Small Cap Wrap: Month: July 2010

AIM Breakfast - Archive

21 July 2010

This week: Jubilee’s delightful new venture, Eden offers rich pickings and ValiRx validates 
Angel Biotechnology Holdings (ABH 0.24p/£5.10m)
Specialist contract manufacturer of advanced biologics has announced its interim results for the six month period ended June 30th, 2010. The Company made a net profit in H1 2010 of £106,737 and expects this trend to continue and looks forward to announcing a net profit for the full year 2010. Net liabilities have reduced from £1.6m (Dec 09) to £100,000. Eight new contracts were signed and two contracts were extended in the period, with a total value of more than £3.3m. More than 92 per cent of 2010 budgeted business has been signed and almost 40 per cent of the business budgeted for 2011. Three of the new contracts signed were specifically to provide regulatory support. Angel successfully raised £1.425m in the period to provide working capital and to facilitate an expansion of the companies resource and appointed Lorna Peers as Group Financial Controller and Company Secretary. Angel is actively assessing its options to increase its manufacturing capacity. Whilst the share price has moved up with this announcement of profitability, it had fallen below the placing price that institutional investors were willing to pay for access to Angel’s wings, although is currently back at the placing price.

Cubus Lux (CBX 16.5p/£3.56m)
The Croatia-focused leisure resort operator and developer announced the raising of £325,000 through the issue of 2.32 million shares at 14 pence per share. Gerhard Huber (Executive Chairman), Christian Kaiser (Director) and Steve McCann (CFO) have all participated in the placing. Management investment is usually seen as a good sign and we see this as a positive move for a company that continues to develop its operations in Croatia. The Company’s uncapped casino operator’s licence in Croatia was extended for a further 5 years at the end of 2009, and allows for expansion opportunities given that it now permits online gaming. With continued development in Croatia and Montenegro, Cubus Lux looks to have good fortune, although unfortunately the Company’s share price will be held back by the City until bank finance can be secured.

Eden Research (EDE 13.5p/£8.33m)
The Technology Strategy Board recently ran the competition “New Approaches to Crop Protection” where £13.5 million of funding was allocated to several firms including two projects incorporating Eden Research’s technology.  Eden, an agrochemical development company, contributed its nematicidal formulations to Certis Europe, and its patented encapsulation technology with biocidal terpenes to a project led by Berry Garden Growers.  Other project partners include McCain Foods, PepsiCo International and Sainsbury’s.  We believe this further validates Eden’s technologies and products.

Jubilee Platinum (JLP 27.5p/£69.98m)
Jubilee Platinum plc, an AIM listed company engaged in the exploration of natural resources in South Africa (focusing on platinum group elements and nickel/copper), recently announced that they have entered into a Memorandum of Understanding to establish a joint venture with Northam Platinum Limited. Northam is the only fully independent and controlled integrated platinum group metals producer listed on the JSE. Together they want to evaluate the construction of a furnace incorporating Jubilee’s ConRoast smelting technology.
ConRoast is a robust, clean and safe DC-arc smelting process for treating high chrome-bearing platinum concentrates from UG2 reef ore and has established itself as an environmentally friendly smelting solution for PGM containing concentrates. Further, Jubilee is looking to explore nickel/copper in Madagascar which is held in a deferred joint venture with Impala Platinum Holdings, the second largest PGM producer in the world. Jubilee announced some interesting news this year and we will definitely continue to watch this company.

Judges Scientific (JDG 226p/£9.43m)
Judges, another specialist Company in the scientific instrument space like SDI, has issued a very positive trading update covering the half year to 30 June 2010. The healthy order book at the beginning of the year has grown further due to a strong order intake and favourable exchange rates. The order intake during the period was materially higher than in the corresponding period last year, resulting in a higher overall level than at the half year end in June 2009.
The results for the period, when published, will include contributions from Quorum (acquired in June 2009) and Sircal (acquired March 2010) and expect noticeable earnings upgrades by analysts to follow immediately afterwards.
The management appear to be able to balance the acquisition of additional businesses as well keeping their hand firmly on the tiller with regard to existing customers – an uncommon talent in the small quoted arena. We continue to recommend the shares.

Omega Diagnostics Group (ODX 20p/£4.13m)
This is our first time of writing on Omega, a medical diagnostics company. The recently published results for the year ended 31 march 2010 included a 14 percent rise in turnover to £6.2m (2009: £5.4m) with gross profit up only 8 percent to £3.6m (2009: £3.3m), adjusted profit before tax of £0.59m (2009: £0.54m) and a decline in pre exceptional earnings per share to 1.0p (2009: 2.0p) which is disappointing. Net cash was essentially flat.
We would question some of the management’s strategies – for example the recent acquisition of Co-Tek (South West) Ltd, which in our view decreases the overall quality of the Group’s operations and increases its exposure to business risks. We regard this acquisition as unnecessary and not in the long-term interests of shareholders.
However, to a discerning eye the Company commands attention. The key products are Food Detective™ and the increasingly important Generrayt™ (sales of £1.04m in the year, up 44 percent). In addition, Omega has a host of other high quality products and diagnostic systems that have the potential to accelerate growth in the top line and correspondingly in earnings per share. The logical question is whether the current management have the ability and experience to deliver in this regard and whether investors have sufficient patience with them.
We would not be surprised to wake up one morning to find that the Company is on the receiving end of a bid. A share for bid an aficionados and acquisitive companies in the same space.

