ShareSoc Company Seminar - March 2019

After a long break over the winter it's a pleasure to meet some new companies and catch up with familiar faces. Given how tumultuous the markets have been, since my last seminar back in October, it's instructive to remember that there are lots of good companies out there doing good work. The key is finding them and I certainly regard these ShareSoc seminars as very helpful in that respect.

Ten Lifestyle (TENG)

According to Alex Cheatle (CEO) Ten Lifestyle want to become the world's most trusted service platform, working behind global brands. What this means is that they provide the concierge services that Coutts, HSBC Private Banking and other high-end brands provide to their customers. If you're one of these rich individuals then TENG will help you discover, organise and book travel, dining and entertainment better than you could do yourself. This is clearly an attractive proposition and businesses are willing to pay for the service (as are some members who subscribe directly). In fact when the business started 20 years ago in 1998 it was all about member subscriptions but of course it's hard to grow with a B2C model. The breakthrough came when they realised that companies would pay for the service in order to improve customer loyalty (which is important when your customers are affluent and HNWI). In addition suppliers like TENG because clients spend more, cancel less often and want premium products - which is why the group can uncover services that are unavailable elsewhere.

After coming to the market at 134p in November 2017 it's fair to say that the business hasn't delivered on its initial promise with the price today just 66p. The reason for this is that their new platform was very late launching and they had to find a new CTO while creating a more mature, experienced team. Now the platform is live and the business is global with dedicated sales resources in the USA and more products on offer. So they have, eventually, made good on their growth plans although the group is still not profitable due to this expansion. On one side, adding more international offices, costs should start to level off as they hit a high enough coverage level. On the other side, spending on technology, it's likely that costs will remain level because they have a solid team and the website needs to remain current. So I can see why analysts are pencilling in another few years of losses even if the level is reducing. With H1 results out on May 25th the trajectory here should become more apparent shortly.

One of the problems with this type of business is that there a quite a few competitors chasing the same market and TENG will have to keep investing in subject experts and relevant content. That said Alex reckons that they have won ~30 of last 35 market tenders and have stolen some business from the competition. So their offering is solid and they have the opportunity to grow by marketing to existing clients, winning new clients and expanding into other verticals and geographies. In addition they have a deep product roadmap covering things like geo-location and targeted call routing to improve the experience for customers. If these expand client usage then that's great since most contracts are based on usage levels with some sort of budgeted upper level and a guaranteed minimum level in order to make the contract viable. Once the contract has been inked, generally for 3-5 years, then there's a reasonable chance of renewal every 5/6 years. Clearly management believe in their product, since they own ~25% of business, but it's a shame that they messed up immediately after IPO. Personally I'm happy to wait until their proposition actually delivers some profits!

Avacta (AVCT)

In an entirely different field Avacta is a pre-clinical biotechnology company focused on using the immune system to fight cancer. As Alastair Smith, CEO, explained this type of therapy has really worked and cured patients with around 75 therapies approved since 2005. The key to this success is that inhibitors are attached to the cancer cell surface, in order to block certain signals, so that the immune system responds to the cell as unhealthy and destroys it. Unfortunately less than 20% of patients respond to current antibody immunotherapies with the effect significantly dependent on the cancer type. The problem is that a large number of tumours simply don't register with the immune system, because they're not inflamed, and thus it doesn't matter whether you interfere with the cell surface since the immune cells just aren't interested. The key for Avacta then is to try and inflame the unnoticed tumours while simultaneously making them vulnerable to attack - which implies some form of combined therapy.

The route that Avacta have chosen it to take their Affirmer technology and to combine it with a chemotherapy payload in a very clever way. In essence the affirmer is a small protein (much smaller and cheaper than a monoclonal antibody) which selectively binds to cancer cells and this is joined to the chemotherapy toxin by a link that only dissolves inside a tumour and pretty much nowhere else (it's all down to the enzymes that are loose inside a tumour). With the toxin being inert while connected this means that the payload is only delivered inside the tumour body and that this then triggers inflammation which, in turn, activates the immune system. Since the affirmer protein is locked onto the cancer cells they can be killed off and thus the tumour will shrink. Even better the body then has an immune response to this type of cancer in the future which stops the disease returning. There is some really clever science here which I appreciate.

The fly in the ointment is that this drug conjugate treatment has only been tested in mouse models so far. Going forwards the animal model work should finish by Q4 2019 with a move into clinical testing perhaps 18 months later. The biggest problem is checking that affimer molecules are safe in people which might happen around Q4 2020. As you would expect the company has a lot of pre-clinical and clinical milestones to hit in order to progress smoothly and this will all cost money - so shareholders should expect further dilution. Still there are some commercial deals around affirmer reagents being used for research and diagnostics, which generates revenue from royalties and licences and helps to offset the drain on funds. With these the board are careful to limit exclusivity as much as possible to particular diseases, delivery mechanisms, geographies etc. so that there remain many licensing opportunities to pursue. Still whichever way you cut it Avacta feels quite early stage for an investor, despite being listed since 2003, and it'll be a while before the company becomes self funding. A little too risky for my taste but it'll be great for everyone if they can get their biotech to work safely in humans.

