ShareSoc Company Seminar - May 2016

For this mid-year seminar ShareSoc moved location to the welcoming offices of Capita Asset Services in the heart of the City. Here we were made very welcome by the Capita staff and there was plenty of space in the seminar room for all attendees (hopefully not as a result of anyone going to the usual location). As ever Carmen provided an excellent buffet and there was plenty of scope after the presentations for getting in an extra question or two with some of the presenters! Another very worthwhile event with four companies on the menu:

Ceres Power

Ceres Power is an interesting, somewhat typical, AIM company in that it has spent rather a lot of time (>12 years) and money (>£100m) trying to make its one product (the Steel Cell fuel cell) commercial. In the early days, from 2004-12, there was a great deal of excitement associated with the company as it worked closely with British Gas. Unfortunately this approach, of designing and delivering units to end-users, failed in a big way and the company required a rescue fund-raising. That, however, is the past and now the team is focused on signing up big-name manufacturers as partners (across multiple geographies and market areas) and licensing their patented fuel-cell technology to them. The upside of the British Gas debacle is that a great deal of someone else's money was spent on discovering real-world issues with the design and new investors are in a good position to benefit from this experience.

Right now the best prospect to deliver on this resurgent promise is Honda as it has just signed up to 2-years of joint-venture development with production of a commercial unit the desired result. This should then lead to licensing revenue and optimistically a chance for the company to hit break-even in three year's time. In the meantime the burn-rate stands at around £11m per annum and with not much more than this in the bank a fund-raising of £10-15m will be required towards the end of the year. So, pessimistically speaking, there's more dilution to come for existing holders and it's still unclear whether this fuel-cell will turn into a winner outside of the lab.

That said CTO Mark Selby provided a compelling introduction to the energy supply market and convinced me that the future involves localised power-generation for homes/businesses and some form of range extension for vehicles. Speaking to him afterwards he was pretty clear that Ceres Power is now in the right place at the right time and that battery-pack solutions, such as the Power Wall from Tesla, aren't much of a threat as they have to take power from somewhere else in order to store it rather than being power generators in their own right. I certainly hope that he's right, from a UK-centric perspective, but there are still too many risks for me to consider jumping aboard just yet; give it 2-3 years though and the picture should be a lot clearer.

Fishing Republic

From one extreme to another Fishing Republic has been listed for just a year, owns bricks-and-mortar stores and turns an actual profit from fishermen buying all of their gear from one of the company's ten stores or their online operation. The theory behind this firm, and the reason for listing, is that there are circa 2300 specialist fishing retailers in this country but most of them are one-man shops; so the market is fragmented, customers don't benefit from a full-service retail experience and there's plenty of scope for consolidation. As founder and CEO Steve Gross puts it, Fishing Republic meets this need by kitting out light-industrial units of around 4000 sq.ft with large amounts of branded and own-brand gear which fishermen can run their hands over and discuss with like-minded sales staff. After this the customers either buy directly (55% of sales) or go online (45% of sales) and purchase through third-party websites or at (which .com and visitors get directed to even though the former are more obviously commercial domains). The only problem with external sales is that intermediaries take a cut, and reduce the margin for Fishing Republic, but it seems that the company is focusing some attention towards boosting their online presence.

Nevertheless at its heart Fishing Republic is a buy-and-build operation which means that they need to acquire sub-scale businesses and generate a certain level of organic growth within the group. As the fishing market is largely mature, apart from changes in fashion, it's all the more important that the company grabs market share and expands into new locations. Right now the company is very focused on the North with 80% of stores beyond Birmingham but a recent, and cheap, acquisition has drawn the company to Swindon and the rest of the South is there to be taken; with the central facility currently able to handle 30 or so stores (and scope for perhaps a hundred such shops across the UK) there's plenty of room for expansion. The tricky part is that out of the £250K it takes to set up a new location about £200K of this is stock and that's a bit of a drain on working capital given that it turns over only about 4x per year (very slow in general retail terms). As such Steve Gross reckoned that a new store would pay for itself in a couple of years but this felt like a bit of a guess; possibly related to the FD Russell Holmes coming across as a touch wet behind the ears and not fully up to speed on how a listed company needs to present itself. Nevertheless the CEO still owns half of the company and he obviously knows how to keep the operation moving; the only problem for external investors is that they'll have to trust the board as they move into uncharted territory and progress might be a bit patchy along the way (even if it all works out in the end). The story isn't quite compelling enough personally but there'll always be a market for fishing tackle.

