Description

This will be brief because two time sensitive aspects might be useful to somebody here, one macro and one micro:

1. Stocks listed on London’s AIM (Alternative Investment Market) might be oversold on forced selling due to feared inheritance tax changes that might not happen, or which will naturally complete.

2. Oxford Metrics (“OMG”) is a seasoned innovator with 34% market share in the small niche of motion capture technology.  At 4x EV/EBIT FYE 9/25 if the company's core Vicon cameras and software resume 8% organic growth after a temporary 2024 decline (5x 2023; 7x 2024) and 2/3 of market cap in net cash (proceeds from sale of business they had founded) the stock should do well from here.  

Why is it cheap?

1. Macro: AIM stocks are under threat of taxation changes at the October 30 budget by the new left wing UK government.  An important inheritance tax relief which historically applied to most AIM stocks - and which I have not seen discussed on this site even on AIM stocks that might be impacted, but I might have missed it - is widely feared to be removed which has caused forced selling especially by retail investors.   

Prices since July 4, 2024 when the Labour Party won UK election: 

• Inheritance Tax (“IHT”) in the UK is actually an estate tax, where a flat rate of 40% is taxed by the UK government on all estates above £325,000.  Business Property Relief (“BPR”) is an exception introduced in 1976 to prevent the needless destruction of businesses by the death of shareholders, whose families had previously often been forced to sell or liquidate the companies in order to pay IHT in only a few months after death.  Many AIM companies qualify for this relief (except investment and real estate companies).  This has encouraged many family-run or long-lived operating companies to list on the AIM market.  Retail investors have been incentivized through this relief to own these AIM shares because after 2 years of ownership they become eligible for BPR relief.  Without such reliefs, individual limits of less than $0.5 million are absolutely small.  Many retail investors with only modest wealth or retirement savings have preferred AIM stock ownership to investments which, even if they promise higher returns, would see the government take the lion’s share of even quite small estates for any estate with more than one heir.  Retail investors are not the most obvious shareholder group because of their small size individually.  However I think many AIM companies are heavily owned by retail investors who will not continue to hold the stock without this tax incentive.  

• BPR for AIM companies is under threat due to the government's pledges to not raise most other taxes, and its needs for additional tax revenue.  

July 29, 2024

https://www.gov.uk/government/speeches/chancellor-statement-on-public-spending-inheritance 

July 30,2024

https://www.bloomberg.com/news/newsletters/2024-07-30/uk-taxpayers-should-brace-themselves-for-the-reeves-budget 

August 23, 2024

https://www.sthelenslaw.co.uk/news/rumoured-reforms-to-inheritance-tax/ 

• A further tax hit in the form of higher capital gains taxes, which might rise from current 10-20% to closer to income tax levels of up to 45%, has caused additional selling of other AIM stocks.

• For both these reasons, there has been an element of forced selling of UK assets, and especially AIM stocks, ahead of this month’s budget.

• Politicians have a pretty good track record of making a fool of investors, as well as themselves.  So although many fear the worst, it is possible that BPR is not scrapped for AIM stocks.  A new government that claims to prioritize economic growth might conclude the benefits of orderly succession of family run businesses, from mom and pops to listed companies with over a century of trading history with ongoing family involvement, might be worth keeping, or at least not risking for relatively small taxation income.  This would be a surprise to the market, and I would expect an immediate recovery in AIM stock prices.    

• In the most likely outcome of loss of BPR relief, forced selling will naturally abate as ownership transfers.  There are plenty of natural buyers for these businesses; takeouts are clearly possible.  

2.  Micro: 3 things happened this week which I think make this stock worth looking at.

• Yesterday the company announced an acquisition (<8x EV/EBIT; 0.8x P/S) in the adjacent Smart Manufacturing space, and the first buyback in at least 15 years which will reduce shares outstanding by about 8%.  These should both prove excellent capital allocations, using 21% of the £52 million cash proceeds from OMG’s 2022 sale of Yotta (65x EV/EBIT; 6.4x P/S), the infrastructure asset management business which it had developed from its original core technology. 