Scancell Holdings (SCLP 72.5p/£11.55)
The developer of therapeutic cancer vaccines announced its results for the 12 months to the end of April 2010. The Company posted an increase in losses for the year of £1.7m (2009: loss of £0.8m), much of which is due to increased costs of development, whilst nil revenue continues to be recorded for the company. Interestingly Scancell holds £2.8m in cash (2009: £1.5m), with the increase being due to a fund-raising made during the year- much of which is to be used to facilitate the continuing development of SCIB1. During the period the Company announced a series of development deals that has resulted in significant costs being categorised within cost of sales- a deal was signed with Ichor Medical Systems in July 2009 for the use of its electroporation device during pre-clinical studies of SCIB1, another was signed with PharmaNet Development Group in November 2009 to run SCIB1 clinical trials, whilst the Company also manufactured SCIB1 to GMP standards during the period which also impacted.
Scancell also announced its intention to move from PLUS to AIM by 30 July 2010. This represents a bold move for the company, and one that we thoroughly endorse given the progress being made by the Company in its development of SCIB1. With such a committed approach to development, this is perhaps one to hold on to.

Scientific Digital Imaging (SDI 22p/£3.96m)
SDI, a specialist Company in the scientific instrument space (similar to Judges), recently announced its results for the year to 30 April 2010. The salient details were Revenue up 6.4 percent to £7.2m (£6.8m); Gross Profit percentage of 59.7 percent, up from 56.4 percent; Profit before Tax of £258k (£57k); and fully diluted EPS of 1.46p (0.04p). The foreign exchange impact was negative in the year to the tune of £23k, which when compared to the positive impact last year of £183k, puts the profit before tax improvement in an even more impressive light.
It is interesting to note that although profits were up, the year-end cash balance was virtually unchanged – this is reflected by an increase in administration expenses and probably included an increase in sales & marketing costs, which would be welcomed if it is the case.
Over 90% of the Group’s revenues are generated by the Synoptics subsidiary whose customers are generally involved in long term projects and where funding is allocated on a long-term basis. Whilst this provides a buffer during the earlier phases of an economic decline, it can hamper performance in the following upswing. For this reason and the fact that government agencies have often been a source of such research contracts, we would expect the Company to redouble its efforts to identify and secure additional businesses to augment the Group’s operations and mitigate any potential revenue declines going forward. We believe that the Company will not suffer the pitfall that has befallen many companies that have embarked on a “buy and build” strategy – that of concentrating on acquiring new customers and businesses rather than maximising efforts on their existing customer base. We expect the Company to deliver positive news on this front in the near future and are therefore buyers of the shares now and on any such acquisition moves.

Surgical Innovations Group (SUN 3.52p/£13.18m)
Surgical Innovations, who develops minimally invasive surgery tools and devices, has received a Court approval for offsetting accumulated losses against the share premium account.  This allows the company to create a new reserve of approximately £3 million which, if desired, could be distributed as dividends.  Until now Surgical has been unable to pay a dividend.  While the company is experiencing strong growth and is likely to reinvest cash into the business or take advantage of acquisition opportunities, this is nevertheless an attractive option to have available and could attract additional shareholders to the register.

TyraTech (TYR 15p/£7.03m)
Trading in TyraTech shares has been somewhat cumbersome due to their Regulation S status which restricts their marketability and requires physical settlement.  There is now good news for current and prospective owners of TyraTech as the company is creating a second line of stock that will be unrestricted with trading symbol TYRU.  All eligible shareholders will be contacted and invited to convert their holding to the new line which should start trading around the end of August with settlement through the CREST system.  One less irritation should help increase liquidity in TyraTech’s shares.

ValiRx (VAL 0.28p/£0.93m)
AIM listed cancer diagnostic biotech company announced that its human papilloma virus (HPV) smear test to detect the onset of cervical cancer in women has now begun clinical sample validation. To date, this molecular diagnostic test has been developed and analytically validated or proven to work in the laboratory.  A clinical study has now started to validate its diagnostic capability and reproducibility of results in women. Thereafter the process will start for regulatory approval and marketing.  There are about 20,000 new HPV cases a year within the EU and ValiRx is developing a user-friendly HPV test for screening HPV infection.   The ValiRx test has been developed to give a clear positive or negative result as to the presence of high risk HPV subtypes which are likely to cause cervical cancer and it is testing the high risk subtypes that are the major issue for predicting the risk of cervical cancer. The virus has been shown to be present in more than 99% of cervical cancers and has been shown to be the primary cause of this condition. In contrast to the conventional Pap smear testing, the HPV test is inexpensive, and its results are both speedy and give an easy to read indication of how developed the cervical cancer might be.   Pre-clinical studies indicate that the combination of the HPV test with the Pap smear test provides close to 100 per cent accuracy of diagnosis. We have written on ValiRx recently and remain keen on the stock.  It seems an anomaly that the price remains static considering the recent good news and we think this is a key opportunity to buy before the rest of the market realises the well diversified potential of the Company.

