Small Cap Wrap: Month: December 2009

AIM Breakfast - Archive

14 Dec 2009

This week: Summit announces a placing, a mixed verdict for Judges Scientific, and Atlantic Coal fires up expansion plans

Atlantic Coal (ATC 0.75p/£10.39m)
The forthcoming acquisition of Montana-based clean burning coal development company Maple Carpenter Creek is Atlantic Coal’s latest move in realising its strategy to expand its asset base and production. The news came after the company’s latest trading update, which showed a now positive cash flow from its primary asset, Stockton opencast anthracite mine in Pennsylvania. By leveraging Stockton’s improved cash flow, Atlantic has taken advantage of what Managing Director Steve Best describes as “well priced development opportunities in the U.S”. The acquisition of MCC will bring to the table 380m tonnes of coal resource in prime coal mining territory, putting Atlantic well on track to achieve its target of producing 450,000 run of mine (ROM) tonnes. With the cold weather soon to hit the US, we expect it to be a very Merry Christmas for Atlantic coal.

Datong (DTE 35.5p/£4.91m)
Hybridan recently met with Datong, the supplier of covert tracking systems to Government departments involved with defence, security and law enforcement, as they released their interim results for the six months ended 30th September 2009 on 1st December.  They reported increased revenue of £2.81m (2008: £1.51m) and a reduced operating loss of £1.32m (2008: £1.67m). Datong has unchanged cash in the bank of £1.7m. The company’s core expertise is in the application of Radio Frequency technology, complimented by GPRS and cellular technology.  The tracking and locating systems are used by Governments to support intelligence gathering operations fighting global terrorism, drug trafficking and organised crime.  In this first half year period, Datong had a record order intake of £4.91m, which had also continued to increase after the period end of 30th September to £7.8m by the end of November (2008: £3.5m).  The company operated mainly in the US, UK and Europe but is looking to increase its presence in other regions.  They expect that over the next 12 to 18 months there will be an increase of EU money used in Eastern Europe to fight organised crime, which they are well placed to benefit from, as well as having new products to launch later in the year.  Additionally they are interested and open to the idea of making appropriate bolt-on acquisitions where it would add new core technology to the suite of products they currently offer.  As they generally have a better second half of the year than the first, this seems like it could be a great year for Datong.


Eckoh (ECK 5.125p/£10.24m)

Eckoh, the provider of hosted speech recognition services, reported interims to 30 September 2009. Sales fell by 14 per cent to £8.6m (H109: £10.0m), but an improvement in gross margins by 5 per cent to 38.6 per cent, due to a shift in the sales mix from Client IVR (which handles premium rate calls) to higher margins sales in the Speech Solutions division, drove adjusted PBT to only fall by 3 per cent to £0.175m (H109: £0.181m). Growth from the Speech Solutions divisions will offset the decline in Client IVR sales. Management are focusing on winning new, long term contracts with blue chip companies in the speech solutions areas. Eckoh will add specialist technologies to broaden its offerings, especially in the mobile area. An increase in capex reduced net cash to £1.5m (FY09: £2.4m). The market estimates 2010 pre-tax profit of £0.7m and EPS of 0.36p. At the current price level the stock trades on a 2010 P/E ratio of 31.3x which we believe is far too generous and we doubt is sustainable.  As an aside, we can’t understand why this company doesn’t merge with another speech solutions tiddler, Telephonetics. This would combine two competitors and so avoid competitive margin erosion, allow for reduced central overheads and perhaps get a combined group to a market cap which would interest institutional investors.  What we hear yet again though is that faint sound of management egos hindering shareholder value creation. Must be an echo.

