For the first seminar of 2017 Sharesoc found four new and interesting opportunities spanning from a collective investment trust to a solid-state battery manufacturer with much in-between. As ever I welcome the opportunity to hear from different executives, with the chance to form my own impressions first-hand, and I'm looking forward to the next seminar already.
To start things off CEO, and founder (and 53% shareholder), of Orchard Funding Ravi Takhar explained how he used his background in company financing to set up in 2002. Aware of the default risks inherent in small-scale lending he decided to focus on two specific niches: insurance premium finance and accountancy fee funding. In these areas customers tend to pay their bills because a default means that they're either uninsured or aren't going to get their tax return completed! This explains why Orchard Funding have suffered zero losses since 2007 and prior to that they dealt with one actual fraud in 2006.
In 2015 Orchard Funding floated to rid themselves of expensive debt and create access to a larger funding pool - a real constraint on growth. With their capital base secure, via a big share issue last year, they're looking to expand in the same markets with new and longer-term products. Ravi also wants to capitalise on their USP which is that they can allow a big broker to set up their own finance provision using Orchard Funding software. The only issues here are a backlog of consumer funding applications with the FCA and the reluctance of brokers to change their way of doing business.
On the plus side Orchard Funding is both quite low-risk and highly profitable with a gross margin of ~90%, a high PBT margin of ~35% and good fee-to-cashflow conversion. Ravi has his sights set on increasing lending from around ~£50m last year (with low leverage) and improving the rating of the firm by having it be viewed more as a challenger bank or a P2P lender. The profitable aspect of the latter is that bank lending is charged at 3-400 basis points over Libor while only ~3% is paid to P2P clients. This isn't quite in place yet with additional FCA permission required, hopefully in the next few months, but it should raise the profile of this small-scale lender when it happens.
In a similar vein Cerillion is another small company hoping to leverage its USP to generate scalable growth. Here though the CEO, Louis Hall, led an MBO of the company from Logica back in 1999 and since then they've been building enterprise CRM and billing software in the telecoms market. As they're a minnow compared to the large consulting firms they've had to win business by targeting niches and providing very reliable and effective back-end solutions. Up till now this has allowed Cerillion to be profitable and cash generative with a substantial amount of cash on the balance sheet.
However the board want to double the size of the company, at least, by targeting three areas of growth: mobile and cloud-based software; sectors outside of telecoms; and new geographies. A start has been made on this transition with new customers already using the cloud/mobile systems and expansion into utilities with Guernsey Electricity and others. However to push this process on Louis Hall is actively looking for bolt-on acquisitions and these are definitely on the agenda - which will lead to shares being issued.
This dilution is actually quite welcome as Louis Hall owns 40% of the business and the shares are very illiquid. This is a consequence of how the business joined AIM in March 2016 with the old venture capital investor (from '99) exiting to institutional clients and the free-float remaining small. Also the reported figures are distorted by the plc taking over the trading company and Louis Hall helpfully provided some pro-rata figures that showed how 2016 produced a turnover of £14.8m and a profit of £2.0m (comparable to 2015). Low growth for sure but management look committed to making this a thing of the past.
Novel, research-driven companies are a bit of a favourite on AIM and Ilika is no exception in that regard. Since 2010 it's burnt through substantial shareholder funds developing solid-state battery technology - although direct costs have all been covered by government grants or commercial partners. Now, though, their patent-protected processes are ready for several sectors where traditional li-ion cells, and competing supercapacitors, are unsuited. This typically means areas where changing batteries is hard and cabling is either costly or impossible: such as the exploding market for sensors (15 billion used in 2015!).
As described by Graeme Purdy, CEO, the road to profitability here is taking a leaf out of ARM's play-book: to create a licensing model of initial and royalty payments. By the end of April they expect at least one licensing deal to be signed and cash break-even requires about three of these on the books - hopefully by the end of 2017 full-year. The only problem is inertia from big companies in getting a product to market and the cash-burn rate of ~£4m pa (so they have enough cash for another 18 months or so).
There's little doubt that Ilika have the solid-state technology that clients need with six patent families and a healthy pipeline of development projects (including self-healing aerospace alloys and lenses for 3D hard-disks). A good example in this area is that Ilika have integrated a photo-voltaic cell with their battery to create, essentially, an eternal power source. Now this won't replace those very cheap li-ion button cells in most applications but in the right environment Ilika could be on to a winner here - eventually!
Albion Venture Capital Trust
For the final session Stuart Mant (Head of Business Development) explained a little about the Albion Venture Capital Trust (VCT) and why they're a good investment. In a general sense VCTs are useful as they offer great tax breaks as a reward for investing in unquoted companies. Even now that the rules have been tightened up to push funds towards investing in smaller, riskier companies these vehicles remain useful - so long as you're with a good manager who selects wisely. This then is Albion's pitch - that they're specialists in the healthcare, environment, leisure and technology fields who conduct extensive due diligence and are very hands-on to the extent that they sit on the boards of portfolio companies.
For example Albion invests in Radnor House independent school, which was previously failing, and identified a young, determined headmaster to turn it around. This has been so successful that the original site next to the Thames in Twickenham is now over-subscribed and a second site opened in Sevenoaks via the takeover of another school. From Albion's perspective this is a very risk-free investment as they have first-call on the freehold of the plot and so have locked-in the asset backing that they often require. On a similar note they've invested in several high-end care homes where residents are paying around £1500 per week to live in, essentially, a hotel but with facilities for their aging needs. Again these are asset-backed stakes with an excellent profile for profitable growth.
Unfortunately this level of management involvement doesn't come cheap with a 3% initial charge, a capped annual fee of 3% and the requirement to lock up your funds for a minimum of five years. For this sticker price the conservatively invested funds aim to return 5-6% per annum with a similar yield on top (which can be re-invested). Historically the 5-year average return across all of the Albion funds has been 6.3% pa but with a wide variation between the flagship Kings Arm Yard VCT (~55% over 5 years) and the Technology & General VCT (~10% over 5 years) - which explains why the former is over-subscribed. Still Albion partners have £3.5m of their own money invested so they must believe in the story.
Disclaimer: the author holds none of the shares discussed here.