*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.

13 July 2010

This week: Angel’s a delight, go far with Bglobal and SureTrack paves the way

AH Medical Properties (AHMP 31.5p/£20.68m)
Since we last wrote on the Company, the opportunistic bid approach has been successfully rebuffed and £2m has been raised in the form of a convertible loan to facilitate the acquisition of 3 new primary healthcare properties, along with bolstering working capital.
The convertible has a 2 year term, an interest rate of 6 per cent and a conversion price of 38 pence. The three primary care properties are to cost £9.8m in total and between them will produce a gross initial yield of 6.75 per cent (£661,661). This looks a very judicious use of funds.
With a published NAV of 42.8p as at 30 April 2010 (up 50 per cent on 2009) and a historic yield on the shares of 4.76 per cent the shares look very attractive. If one factors in the NAV of 45.9p per share should Management achieve the conversion of the Company to REIT status, we would expect the shares to outperform over the rest of this year, as they appear to us to be materially undervalued.

Angel Biotech (ABH 0.22p / £4.53m)
Angel, the contract manufacturer which provides extremely high grade materials for the biotech industry, recently announced the appointment of Lorna Peers (FCCA) as Group Financial Controller and Company Secretary (taking over from Roger Jones on the 1st August). Lorna was previously Financial Controller and Company Secretary at Stem Cell Sciences Ltd and is therefore familiar with the advanced biologicals field, and has experience of the dynamics and deal structures particular to the biopharma sector. She is expected to be appointed to the Board as Finance Director within the next 12 months. With her varied experiences, strong reputation and in-depth knowledge of the industry, we feel that Lorna’s appointment is a most suitable one.

Bglobal (BGBL 36.25p/£35.96m)
The provider of smart meter solutions announced its results for the year ended 31 March 2010. Revenue increased by 99.3 per cent to £13.23m, and an improvement was seen in losses before tax which was £0.67m for the year (2009: loss of £4.28m). Whilst admin costs were brought down by £0.7m to £4.95m, high cost of sales continue to result in low margins, though this has improved to 33 per cent (from 23 per cent). The Company recently acquired Utiligroup, which represents an exciting opportunity to broaden Bglobal’s appeal. Utiligroup has a strong Australian customer base, and the acquisition allows Bglobal to offer end-to-end solutions for its key markets, namely the UK, Continental Europe and Australia. Utiliserve (an IT service division of Utiligroup) prospectively enables Bglobal to provide advanced data management and billing platforms, thereby allowing customers to potentially benefit from a more comprehensive end-to-end range of solutions/services. Such strategic acquisitions are valued highly by the market, and given the evolving nature of the industry, provide Bglobal with a real advantage in striving for new business. The coalition government is yet to announce its strategy on domestic smart metering, but there is much potential for Bglobal to make significant in-roads into a potentially lucrative market.
Datum International (DATP 9p/£4.58m)
We last wrote on this PLUS-quoted software Company in early January and the share price has risen 2 pence since then. This morning Datum announced a positive trading update to the effect that revenues, excluding those generated from the acquisition of Root 3, have increased by over 100 per cent compared to the corresponding period last year. Datum expects to announce maiden profits that are ahead of current market expectations in its FY10 results to 31st April 2010. Post the year-end it has made further progress, in particular, the successful integration of Root 3 provides the Company with the capability to bid for and win projects of a significantly higher value than was previously possible. The board of Datum has stated that it is therefore confident of continued strong trading during the first half of the current financial year and beyond. We believe that DATP trades at a discount to its peers and the software sector. The market expects Datum to continue with its current buy and build strategy so therein lies the potential for upgrades in 2011.
Gulfsands Petroleum (GPX 281.75p/£341.07m)
Oil and gas production, exploration and development company with activities in Syria, Iraq, Tunisia, Italy and the U.S.A. has announced that ADX Energy Ltd, the operator of the Kerkouane Exploration Licence offshore Tunisia (Kerkouane Licence), has advised of the commencement of drilling operations on the Lambouka-1 well on the Lambouka Prospect in the Sicily Channel. ADX Energy has estimated the mean prospective resource for the Lambouka Prospect at 270 million barrels oil equivalent with the primary objectives for the well being the Miocene aged Birsa Formation and the Cretaceous aged Abiod Formation. Drilling of the Lambouka-1 well is being carried out by the Atwood “Southern Cross” semi-submersible drilling rig and it is expected to take approximately 35 days to drill and evaluate this well. Gulfsands is acquiring a 30 per cent participating interest in the Kerkouane Licence and the adjacent Pantelleria Permit which lies in the Sicily Channel in Italian waters. This company’s share price has had a fantastic run over the past year, almost doubling, and has had a great start to 2010. We have been impressed by the management behind this company and think that it has a long way to go still. The share price was at 322 pence when we last wrote on the Company at the end of April, and come off a tad since then, but the fundamentals are strong for this stock.