Imaginatik (IMTK 8p/£12.34m)
Imaginatik provides software and services for “Collective Intelligence” or “Idea Management”, tracking the thought processes and tapping into the brain power of employees within a business, using the employees as an additional resource.  Whilst this is still niche at the moment, Imaginatik expect it to be mainstream within 2 years.  In fact, as validation of the whole area, more than $40m has been raised by mainly US businesses in the sector recently. In their recent interim results they increased revenue by 26 per cent to £2.3m despite the troubled global economy, and signed multi-year deals giving visibility on future revenue.  The business traditionally has a better second half, and this is expected again this year, especially as they have increased their spending on Sales and Marketing to drive the business forward.  There has been a restructuring of the sales team too, giving each division specific focus, be it for new business or for upselling to existing customers.  The result of this should be seen in the year end results, as management expect it to take 4 to 6 months for new sales staff to become fully productive.  Additionally there is a new version of the software about to be rolled out in January 2010, giving an improved, sleeker, better user experience. The shares have risen 78 per cent since January (when they were just over 4.5p) but we still imagine it could be a great second half for Imaginatik!

Judges Scientific (JDG 137p/£5.13m)
One of our favourite micro-caps, Judges Scientific has given a mixed trading update statement even though the chairman uttered those immortal words that trading is “ahead of market expectations”.  It reported the year to date has been underpinned by an unusual surge in orders received late in 2008 and that Qurom Technologies, acquired in June, has been performing well. However, all is not well in East Grinstead, global HQ of Judges. It seems that last year’s level of orders may have been a one off caused by public sector bodies rushing to splash their cash before the new budgetary discipline kicked in.  Indeed, since the June half year order intake has declined and is now well below the comparable period and the usual year-end surge in orders has not materialised yet. So 2009 will be good but the market will be downgrading 2010. We expect forecasts for 2009 to increase to £1.6m PBT with EPS of 26.3p, but 2010 expectations to fall to flat with 2009 or £1.6m PBT and 23.5p EPS – a reduction of 6 per cent or so. The shares fell 12 per cent on this news and now trade on a prospective P/E ratio of 5.8 times. Notwithstanding the slight dent to the visibility of earnings we believe the current price represents excellent value and we’ll be filling our little red booties over the holiday season.


Nostra Terra Oil and Gas Group (NTOG 1.06p/£16.27m)

Nostra Terra, the oil and gas group, announced a placing of 318.5m shares this month at a price of 1p per share. The £3.185m raised from the placing will fund the development of the company’s Bloom property in Russel County, Kansas. Under the terms of the joint venture with Hewitt Petroleum, Inc., NTOG will receive 75 per cent of net revenues from the Bloom property until its actual costs have been repaid, and 50 per cent thereafter. The Bloom property consists of nine production wells and two salt-water disposal wells, and is the latest in a series of successful property acquisitions made by the company so far this year. The company has transformed itself over the past five months, and it will be interesting to see if further discoveries will be made similar the oil discovery in its Boxberger site that saw share price soar from 0.57p to 2.20p in the week following the announcement. By building a foundation in an area of low political risk with assets of low geological risk, the company are now positioned for growth.

Oilex Ltd (OEX 10.75 p/£13.91m)
Oil and gas producer Oilex last week advised that on the Loré-1 well, the first of a 2 well program in the Timor Sea contract area JPDA 06-103, the initial wire line run has been completed after the well reached total depth at 3,581 metres. The well intersected the objective Elang and Plover formations close to prognosis and minor oil shows were observed in the Elang section. Preliminary evaluation indicates that there are zones with limited oil saturation in the Elang formation which will be evaluated with further wire line logging. After finishing the Loré-1 well, the “Songa Mercur” will move to the Lolotoe prospect. The prospect is targeting a mean prospective oil resource of 90 million barrels in the primary objective Elang/ Plover formations. The Joint Venture participating interests in JPDA 06-103 are that Oilex have a ten per cent interest. The share price last week fell by more than a third after confirmation that there are no zones of significant movable hydrocarbons in the Loré-1 well, although work is now to commence on the Lolotoe prospect. We are monitoring the news flow from this oil and gas stock.

Rotala (ROL 50.5p/£16.57m)
Another trading update, this time from the regional bus operator Rotala. The company announced trading for the 12 months to 30 November in line with market expectations of  £2m PBT, 7.2p EPS. The company will also now enter the dividend list which took some people by surprise but which has been forecast by Hybridan for a while now.  The difficulties faced by other operators are playing into the Rotala’s hands as it has continued to win new contracts and expand with new bus operations in Bath, Birmingham and Worcester. Customer retention is also a positive; the Heathrow operations were renewed to February 2015 while the group extended contracts with Qantas for an additional 3 years and with Cathay Pacific. This year’s P/E raring of 7x looks attractive but even more so for 2010 where it falls to 4.3x (as debt is repaid and interest payments reduce) and looks very good value indeed. Next stop, Rotala.