NB A video of this presentation is available here courtesy of piworld


With previous experience of investing in NCC Group, which has had a torrid few years, I was looking forward to seeing Ian Mann, CEO, from ECSC Group. This is another full-service cyber-security outfit that prevents or deals with hacking attempts. The company started in 2000 and has grown organically by offering incident response, consultancy, advice, remote management, assessing standards and penetration testing to UK customers. In addition they now offer 24/7 monitoring using their new centre in Brisbane - the development of which was a key driver behind the decision to float in December 2016. Now, rather like Ten Lifestyle, the path since listing has been problematic with the shares multiplying massively on the back of WannaCry before crashing back as profits evaporated and the company fell into making a loss. A traumatic time for all concerned but it seems that the board have kept plugging away and new regulation, such as GDPR, and public hacking scandals have driven increasing levels of business into their arms.

Now the final results for last year just came out on Wednesday and they seem pretty good with organic revenue growth of 35% leading to gross profit growth of 67% and a much reduced FY loss (down to a £600,000 loss compared to £2.9m in 2017). Even better, according to Ian, each successive quarter in 2018 saw the company inching ever closer to break-even with Q4 just about making a net profit. So the trend is positive with 95 new consultancy customers signing up last year and paying fees of £5-50K for their projects. With luck some of these will convert to much more persistent managed services contracts with fees there coming in at £100-500K over a number of years. The other benefit to this managed services revenue is that it is truly recurring (currently 29% of total sales are classed like this) while consulting revenue is more erratic even though 78% of the sales here are for repeat business from existing customers. The key to all of this is retaining experienced consultants and ECSC, like other IT firms, has to keep on top of recruitment and keeping staff happy. Apparently though the staff retention rate is 80-90% and some employees have returned after leaving to work elsewhere - so they must be doing something right in the workplace.

Looking forwards cyber-security is a constant concern for company boards, considering the potential size of GDPR fines, and thus ECSC is seeing strong demand from new/existing clients. The plan is to focus on organic growth in managed services while leveraging existing capacity and keeping control of costs. This should help the company move towards profitability in the current year or the next. There will be continued investment in the proprietary AI platform because this is central to the process of taking a huge volume of log data (billions of records) and converting it into a few hundred alerts that are analysed by a human with around 10% being investigated as a potential breach. Without this there would be no way to find the needle in the haystack! As a result the management aren't really looking for acquisitions (I get the feeling that they've always preferred to grow internally) but might take an opportunity if one arises. On the whole there's no doubt that ECSC operates in a 'hot' sector and the company seems conservatively run. I just wonder if perhaps the board are too risk averse and thus won't expand the company as fast as investors might like?

HarbourVest Global Private Equity (HVPE)

I've seen Richard Hickman from HVPE present a number of times before, at ShareSoc and Mello, so I'm not going to rehash all of that explanation again. Suffice to say that this listed fund of private equities is continuing to successfully tread the same path that it's been following over the last decade. Just a quick look at the steadily increasing share price over that period shows how reliably the fund has managed to keep growing irrespective of the economic environment. The reason for this is that PE has outperformed most asset classes over the last 3, 5 and 10 years with investors in this space being able to access a vastly larger pool of private companies when investing (e.g. in Europe there are ~5000 public companies and 360,885 private ones). As a result the opportunity set is much larger as is the potential for diversification.

Right now HVPE is 46% invested in primary funds, 31% in secondary funds (sometimes at discount) and 23% allocated to direct investment into companies alongside other PE firms (which removes a layer of costs). This is not far off their target allocation although they would like more exposure to primary funds. Geographically the split is USA 58%, Europe 20%, Asia Pacific 15% and RoW 7%. Here they'd prefer a larger US exposure while Asia Pacific is over their 12% target due to strong returns in the region. Finally, looked at another way, buyout investments make up almost 2/3 of portfolio (giving access to leading companies where managers can unlock value through expansion and optimisation) while venture and growth investments are about another 1/3 (here you need to carefully select mangers with a great track record because total losses are common). Something which is new is that real asset investments now account for 1/10 of portfolio and this is where the fund has broadened into the debt and infrastructure space to provide further diversification.

From an investor perspective HVPE has really performed admirably. However the discount to NAV is still around 18% and this hasn't changed much since I first saw Richard present - let alone since the 2008/09 crash. There's no systemic reason for this discount but it certainly is persistent. Nevertheless Richard is sure that one day this gap will close just because the fund has built up such a great track record. One thing which the fund won't do to try and stimulate this change is to start paying out dividends. On one hand there's no evidence of their efficacy on this point and on the other the absolute NAV value determines how much capacity they get with new investments and it's in everyone's interests to keep this potential capacity as high as possible.

The author holds none of the shares discussed in this article.

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