IDOX (IDOX 11.75p/£39.99m) 

IDOX, the public sector software provider, last week announced its interim profits for the six months to 31 April 2010. Its operations are split between 3 businesses: Software, Information Solutions and Recruitment. The results look good with pre-tax profits up by 14 per cent to £2.1m and recurring revenue now comprising 61 per cent of total revenue. Gross margins for the Company are also particularly high, currently at 81 per cent (2009: 76 per cent). The Company also made two revenue enhancing acquisitions during the period- Grantfinder which provides value-added databases for government and EU funding information, and MDA which comprises 11 local authority contracts. Whilst this is very positive news and shows the Company’s willingness to broaden its offerings, a number of difficulties suggest to us that the Company may have a rocky road ahead. Firstly, it has a high cash figure sitting on the balance sheet at £14.2m (2009: £9.8m), which it intends to hold for acquisitions that have strong recurring revenues, though it appears the Company is struggling to find suitable opportunities. Secondly, public sector spending cuts announced by the new coalition government look to provide a challenge to the Company in the near-term future. Whilst cuts at a national level are likely to have a smaller impact at regional levels, the Company will still see a market which is more limited, and therefore must address such an outlook with strategic acquisitions that allow it to focus on areas that include recurring revenues. Whilst we have seen the results of the Budget in June, we look forward to the comprehensive spending review in October, which should provide a more detailed plan of public sector spending, and therefore allow us to paint a clearer picture for the Company’s prospects.

Immunodiagnostic Systems Holdings (IDH 791p/£220.33m)
The immuno assayer announced results for the 12 month to 31 March 2010. The company operates in the in-vitro diagnostics market, manufacturing immunoassay kits for detecting particular substances in a sample. Performance was most positive in that revenue for the Company was up by 49 per cent to £37.16m, gross margin was up to 74 per cent (2009: 66 per cent) and PBT up 130 per cent to £10.99m. It recently received FDA approval for the iSYS automated platform, which should allow it to compete more fully in the US market, with its main competitor likely to be DiaSorin. Whilst the Company continues to make significant earnings from sales of manual assayers, it seems that the Company sees the future being with automated assayers, which are anticipated to outstrip the manual assayer within 3 years. There has also been something of a restructure, with the COO (Ian Cookson) being appointed the new CEO, and the current CEO (Roger Duggan) becoming the Deputy Chairman who will head up the Business Development Group. This represents an interesting move that will no doubt ensure that a well-rounded and understood CEO continues to be in place. The Company has also identified two new areas of diagnostics that it sees great potential with: Chronic Kidney Disease and Vascular Calcification, where it intends to progress its business. FDA approval is a key milestone for the iSYS platform, and we see the company providing strong competition for DiaSorin in the coming year. Watch this space for a company we see going places.
Polo Resources (POL 5.15p/£119.32m)
We have been keeping a watchful eye on Polo Resources (“Polo”) for some time and have been bemused by the persistent discount at which the share price trades compared to the value of the Company’s underlying assets.
On the 19 March, with the share price around 3.75 pence, Polo owned the following: 9.3 per cent of Extract Resources valued at US$169.4m; 26.1 per cent of Caledon Resources valued at US$38m; 29.8 per cent of GCM Resources valued at US$32.5m; US$10.8m of Caledon Resources 8.5 per cent convertible loan note; 50 per cent of a JV company with Peabody (holding uranium and coal assets in Mongolia); and US$27m in cash. The cash and quoted investments had a total value of US$277m or 6.43p per share. Since that date, the Company has sold its shares in Extract Resources for US$ 137.3m, along with its 50 per cent interest in the Peabody/Mongolian JV for US$15m up front with an additional $20m deferred for 12 months whilst retaining a net 0.5 per cent royalty on coal mined and sold.
Latest Company news includes additional share purchases by the Chairman, an announcement that the Company is minded to pay a 3p per share special dividend and an opportunist bid from one of its shareholders (the bid has understandably been rejected out of hand since it is too low and not in a form that could command any consideration of acceptance).
Attention will now focus on how the company will maximize its strategic positions in GCM Resources and, in particular, Caledon Resources. The latter owns not only a producing mine, but also Minyango, a very attractive coking coal deposit in Queensland Australia. It is this asset that we believe will be the focus of interest both for investors and commercial organisations. We will write on Caledon in a future issue and in the meantime will continue to consider shares in Polo as materially undervalued.
Rockhopper Exploration (RKH 327p/£629.56m)
The North Falkland Basin oil and gas exploration company announced last week that its Executive Chairman, Pierre Jungels, had increased his shareholding in the company by 23,350 shares. Rockhopper has moved from strength to strength since the beginning of the year, having made an oil discovery at its Sea Lion exploration well and, last week, presenting a new analysis of wireline MDT samples obtained from Sea Lion that is helping to confirm a medium grade crude oil. Share price has risen from 38.5p at the end of May to 327p as of today. Management investment is usually seen as a good sign of confidence, and we have no reason to suspect otherwise in this particular case. Having put considerable time and resources into exploring this site, Rockhopper’s good fortune is well deserved. A gushing success, we think.