Summit Corporation plc (SUMM 6.5p/£3.22m)
UK based drug discovery company, Summit, last Friday announced a placing (on which Hybridan acted as placing agent) to raise £6m gross with new and existing investors. In addition, the Company is looking to raise up to a further £2.2m gross through an open offer to existing shareholders.  The New Ordinary Shares are issued at 5 pence per share representing a discount of approximately 35.5 per cent to the closing price of 7.75 pence per share on 10 December 2009, and despite an open offer having been announced, the shares are still trading above the placing price.

In addition, the Company separately announced that it has been awarded a £2.2m grant from The Wellcome Trust to fund the development of the Company’s infectious disease programme targeting Clostridium difficile. Summit has built a Product Portfolio and an innovative technology platform developing second generation iminosugars for use in drug discovery. In the last 18 months, the Company has demonstrated a track record of technical achievement and commercial exploitation as illustrated by the establishment of the Partnered Product Portfolio.  In addition to the C. difficile programme above, this Portfolio comprises seven drug programmes and requires no further investment from the Company but has contractual success-based development, regulatory and sales milestone payments totaling over $160m plus sales royalties on certain products of up to 13 per cent.

The Placing and Open Offer are intended to provide Summit with financial resources that will last until at least December 2011, excluding milestone payments from existing and new deals. Summit will use the proceeds to fund key activities in the development of the Company’s proprietary iminosugar technology platform; further develop the diabetes and anti-viral programmes; expand the iminosugar collection; and ensure the Company benefits from milestone payments from existing programme deals.

We believe that the enhanced market value after the current fund-raising of £14.4m still looks cheap given everything that Summit has going for it. The directors certainly think so, and between them are subscribing for £250,000 in the placing – 5 per cent of the funds being raised. Summit seems to have managed its options much better than most. It has navigated its way through a crisis, well done to its well regarded Chairman and management team! We imagine that the announced Open Offer will go well too.

*A corporate client of Hybridan LLP

The Hybridan Small Cap Wrap is a weekly review of some of the most interesting small cap stories of the past week.  Our review will usually be of those companies whose market capitalisations are less than £50m although we may occasionally cover larger companies.

07 Dec 2009

This week: A setback for Intelligent Environment, growth prospects for Plant Impact and iPoint-Media misses the point

Bglobal (BGBL 51p/£40.13m)
Smart meter provider, Bglobal, reported its interims to 30 September 2009 with revenues up 116 per cent to £5.8m (H109: £2.7m) driven by an increase in meter installations and that gross margins increased by 7.2 per cent to 33.5 per cent  driven by economies of scale and increased operational efficiency.  Pre-tax losses were reduced to £0.67m (H109: £2.0m) but significantly the company was able to report that it was generating cash at the operating level from September. Net cash stood at £2.4m at the end of November 2009 following a placing to raise £2.25m in November.  Nick Kennedy impressed us in his debut role as the company’s new CFO with his focus on cash and working capital management and he was particularly proud of his working capital efficiency gains which managed to generate net cash in the period of £450,000 notwithstanding the headline loss. On the trading side the group has won significant new customers including Gazprom, which is making a concerted push to break into the UK energy market by offering an all smart metered solution for business users and it seems there is strong business demand elsewhere for the smart meters with an increasing order book. The company also looks to be well positioned to take advantage of the take up of smart meters in the residential market with a “future proof” meter that should meet the regulatory requirements when published over the next 18-24 months. The market continues to forecast 2011 pre-tax profit of £4.5m and EPS of 5.7p, which puts it on 9x earnings which looks very attractive in our view given the market potential and operational and financial efficiencies now in place. Smart one, guys.