RedX Pharma

The Biotechnology & Medical Research sector is a rather alluring one for investors as it offers huge potential rewards but at the cost of very high risk. Out of 44 companies in this sector fully 40 of them are AIM-listed and the average Stockopedia rank across this group is a lowly 17! As such RedX Pharma is a fairly typical discovery & development company in that it has a pipeline of opportunities that it's taking through the analysis and approval process. The difference, as explained by CEO Neil Murray in a very technical presentation, is that RedX Pharma has a broad pipeline for such a small company and is able to move these compounds forward both more cheaply and more quickly then heavyweights like GlaxoSmithKline or AstraZeneca. To put this into perspective Neil Murray indicated that their "time to candidate" came in at around 21 months, compared to 4-5 years for Big Pharma, and that this translated into a cost below £2m as compared to the norm of around £8m. That's quite some advantage and even though the company is still in its cash-burning phase (spending perhaps £10m per year) at least it doesn't need to tap the market so often (and not for another year at least as they've just raised £10m).

Of course in the end RedX Pharma will need to find a partner for drugs which make it to the clinical study stage and that's all part of the game-plan according to Neil Murray. In his view Big Pharma look on the small discovery companies as something akin to an extension of their own labs but with less red-tape and risk; so if a minnow has a compound that looks half-interesting then they'll swoop in and buy up the potential. Curiously this process is partially in play with all activities being moved to Alderley Park right now and this being the lead cancer research facility for AstraZeneca. It doesn't do to get too excited though as while the company appears to be doing excellent research in the cancer, infection and auto-immune spaces it's still very early days; the most advanced candidate, a Porcupine inhibitor for certain cancer stem cells, has still only completed pre-clinical trials on mice and is yet to go near a human. Even if this drug doesn't work out there's always the possibility that RedX Pharma have created the first new class of antibiotics in 25 years; given recent press coverage of the coming antibiotic apocalypse this is rather timely (although other companies are working on new antibiotics too).


I've known of Quarto for a number of years, principally through John Lee's investment in them, but have always thought of the company as a niche publisher of coffee-table books. Now, thanks to an enthusiastic and entertaining presentation by CEO Marcus Leaver, I realise that they do work in niches but quite a few of them and with a focus on creating 'enduring' books rather than following fashion. The benefit of this approach is that while just under half of sales come from titles which are 1-3 years old another 20% is split equally between books aged 3-6 years and those over 6 years old. In addition the content of these existing titles can be sliced-and-diced to create new formats and editions as almost all of Quarto's roster is non-fiction. This is very much a concept led business with authors and designers being hired to deliver on an idea - although occasionally an unknown author comes along (such as David Litchfield with The Bear and the Piano) and they sign-up an award-winning talent for a three-book deal. Actually this title fits right into one of the strategic aims for management which is to grow their children's publishing arm to around a third of all sales by 2018 (or $50m) and I get the feeling that management are constantly looking at ways to exploit their intellectual property (such as the Create your own cookbook site). That said acquisitions of complementary publishing imprints are equally on the agenda as the company works in mature markets and organic growth can only counteract this to a certain degree.

I must admit that I like the type of management who have a very good understanding of the business dynamics and a clear road-map. At Quarto this is partially down to a boardroom coup back in 2012 where Laurence Orbach, the founder, was ousted by shareholders and a new team installed. Since then there's been a necessary and explicit focus on improving the finances of the business by reducing debt (with the aim of getting this down to about 2.2x EBITDA or $45m at current levels [although the EBITDA metric is flattered by development costs being capitalised and written off over a 3 year period]), improving working-capital and lifting margins; I get the impression that previous management had become a touch complacent and wayward in their duties and that the whole enterprise was crying out for a change at the top. Which is not to say that the company is without issues: non-English sales make up only a 1/6 of turnover, and this is mostly in Europe, while the future existence of hard-copy books remains an open question for many people. So there's a reason why the shares are so cheap with a P/E of 6-7, and a current yield of 4%, with this somewhat justified on account of Quarto being far from an exciting, go-go growth company but still it's one of the cheaper shares in the Media & Publishing sector as a whole. Given the proven quality and honesty of current management (no avoiding difficult questions here) I think that this discount is rather excessive.

Disclaimer: the author holds no shares in any of the companies mentioned

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