ShareSoc always takes a break over the Christmas period as companies generally aren't keen on presenting near the year end and the hard-working ShareSoc team need some well deserved time off. Still I always look forward to the first seminar of any year as it's a good chance to get back into the investing frame of mind and meet new companies looking for exposure to the unwashed masses! This time we enjoyed the lovely offices of Link Asset Services and an interesting looking line up:
Venture Capital Trusts (VCTs) seem pretty popular with investors who've got funds outside of a tax shelter and I can see why - the government gives you 30% of your investment back (along with tax free dividends) and that's a pretty good return to start with. There are, of course, a few caveats and Mark Wignall (Managing Partner) of Mobeus Equity was quick to point out that if you don't understand the implications of a VCT investment then you shouldn't invest without professional advice. Still Mobeus Equity has a good record of realisations at a decent money multiple (2-6x) which means that they've generated a healthy return for investors. On top of the capital gain it seems that there's a high income element with a yield of 10% or so; really quite remarkable.
Anyway Mobeus Equity presented today because they're currently raising funds for their 4 VCT portfolios and they're almost fully subscribed. As a strategy they look at UK based companies which require £2-5m in capital and have a proven product with £500k of revenues or more. So these are stable companies that have proved their market and want to expand. The existing portfolio is 76% invested in MBOs of this type of established, profitable business. However the VCT rules have been tightened up and new investments will be in younger, smaller companies where there's a limited track record but hopefully a decent management team. In any event Mobeus Equity usually add management resources to these companies and are able to guide them towards greater profitability.
On the whole Mobeus Equity seem to know what they're doing even if they do self-proclaim themselves to be part of the VCT nobility. If I had a lot of spare capital, and didn't mind locking it up for five years, then I could well be tempted to invest. The only problem is that the clock is ticking and when the offer is fully subscribed then that will be it for another year!
I first saw Ilika exactly a year ago at an earlier seminar. At the time their technology looked just as promising as it does today; the problem was getting clients to take out a license (with one hoped for in April 2017 and maybe another couple by the end of the company year). Also, back then, they had enough cash for another 18 months with about $4m pa going out the door.
Today Graeme Purdy (CEO) talked again about copying the ARM model and looking to generate revenues from licenses first (which is now) and then from royalties (2-3 years after the license perhaps). As before Ilika don't develop products without a clear route to market which is why they like their long terms partners (Johnson Matthey, Toyota, Rolls Royce etc.) to provide both ideas for promising materials and some funding. This plays to the firm's strength in testing innovative materials without exposing them to blue-sky theories that will never be commercial.
For example their solid-state batteries are smaller with a longer life and higher energy density than comparable cells and yet are also non-flammable; so they're great for IoT and wireless networks. Right now they have three deployment projects in progress but the real income will come with licensing and this has been repeatedly delayed. Fundamentally they need a manufacturing supply chain in place but there's a chicken and egg problem here. On one hand the actual manufacturers (foundries/IDMs) won't produce at scale without a customer and OEMs won't license if you can't prove that you can produce at scale. So Ilika are trying to bring these two worlds together but I suspect that it's harder than it looks and it's certainly taking longer than I have the patience for.
This is an interesting situation in that Proactis is the result of a recent merger between itself and an equivalent company called Perfect Commerce. According to new CEO Hamp Wall these businesses were extremely complementary, despite appearing to be competitors, and so the combination is the best of both their operations. So after a period of consolidation where employee numbers were rationalised, and some office locations/data centres closed, a recent trading update shows adjusted EBITDA to be up by >100% with 35 new "labels" won in the half-year (I take "labels" to be the equivalent of customers). However a lot of this growth is down to the acquisition itself and that's a pattern which Hamp Wall intends to continue as Proactis seeks to consolidate the industry and grow by 25-30% pa (inc. organic growth of 10%). This is a reasonable ambition as Proactis is now the 5th biggest player by revenue (2nd largest by profit) behind SAP Ariba and there are lots of small players in the market.
As for what Proactis does it's an intermediary between suppliers and customers. They have a SaaS cloud platform that hosts a large number of suppliers (~2 million) and connects them to around 1000 customers (half private and half public). The customers benefit from organised supplier negotiation (eSourcing), with full auditing, along with eProcurement when they actually buy from a selected supplier using the network/transaction layer which Proactis supply. In addition to directly benefiting their customers Proactis also monetise their supplier pool by helping them to work effectively with customers. So you can see why this is a business that benefits from scale as larger numbers of customers/suppliers feed back in a loop that benefits everyone.
In Hamp Wall's words (and he seems very positive about the future) they are now a global player with a full solution suite in a growth market. They can also self-fund tuck-in acquisitions, rather than raising money in the market every time, and are one of the few PCI-compliant firms which means that they can hold credit card data. With a "prettier" system in place I can see why recurring revenue visibility of >80%, with EBITDA margins at >30%, should allow them to hit their target of £100m in sales (from £55m now) and so achieve the level of profit growth pencilled in by analysts. The only problem is that organic growth is hard to discern in a bolt-on business and it seems that the underlying Proactis arm only managed ~8% in this half-year with the underlying Perfect Commerce being largely flat - so it'll take a bit of work to meet the overall 10% organic growth target. Still given Hamp Wall's track record I'm sure that he'll get there in the end.
A relative newcomer to the online gaming world Veltyco reversed onto AIM in June 2016. Previously it seems to have made its money in the advertising space, driving punters towards other platforms such as Betsafe (online casino and sports betting), Lottopalace (lottery) and Option888 (binary options), but now it's moving into the operations space with Bet90. The business appears to be very cash generative, with EBITDA margins of 50-60%, which allows them to make acquisitions, invest in other areas and improve margins further through increased advertising. One idea is to take a minority interest in eSports.com (an aggregator of eSports data and statistics) with the idea being to enable online gaming on Bet90 directly from this domain. Given the general hype around eSports at the moment I can see how this could be a winner although it's early days yet. Even without this Bet90 appears to be significantly adding earnings with profits forecast to triple in this year alone!
Still there are some real risks with this young business despite long-term contracts with gaming operators, affiliates and SEO partners providing some reassurance. On the regulatory front they offered binary options up until last year but removed them all this year as the landscape altered; a fast but reactive change which is both a strength and a weakness. They are also going up against strong, entrenched competition which means that they are looking at peripheral markets in continental Europe and Latin America primarily. I'm sure that there are plenty of players in these markets but I guess that they are also immature? Finally it's a very small operation with only 11-12 employees (everything is outsourced apart from marketing) and the free float is very low at ~22.5%. In time the large, insider shareholders might wish to place some of their shares with institutions but right now small holders are very much along for the ride. I imagine that Veltyco will do well from here but there's far too much risk here for my tastes!
NB In searching for the company I discovered that they floated the idea of some sort of Blockchain angle last year. Make of that what you will!
The author holds none of the shares discussed in this article.