GEONG International Limited (GNG 41.5p/£15.7m)

We write for the first time on this China based provider of enterprise content management (ECM) software and solutions, which last week announced its unaudited interim results for the six month period ended 30 September 2009. Revenue was up 26 per cent to £6.5m (H1 FY2009: £5.2m) and net profit was up 137 per cent to £0.84m (H1 FY2009: £0.36m). The net cash position (prior to fund raising of £2.2m gross in September) at 30 September 2009 was £2.4m and the current order book stands at £14.0m (H1 FY2009: £12.9m). During the period, ten new clients were secured within the Information as a Service (IaaS) model, including Qilu Bank, Shangdong Rural Bank Alliance, Dongfeng NISSAN, and China Central Television, and seven new clients secured using the Software as a Service (SaaS) model including Xinhua Insurance, Guangdong Development Bank and EMC.

At an analyst meeting which Hybridan attended, we were party to much talk about a new strategy of ‘Go Deep and Broad’ which was been implemented for the SaaS model, by this is meant delivering larger and longer term projects going forwards, which would ultimately improve the profit margins. Chief Executive, Wang Weidong said: “We foresee our full year results being in line with market forecasts”, which explains the jump in the share price during last week.  In order to improve debtor days, Geong talked of increasing volumes of second tier banks and corporations, which would pay faster than the largest corporations with whom they have relationships currently. The CEO mentioned that the financial sector would remain important for them and that their automotive client business would pick up. Geong has ambitions to broaden out beyond China and aims to be the Asia Pacific leader in the ECM market, not just in China. We will continue to watch this one.

Herencia Resources plc (HER 0.61p/£5.17m)
In a project update Herencia announces that a new drilling programme has been designed for its Paguanta zinc-lead-silver project in northern Chile.  Following the successful recent fund raise the company is now approaching drilling contractors with a view to commence drilling in February.  If everything proceeds according to plan, Herencia should be in a position to publish an updated mineral resource estimate by mid-year and initiate a feasibility study in the second half of 2010.

Hightex (HTIG 7.75p/£11.6m)
Hightex, the designer and installer of large membrane roofs and façades worldwide, has announced a placing to raise £2.7m at 7p per share in order to strengthen the company’s balance sheet and provide working capital for future growth. The company has really started to motor this year with its strategic change focusing on large, high margin contracts and has posted a profit for the first time since flotation. The second half of this year has seen two significant high profile contract wins: these are the Warsaw and Kiev contracts, which have a combined value in the region of EUR32m.  Market expectations are for a pre-tax profit of EUR2.6m next year with earnings per share 0.9p putting the company on a current rating of 8.6 times.  A fair rating in our view but certainly one to buy on any weakness.

Intelligent Environment Group plc (IEN 9.75p/£15.85m)
In what is likely to be a temporary setback for the online software provider for financial services, Intelligent Environment has issued a profit warning as a customer has cancelled a significant order for the company’s NetFinance platform.  This is due to the customer merging with another financial institution and putting all major projects on hold.  Until Intelligent Environment reaches a certain level of orders and customers, the revenue will be volatile and events like this will be unduly noticeable.  However, the company is able to offer attractive cost saving solutions to the financial services industry including non-financial customers such as retailers as well as traditional banks and savings institutions.  We think the company’s transactional revenue model will turn out to be a successful strategy in the longer term.

iPoint-Media (IPNT 2.25p/£3.12m)
iPoint-Media which provides live interactive video applications and content delivery platforms for web and 3G mobile, has announced that a Chinese national MobileTV operator has selected its new product GOliveStudio for immediate deployment at the company’s workstations . The contract represents a few hundred thousand $ in revenue for iPoint for software licenses and services. However, this good news is outweighed by a profits warning that the company will report materially lower earnings and a pre-tax loss of around £0.5m because two major contract decisions have been delayed until 2010. While the fact that it is achieving traction from a leading Chinese National MobileTV company bodes well, it is at a delicate stage where it is heavily exposed to one or two major contracts.  Not surprisingly, the shares have come off strongly down 35 per cent to 2.25p against the offer price of 4p under the company’s open offer of this summer when it raised £1m. As this company has missed every forecast since its IPO five years ago last week’s news was not the greatest surprise in small cap land.  The wonder is that this summer’s investors seemed to have missed this point.

