to popular operating systems such as Windows, Linux and Android. Many applications only require the detection of a single touch. However, the demand for large gaming tables in which each player is in control of their region has resulted in the development of multi-touch sensors. Zytronic is now breaking into the casino market, with both its curved (slots) and flat (table card) solutions. There is a collection of videos online showing the Zytronic products and operation. 2017 saw a shift in the sales mix at the company, with the gaming sector exceeding sales to the financial sector (ATMs etc.) for the first time. Vending remains the company’s third most important market. 87% of Zytronic’s turnover is derived from exports through agents and value-added resellers. The exception is ATM products, which the company handles directly. The current

Dividend growth will reduce cover, down to 1.2 times 6

touch products are now 90% of group revenues

weakness of the pound should make its exports even more attractive. While Zytronic possesses a range of mightily impressive products, its target markets are not huge. Further, when allied with an operating system such as Android or Apple, it is easy to understand that of all the components, it is the display that the customer expects to replace least frequently. The lack of dynamism in the application area likely explains the lacklustre top-line growth that the company has delivered recently. In the last five years, annual sales have ranged from £17.3m to £22.9m. In the last three years, total sales figures have fallen within a range of just £1.6m i.e. just 7% variance. That stirs my inner contrarian. It is the lack of any significant sales growth that reveals Zytronic’s beauty. For while sales have broadly flatlined, net profit has increased at a rate of almost 7% a year in the last five years, driven by increased touch sensor sales against falling legacy glazing. Again, that’s not exactly shooting the lights out but shareholders are being rewarded handsomely along the way.

a range of mightily impressive products Dividend growth has averaged 17.5% per annum in that time. Analyst expectations are for 4% EPS growth in 2018, with the dividend increasing by 20% for the full year. Earnings growth similar to the historical rate of 7% per annum is expected for 2019. Dividend growth will reduce cover, down to 1.2 times for 2019. The shares have declined in recent months and are around 20% off the all-time high reached in September this year. Zytronic (LON:ZYT) FOR Longstanding success Strong balance sheet AGAINST Modest growth Concentrated customer list Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£73m 475p:490p 16.2 4.7% 367p:635p www.aimprospector.co.uk

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Insurance and benefits specialist is longstanding success Personal Group is a provider of employee insurance and benefits. Dividends at the company have been increasing since 2004. Group sales have approximately doubled in the last five years, all delivered from a net cash position. Second, we have seen with other quoted smallcaps, that when done right, running employee benefit schemes is a great niche. The company joined AIM in 2001. Chief Executive at the time was Christopher Johnston, founder of the Group. Mr Johnston led Personal Group until 2004. He continues to control almost 40% of the company’s shares.

In 2016, insurance comprised 56% of group revenues Personal Group’s insurance offering comprises hospital and convalescence insurance, death benefit and income protection. In 2016, insurance comprised 56% of group revenues and around three quarters of group profit. The benefit offering is essentially a technology portal to a breadth of discount offers from retailers and service providers. Personal Group emerged from 2016 in a bullish mood. Its insurance sales increased for the fourth successive year and the Group signed its largest ever contract with Royal Mail for Personal’s Let’s Connect product, an employee benefits scheme that allows staff members to buy technology www.aimprospector.co.uk

increased its addressable market from 6m to 27m employees products and pay for them through salary sacrifice. Another significant achievement of 2016 was Personal Group’s new arrangement with Sage. This allows Sage to offer a software-as-a-service benefit offering to its customer base across the UK. The offering (badged as Sage Employee Benefits) increases Personal Group’s reach into the SME space in the UK tremendously. According to Personal Group, this deal alone increased its addressable market from 6m to 27m employees. The catch here is obvious: if the arrangement between the two organisations is too far in Personal Group’s favour, Sage’s sales team won’t have much incentive to sell it. If Sage do very nicely, Personal Group won’t get much more than the expense of supporting all the resulting business. 2016 client wins were drawn from a range, from NHS Trusts and police forces to household name retailers. Positives aside, EBITDA slipped in 2016, as a result of investment in the SME offer and the impact of changes to the treatment of salary sacrifice by HMRC. The first half ending June

2017 showed pre-tax profits broadly unchanged on the previous year and a 3.2% dividend increase. Management is now prioritising the opportunity presented by the Sage tie-up and its mobile ready benefits platform hapi. One of AIM’s more successful

3.2% dividend increase companies looks set to continue delivering profits and dividends as it strengthens its niche position. The insurance operations are the most important part of the business and it remains to be seen if Personal Group’s face-to-face buy-on-the-day modus operandi will continue to deliver in a mobile world where the ability to shop elsewhere is at the end of the consumer’s arm. Personal Group Holdings (LON:PGH) FOR Sage prospects encouraging Excellent dividend record AGAINST Competitive market Insurance offer expensive Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£151m 475p:490p 19.5 4.8% 265p:505p 7

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Fashion discounter at too high a price MySale is, in its own words “a leading international online retailer”. I think that the shares are overpriced and that the claimed discounts are questionable. I am shorting the shares via a spread bet. I first became familiar with MySale when reading internet bulletin board comment. The company was being mooted as London’s next big online retail success. Given the returns delivered by boohoo and Asos, who wouldn’t want to take a punt on that? Both the boohoo and Asos stories are so established that I don’t think it likely that another upstart could come along and repeat the trick. No such diffidence is apparent in the MySale share price however, where the shares trade on a nosebleed valuation.