SeaEnergy (SEA 20p/£13.82m) 

We have written extensively on this AIM listed offshore wind company over the last 10 months, with a number of key events having taken place. In particular, the intention to dispose of all, or part, of its 80% stake in SeaEnergy Renewables Limited (SERL) signaled a bold restructuring initiative.  There are a number of interested parties looking to acquire the SERL business, and whilst SeaEnergy has appointed advisors to oversee the sale, SERL continues to announce respectable news that should see a good valuation for it. The Inch Cape offshore wind farm project continues to present increased opportunity for the division, whilst this week it announced a Strategic Co-operation Agreement (SCA) with the Chinese company Nantong COSCO Ship Steel Structure Company to develop and market steel structures for the offshore wind industry. On the back of such news, we can’t help but notice the good prospects for SERL and place question over the need to sell such a division. Nonetheless, the market should reward such good news, though we continue to hold our sentiment over the last few weeks that this particular offshore wind company undeservedly faces testing waters.

Seeing Machines Limited (SEE 3.0p/£12.17m)
Last week we wrote on Seeing Machines, the leading developer of advanced computer-based imaging software systems, and since then they have announced the sale of their first faceAPI licence to Di-O-Matic Inc. who operate in the computer graphics animation sector. faceAPI allows world-class face tracking algorithms and will be used by Di-O-Matic to develop character animation software and plug-in applications for professional 3D animation artists and production studios based on dynamic man-machine interfaces. Clients include Disney, RockStar Games and SEGA, and the software has been used to enhance and animate CG characters such as Batman, Garfield, Spider-Man, and SpongeBob SquarePants. Animation represents a large and growing market, and the technology has great potential in the gaming industry, perhaps similar to the motion sensing technology used by Nintendo in their Wii console.
The Company made a second announcement today that it had sold an API tracking software license to Pillar Vision, which is a developer and vendor of basketball training products. Their products and devices are designed for the mass market and are used by basketball players in their training environment to assist and improve goal shooting and performance.
Seeing machines develops technology that can be utilised in many different applications, and this has been clearly demonstrated by the news we have seen over the last week. On this basis, we think the Company’s offering has a wide range of addressable industries, and look forward to seeing what happens next.

SureTrack Monitoring (STMP 0.75p/£3m)
SureTrack Monitoring, the asset protection, cash security, crime deterrent and tracking business, announced last week its intention to raise £1.42m (at 0.6p per share) and its admission to trading on AIM. A blue-chip client base including Ford, Network Rail, WS Atkins and UK Mail, and an innovative product base together with its desire to expand stand the Company in good stead.
The MT2 device is the Company’s core product and offers a degree of flexibility and long-term continued service that rival trackers struggle to compete with. The uniqueness of the MT2 product is down to a number of features, which include the fact that its uses GSM technology for tracking (allows tracking inside multistory car parks and inside buildings), and that the product uses a disposable battery (with a lifespan of up to 3 years) which allows the device to be hidden more remotely or to be attached to a wider variety of assets/products. This ingenuity allows for SureTrack to have a wider potential market than most other tracking companies, and SureTrack have identified caravans, plant equipment, agricultural equipment, light commercial vehicles, passenger vehicles, retail, casinos, cash-in-transit, and ATM machines as some of its addressable markets.
Sales of the product have been conservative, and so too have estimates, though with the Ford contract now in place and the Company’s intention to raise capital so as to expand, we see plenty of scope for growth. This is one Company that looks to be on the right tracks.

Technis International (TECP 1.75p/£1.43m)
PLUS quoted Telecoms and Technology IP play recently announced the acquisition of a 10% share in BeCognitive Systems Ltd, with consideration of £25,000 (payable by Technis shares at £0.04 per share). BCS provides security and compliance cloud based telephony applications, with operations based on the iPhone platform, though it intends to widen its mobile application suite to include Blackberry devices later on in the year. In what is considered to be an increasingly consolidated market, this particular investment represents a positive move, and allows the Company to develop its knowledge of this dynamic industry. An interesting development, with great potential.