• https://www.londonstockexchange.com/news-article/OMG/share-buyback-programme/16709964 

• https://www.londonstockexchange.com/news-article/OMG/acquisition-of-the-sempre-group/16709790 

• On Monday Ian Wilcox joined the Board as a non-executive.  Current executive at Judges Scientific, the much larger and very successful buy-and-build scientific instruments company also listed on AIM.    Judges paid 7x EV/EBIT for Geotek, its largest acquisition to date, a bit smaller than this.    https://www.londonstockexchange.com/news-article/OMG/non-executive-board-changes/16700970 

• The bear case is twofold.  Worst case is technological obsolescence; they operate in fast moving and glamorous industries, so the threat of new entrants is constant.  So far, they have managed to keep innovating, evidenced by rising sales and only gentle erosion of market share as the TAM has expanded.  The second worst thing that could happen for stockholders is that the company enjoys modest success.  Even at current valuations shareholders could lose money if management proves smug rather than ambitious.  Imogen O’Connor will probably earn 10-20% of the company’s operating profits in her first year as CEO.  She has the right background to succeed, with 22 years at Vicon, 11 as its CEO, but shareholders will only make money here if she allocates capital well.  The former CFO had talked about wanting a net cash buffer of £16 million, one third of the Yotta sale proceeds.  So the risk was that management would entrench themselves at shareholder expense.  I think the three news events this week somewhat reduce this second bear scenario, though microcaps always carry these risks.       

3 weeks ago the stock dropped by 30% when the company lowered guidance for the financial year just ended. 

“The Group now expects to report revenues in the range of £40 - £42 million and is expected to result in Adjusted PBT* materially below current market expectations* for the financial year.

*Oxford Metrics' compiled market consensus as at 20 September 2024 is as follows: FY24 Revenue £48.6m / FY Adjusted PBT £7.8m.”

https://www.londonstockexchange.com/news-article/OMG/trading-update/16677417 

• So sales to September 2024 are 16% lower than expectations; profits an unknown amount lower.  Despite management holding out hope that some of this might be just timing, and boost the next year’s sales:  “Globally, we are seeing customers across our markets exercising greater caution and purchasing decisions are taking longer to conclude. A number of opportunities in the pipeline have now shifted into the new financial year.”

• Vicon has delivered 8-12% sales CAGR for the past decade.  

• 2024 results will be announced December 3, when profits “materially below” will be quantified.

The products

Vicon uses highly accurate motion capture camera technology, was spun out from Oxford University over 40 years ago, and has since built its brand on quality technology, innovation (introducing a new camera every 6 years) and service (bundling customer support and software with the hardware).  

The company sells globally.  2023 top 3 country sales were US (37%), Japan (13%) and UK (7%).  Main customer industries are Entertainment (41%), Life Sciences (34%) and Engineering (20%).  Use case examples:

Entertainment: Last month NYU's Martin Scorsese Virtual Production Center in Brooklyn installed 40 Vicon motion capture cameras and software for virtual production.  https://oxfordmetrics.com/news/2024-09-25/vicon-and-lux-machina-outfit-nyus-martin-scorsese-virtual-production-center

Steven Spielberg’s Ready Player One (2018) used 234 Vicon cameras for the performance capture techniques used for more than half of the movie.

Life Sciences: The 400 Vicon cameras installed in 2021 at the LeBron James Innovation Center on the Campus of Nike’s Oregon headquarters, to analyze biomechanics and athlete performance.

Life Science customers include hospitals who buy Vicon systems for clinical gait analysis.

Other users range from manufacturers of drones to contact lens.

Current organic and inorganic growth is extending traditional motion capture by “Markerless” technology which removes the need for physical markers attached to the body.  This reduces clumsy set-up times and should increase unit demand to maintain accuracy (subsitute more camera units + AI for markers).  In the blue sky scenario it is not hard to dream up dramatically escalating use cases, in which case an enterprise value of $33 million does not seem a lot for a profitable company in this space with core technology, decades of experience and reputation for quality.

https://www.youtube.com/watch?v=Gro7I2urFRE 

Competitive landscape

The company claims 34% market share in its £130 million Serviceable Accessible Market (2023), defined as active or passive optical and inertial motion capture in Life Sciences, Visual Effects, Engineering and Location-based Entertainment with the following competitors:

Additional Risks

• Microcap liquidity and governance

• This is a tiny company, serving a small niche which is subject to technological obsolescence.

Catalyst

buybacks, further good acquisitions within its niches, October 30 2024 UK government budget