the shares trade on a nosebleed valuation Unfortunately for MySale shareholders, its recent and projected growth is more similar to the internet operations of the old bricks and mortar retailers than world beaters Asos and boohoo. Reported top-line growth over the last four years has been commendable without inspiring. Growing from AUD224m to AUD268m in four years pales in comparison with boohoo, who more than doubled sales in that time. Worse still, MySale reported a pre-tax loss with 2017 finals and the closing cash balance was AUD15m down. Yet the shares are priced like a long-term winner. Worse, I’m not convinced by the 8

easy it is to find same/similar goods cheaper elsewhere retail proposition. If you sign up for MySale’s website cocosa.co.uk (why you have to sign up is beyond me) and do a little bit of comparison with other sites, you will realise how easy it is to find same/similar goods cheaper elsewhere. At the time of writing, Cocosa was selling a Trespass Cycling jacket at £40 inc. postage. Tesco sell the same item at £37.12. The last time that I was on the site, Puma men’s footwear, for example, was advertised at up to 75% off. Cocosa was selling the Puma Ignite Mesh at £39 but in just four different sizes. This was listed as a reduction on Cocosa from £110. The same shoe could be bought for £26 from SportsDirect (marked down from £84.99). Similar fun was had with Casio G-Shock watches. Cocosa was selling one model for £79.00, marked as a reduction from £125.00. The same model was simultaneously being sold on argos.co.uk for £69.99, with delivery at £3.95 or free click and collect. No G-Shock model on argos. co.uk sells for more than £89.99. A very similar model was selling on Amazon for £67.38, discounted from £87.82 and with free delivery.

Reviews on trustpilot don’t inspire confidence either. Then again, the same goes for Asos and boohoo. The full year results, released at the end of September, showed an 11% increased in active customer base and a 10% in online revenue. Bonmarche showed 39% growth in online sales when they reported in July and Dunelm showed 46% growth in internet sales recently. Unless the company starts reporting the sort of growth that saw Asos and boohoo shares begin their ascent, I will remain short the shares.

Bonmarche showed 39% growth in online sales You don’t have to spend long on Cocosa before deciding that in many cases you would be significantly better off shopping elsewhere. Indeed, it is more difficult to find a real bargain there. As the stock market appears to be regaining some sceptical capability toward growth companies, MySale shares could fall harder than their claimed discounts. MySale Group (LON:MYSL) FOR Distinctive offering Successful backers AGAINST Stretched valuation Questionable relevance Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£163m 104p:106p 77.1 0% 94p:136p

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Housebuilder thrives with new business model Quoted on AIM since 2002, Telford Homes is residential property developer, focused on the London market. For the year ending March 2017, the company reported revenues of £292m, producing a pre-tax profit of £34.1m. A quick comparison with Telford Homes’ first results as an AIM-quoted company tells much. For the fifteen months ending March 2002, the company earned a pre-tax profit of £1.4m on turnover of £8.8m. The company is the paradigm of a commercial organisation that has ridden London’s property boom. Shares in Telford Homes have doubled in five years and the dividend has increased every year since 2010, at an average rate of 34% per annum.

dividend has increased every year since 2010 Telford Homes’ speciality is the development of brownfield sites, frequently with mixed use. This is typically done in non-prime locations. The 2016 annual report shows many of the company’s flagship projects are in the E14 and E15 postcodes i.e. Poplar and Stratford. One important twist on the typical housebuilding business model is Telford Homes’ move into what it calls the “institutional private www.aimprospector.co.uk

shares still appear modestly valued

rented sector”. Since early 2016, the company’s announcements to the stock market have been punctuated with sales of portfolios of built-forrent homes to long-term investors or housing associations. One example is the May 2016 sale of an interest in a 22 storey tower in E14 to M&G Investments.

built-for-rent homes to long-term investors By bringing in an institutional investor, the risk inherent in building and selling individual units is replaced by a single negotiation. Telford Homes wants PRS sales deals such as this to become a larger part of its business. Final results, delivered at the end of May, showed revenues advancing 19%, to reach that record level of £292m. Revenues are forecast to increase 28% this year (due to the shift in business model), to be followed by another 19% rise the year after. Even better, Telford Homes is a long way toward delivering those figures. Half-year results from the company confirmed that 95% of expected gross profits for the current year have already been secured, with 65% for the 2019 year also in the bag.

While a certain level of forward visibility for the medium term is typical in the industry, Telford Homes shares still appear modestly valued. According to the traditional valuation metrics, Telford Homes shares are typically cheaper than around 80% of their peer group. London’s population is growing at around twice the rate of the rest of the UK. Currently home to 8.7 million, the head count is reach ten million by 2030. That doesn’t mean it will be one way traffic however. Recent Rightmove stats reported the largest fall in London prices since 2009. That said, Telford Homes’ ability to enrich shareholders appears well secured, thanks to entrenched rising demand in its London market and a maturing business model less reliant on sales. Telford Homes (LON:TEF) FOR Strong track record PRS trends positive AGAINST High London exposure More competitive PRS landscape Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£311m 411.75p:413.75p 8.5 4.2% 305p:440p

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