Tower Resources (TRP 2.55p/£25.68m)
Tower Resources, the oil and gas exploration company with interests in sub-Saharan Africa, provided an update on its operations in Namibia. Tower has a 15 per cent interest in the 0010 licence where a 3-d seismic survey was recently undertaken, and for which processing and interpretation should be complete in early 2011. Further the Company announced an independent appraisal of the licence’s resource potential, which was conducted by Oilfield International. The appraisal concluded that Towers 15 per cent interest has an economic monetary value of US$696m, of which US$480m can be attributed to the Delta Prospect and the Delta Lead, both targets for the first well to be drilled. In conducting the appraisal, Oilfield have used seismic and well data from two wells drilled in the early 1990’s (together with a judgement of its relative specialities), as well as regional data and data from two Namibian discoveries. They also consulted with Arcadia Petroleum, who are financially carrying the licence, to understand the technical approach of the drill. This independent appraisal bodes well for the Company, and supports the good prospects for this site. The share price has increased from 1.32p when we last wrote on the Company in early June to 2.55p as of today. With news such as this and the recent agreement with Global Petroleum Limited for it to have a continuing option to participate in the Uganda project, Tower could have a bright future ahead. Look high and wide for this one.
*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.

06 July 2010

This week: A model to behold with 3D, rest assured with NCC and advance yourself with TyraTech

3D Diagnostic Imaging (3D.P 16p/£17.28m)
Last week PLUS quoted 3D Diagnostic Imaging’s CarieScan division announced that it has signed an exclusive agreement with Patterson Dental, for the distribution of the company’s CarieScan PRO in the USA. 3D Diagnostic Imaging operates through its wholly owned subsidiary, CarieScan Limited. CarieScan has launched a dental caries detection device, the CarieScan PRO, which offers early detection of caries. The CarieScan PRO can measure the carious state of teeth early to initiate remedial (preventive) treatment. It also enables detection of the hidden lesions extending into dentine. Patterson Dental is the largest distributor of dental equipment in North America with revenues in the 2009 financial year in excess of $2.1bn. The USA is considered to be one of the World’s largest homogenous dental markets and is served by over 165,000 dental practices. The share price increased from 15.5p to 16p on the news. In fact the share price has nearly doubled from 9 pence when we last wrote on the stock in May 2010.
Elektron (EKT 22p/£19.6m)
This is the first time that we have commented on Elektron, although it has been on our radar for a little while.
Elektron plc is a technology based provider of engineered solutions, with a particular emphasis on high margin products for global markets.
The company invests significant sums in both in-house innovation (£1.8m budgeted technical spend for the current year) and in third party independent companies that possess technologies management considers attractive and of potential benefit to the group’s entities.
The company released its results for the year ended 31 January 2010 on 10 June which showed that whilst its sales had fallen from £35.6m to £29.9m, a loss of £2.03m was turned into a profit of £291,000. This performance was all the more remarkable in light of the fact that it occurred during a period of severe market distortion and economic depression. This turnaround is a direct result of the material transformation of the group’s operations caused by the cost cutting actions taken by the foresighted management team at the beginning of the downturn.
It is worth noting the significant improvement in gross profit margins over the 6 months to Jan 2010 compared to the same 6 month period a year earlier, from 29.2 per cent to 43.2 per cent.
With regard to the balance sheet, in the financial year to 31 Jan 2010 the group generated £2.9m of cash from trading operations (before restructuring and exceptional costs of £1.3m). Assuming an increase of £400,000 in working capital on the back of higher sales, then net gearing of £3.4m should be far from a concern of investors. With such positive cash generation, we are surprised that the company utilises expensive invoice discounting for its day-to-day working capital requirements. In fact, we would go further to say that in our view management should consider weaning itself off its invoice discounting facilities in priority to considering an interim dividend.
On 5 July 2010 the company released a trading update stating that pre-tax profits for the half year to 31 July 2010 “are expected to be significantly ahead of management’s expectations”. It went on to say that the Board continues to be cautious. To put this in context, it is worth noting that the trading update at the beginning of April 2010 highlighted the fact that the pickup in trading in the final weeks of the financial year had continued since the year end. This improvement, despite the caution demonstrated by management, looks as though it is a trend rather than an aberration.
If there is one area of concern, it is that in some parts of the group, management is “extremely stretched” to quote the Chairman’s Statement. This is a problem that we are sure that the Board is addressing and would not be surprised if the company’s Directors have not considered the benefit of additional management that a suitable acquisition can provide.
We recommend investors to take a closer look at this exciting company as it is, in our view, undervalued by the market.

EnCore Oil (EO. 54p/£156.7m)
EnCore has yet again released further positive news regarding the recent discovery at the Catcher exploration well located in the UK Central North Sea block 28/9, this time from the south-west side-track appraisal well.  Initial tests indicate a hydrocarbon column of 173 feet.  Whilst the current phase of the Catcher area drilling programme is complete, the consortium is discussing further exploration drilling later in the year.  In the meantime, investors should remember the recent experience and keep in mind that lack of news does not equal lack of value.  EnCore and its partners have most likely established a very important new North Sea discovery with significant upside potential.  Should the share price start drifting over the next few months, it could be well worth taking a second look at analysts’ revised reserve estimates.  EnCore will do it again.