Offshore Hydrocarbon Mapping (OHM 7p/£4.87m)

We write for the second time and the second week running on this provider of remote electromagnetic offshore oil and gas sensing services, which last week announced that it has been awarded one of its largest rock physics and seismic inversion projects to date, with an order value approaching $1m for a client operating in West Africa. Work on the project is expected to commence in January 2010. Since the start of 2009, OHM has been awarded approximately $3.5m of seismic inversion project work in West Africa, which is an up and coming region for OHM and indeed which is an active area in general. We like OHM’s shift in focus and its restructuring and cost cutting should position it well going forward. We expect to see more deals from its new relationship with the Chinese bureau of geophysical prospecting.

Plant Impact PLC (PIM 32p/ £9.74m) *

Developer and marketer of ecologically friendly crop nutrition and crop protection products announced on 7th December its interim results for the six months ended 30 September 2009. Turnover was £969,554 (2008: £225,287), primarily from sales of nutrient products in the USA and the milestone payments for BugOil, giving an operating loss of £879,381 (2008: £1,300,464), whilst cash at the period end was £1,584,942.

Pi recorded a number of important achievements during the six months under review. These achievements include entering into a licensing agreement for BugOil, the Group’s pesticide product, with Arysta LifeScience Corporation (ALS) under which it has received the first regulatory milestone payment, and signing an extramural agreement with the United States Department of Agriculture for extensive trials on PiNT, the Group’s nitrogen delivery technology. Plant Impact has continued to experience commercial growth in both its BugOil technology and crop nutrient products. The next regulatory milestone for BugOil is the UK approval which is anticipated during the first half of 2010. Crop nutrient sales continue to grow especially in the key territories of the Americas and Europe.

During the period the Company recruited an additional salesman in Spain and has subsequently added a business development manager for the Americas, who brings 30 years of industry experience. A number of strategic initiatives have been undertaken during the period including a collaboration agreement with CEM Analytical Services Limited (CEMAS) in June 2009, the establishment of the Plant Impact Scientific Advisory Board in September 2009, and the appointment of the Group as a Member of the Parliamentary Science Committee to the House of Commons in July 2009. After the period end, in October 2009, Pi received approval under the European Framework 7 grant process for a grant to assist in development of its nematicide technology. The grant is for €1m and Plant Impact is the nematicide technology provider and coordinator of a consortium of seven members with approximately €300,000 payable in respect of Plant Impact’s contribution to the consortium. Plant Impact continues to improve its patent portfolio, with two patents granted in the UK in 2009 on the Alethea technology.

Field trial development continues in Europe, the USA, Central America, the Middle East and Africa. The objective is to expand both geographically and in the number of crops. The trials focus on high value fruit and vegetables, ornamentals and nuts. Since the period end, and announced by Pi last week, the Company received the final field trial results from Eurion Consulting on melons, cucumbers, tomatoes and lettuce using InCa (from Plant Impact’s CaT technology). The key findings included a 41 per cent increase in marketable yield for standard melons, a 50 per cent in marketable yield for standard tomatoes, a 22 per cent increase for standard cucumbers and the fresh weight of lettuce was 9 per cent better than standard and 12 per cent better than competing products.

Even discounting material revenue growth going forward, we believe Pi has sufficient capital to comfortably fund the next 18-24 months, at current operating levels. We see Pi’s continued commercial, strategic and technological developments as greater indications of the company’s value than near term performance – especially given the difficult trading conditions ongoing across the agri-business value chain. We forecast Pi will reach profitability in 2011, and believe that it will continue to generate plenty of news flow along the way.

Serabi Mining Plc (SRB 1.8p/£5.33m)
Serabi announced that an additional £317,274 was raised as a result of the northern Brazilian gold mining company’s open offer to shareholders to participate on equal terms to a previously announced £2.4m private placing.  In addition, three board directors have subscribed for a total of £82,000 at the placing price.  Serabi now has sufficient funds to initiate the first stage of its exploration programme.  The company has identified a number of targets and will use the funds to prioritise and drill 4-6 of them next year.

*A corporate client of Hybridan LLP

The Hybridan Small Cap Wrap is a weekly review of some of the most interesting small cap stories of the past week.  Our review will usually be of those companies whose market capitalisations are less than £50m although we may occasionally cover larger companies.