Herencia Resources (HER 0.625p/£6m)
Excellent assay results from Herencia’s Paguanta zinc-lead-silver-gold project in Northern Chile keep coming back from the lab.  Results from a further four holes in the current drilling programme are very encouraging as new and broad zones of high grade mineralisation is being intersected.  Particularly, one of the drill holes, PTDD049, points to either a 300 meter eastern continuation of the New Vein (previously announced), or an entirely new mineralised vein.  Final drilling will take place in early July with assay results expected by the end of the month.  An update of the mineral resource estimate is expected by early September which would allow Herencia to move to a Feasibility Study phase in the fourth quarter of 2010.

NCC Group (NCC 430p/£144.9m)
NCC Group, the Escrow and Assurance services business, announced their final results for the year to 31 May 2010. The company provides independent IT assurance to public and private sector companies worldwide in the form of Escrow, penetration testing (including software, website and security) forensic investigations, IT security research and audit/compliance services.
Revenue for the company pushed up by 15 per cent to £53.7m and pretax profits by 18 per cent to £14.5m, with the company displaying sound and promising performance given market conditions. Further, the company was able to announce a dividend increase by 16 per cent to 10.75p per share- a very admirable feature of the year’s results. Acquisitions during the year appear to be well thought out, with SDLC offering widened Assurance capabilities and a sound client base, whilst Meridian delivers a complementary set of capabilities to the company’s well established ethical security testing service. We also appreciate the company’s willingness to recognise and move away from areas of operation with less promise (with the company reducing its IT advisory service) and invest in practical aspects of its business with £1.5m of its capital expenditure for the year being used to update the company’s IT systems.
IT assurance continues to be a growing and important element of modern business, and we see no reason for such trend to change. Rest assured, NCC looks to be in a comfortable position, and market sentiment should reflect this in the near term.

Rockhopper Exploration (RKH 298p/£573.72m)
We last wrote on the North Falkland Basin oil and gas exploration Company three weeks ago. Last week the company presented new analysis of wireline MDT samples obtained from the recent Sea Lion 14/10-2 oil discovery well in the North Falkland Basin.  Samples analysed under reservoir conditions in a specialist laboratory are confirmed as medium grade crude. Sam Moody, Managing Director, commented:  “These positive results, when combined with our knowledge of reservoir quality from logging data, give us further comfort that a flow test of the Sea Lion well will confirm a mobile crude oil.” Rockhopper has risen from 38.5p at the end of April 2010 to 299.25p as of today. The company has demonstrated excellent progress since its inception in 2004, and we see this continuing well into the future. Dig deep and hold on to this one.

Seeing Machines (SEE 2.75p/£11.16m)
We last wrote on Seeing Machines, the leading developer of advanced computer-based imaging software systems, back in April of this year where we commented on a new contract to supply DSS driver monitoring equipment to the Safford mine in Arizona (in addition to the Grasberg mine in Indonesia back in March 2010). Low and behold, the company strikes again with a new DSS mining contract- its biggest yet- at the Morenci mine in Arizona. Recent share price for the company has been down a little on expected falls in revenue for the 2010 fiscal year due to order delays. However, with the new contract the company continues to demonstrate its strong position in providing driver monitoring equipment, especially in the mining sector. With the continuing growth in demand from this sector, we believe Seeing Machines will be able to absorb its fair share and prosper from larger sales.

Toumaz Technology (TMZ 6.5p/£38.5m)
AIM listed wireless infrastructure technology company held an analyst & investor meeting last week. The Toumaz Sensium Plaster provides a complete technology platform to allow healthcare providers to monitor the human body continuously, wirelessly, intelligently and at low-cost. At their analyst & investor briefing last week the company spoke about their actual position and plans for the following year.
Toumaz has 25 strong patents protecting its Sensium Plaster, thus restricting competition. The plaster is thin, comfortable and user-friendly offering an attractive package to both patients and hospital personnel. The use of multi-band RF, as opposed to Bluetooth technology, serves to add to its convenience given its lower power consumption. Toumaz is working together with CareFusion (the Cardinal Health spinoff) to bring the product to market, and is acting to ensure regulatory licenses (FDA and CE) are obtained to allow sales in the US and European markets (filing for regulatory approval by year end, with actual approval expected mid 2011).
Toumaz also operates a second division, that sell Toumaz AMx Ultra Low Power Radio Tuner Chips to consumer electronic companies like Pure Radio, although margins for this offering are extremely tight, especially when compared to margins made in the medical division. The consumer product sector is a very competitive market and we fail to see the connection between it and the medical division. However, we see strength in leadership with Chris Toumazou (Co-Founder and CEO of Toumaz Technology), who has strong industry and academic experience, having been made a Professor at Imperial College (at age 33, one of the youngest ever) in recognition of his outstanding research. Definitely one to watch.

Transense Technologies (TRT 4.5p/£5.95m)*
Following the Extraordinary General Meeting where the share placing and (the oversubscribed) Open Offer were voted through by shareholders, the Management presented at the Annual General Meeting a review of the current opportunities enjoyed by the company. A copy of the presentation is available on the website and we would recommend those interested to review its contents – in particular the online real time data gathering from OTR truck trials in Chile. At the presentation in London, the audience was able to watch the actual trucks’ locations move over time and their corresponding tyre temperatures and pressures recorded as the vehicles moved around the mine. Very impressive.
With our forecasts for revenue to grow from £637,000 in 2009 to £2.1m in 2010 & £4.9m in 2011 and with a forward looking PE in single figures, we find it hard to believe that the company is not attracting some (albeit circumspect) attention from acquisitive technology companies. An example of such a company could be Elektron plc mentioned above, where in the latest Chairman’s statement and Operational review one can find the following:-

“the major focus of the Group is innovation”
“South America, Greater China and Asia Pacific continue to be key markets for Elektron growth”
“we seek to partner with global OEMs to provide bespoke solutions to challenging technical problems”
“Digitron’s (a group company) growth proposition is to target areas of high growth in the mobile and wireless temperature measurement industry”
“projects include…. the remote monitoring of water temperature using both cloud computing and GSM technologies”

In addition, Elektron is looking to capture the benefits from in-house manufacture – something that will be of benefit to Transense as sales grow.
It should be no surprise that we reiterate our view that Transense offers a very attractive investment opportunity at the current price levels.
TyraTech (TYR 13p/£6.1m)
TyraTech, whose technology is used in potent but safe pesticides for human, animal and environmental health, has recently reported results for the year ended December 2009.  These results are only slightly different to the preliminary result we commented on in February, mainly due to GAAP adjustments, with product revenues at $6.6 million and a net loss of $13.9 million.  Although the company had a difficult year in 2009 we feel that there have been many more steps going forward than going back.  The company highlights some of the achievements in its report and we think they are worth repeating as they underscore TyraTech’s partnering model, which is the key to the company’s future development.  One of TyraTech’s key partners is Terminix who launched the SafeShield eco-friendly household pest control product into the consumer market and two other natural pest control products into the institutional and commercial markets.  The partnership with Arysta produced a crop protection product which will be launched this year; the partnership with Clarke Mosquito Control led to the development of TyraTech’s Natural technology for the vector control market; the partnership with Chemplast resulted in a commercialisation strategy for TyraTech’s proprietary technology for the banana and pineapple market; and the partnership with Kraft for functional foods was revised with improved payment terms.
We expect to see increasing revenues from the company’s partnering model this year and with a much lower cost structure and development capital being carried by the partners it is conceivable to see TyraTech break even this year.  The company recently raised $3.2 million in capital.
William Sinclair (SNCL 117.5p/£19.45m)
The company issued a positive update ahead of the planned visits by investors and industry operators to the company’s facilities at Herriad, near Basingstoke.
Achieved margins are continuing to improve as the benefits from the ongoing efficiency programmes flow through to the bottom line. As a result, margins are expanding and are at a level significantly ahead of last year.
In addition, many of the company’s smaller competitors are suffering from a shortage of raw material for supply to customers and are therefore having to either source peat from the wholesale market at correspondingly higher prices or to forego sales. William Sinclair on the other hand is experiencing no such supply problems as they gathered their planned harvest volumes in the 2009 season, despite the disruptive weather conditions.
The 2010 Peat harvest to date has produced excellent quality and yields, and is ahead of the company’s demanding internal forecasts.
The only slight negative within the update related to the need to write down the value of a property that the company has available for sale, following the Metcalfe acquisition. This will result in an exceptional charge to the accounts at the year end, but should not be considered material in the context of the business operations. Conversely, bearing in mind the company’s search for a large super site to bring together the main operational elements, the continued weakness in the industrial property should prove to be an advantage in this regard.
As a result of the above, we have increased confidence that the final dividend will be 3p per share (2009: 2.5p).
We expect the shares to continue their upward trend, including a particular positive move over the time of the site visits.


Zeta Compliance Group (ZGCP 42.5p/ £3.73
m)
Zeta last week announced that its subsidiary, Fineapply Limited, has been engaged by a major FTSE100 company to provide water hygiene services across its portfolio of sites. The engagement is due to last 4 years, and has an expected total value of £1.6m. Fineapply Limited is the UK’s leading independent legionella risk management and control company. Zeta Compliance Group provides products and services to enable organisations with large estates to ensure that they systematically meet their Environmental, Health and Safety obligations.  It carries out risk assessment and monitoring services in respect of water and air hygiene where Legionella and MRSA are principal concerns.
We are impressed by Zeta’s list of blue chip clients, namely high street chains, banks, universities, hospitals, and facilities management companies. All businesses have to comply with Health and Safety Laws, and there are a multitude of statutory regulations in the water, fire and gas space, to name but a few. We expect to see a number of acquisitions driving this stock, as well as solid organic growth, as its client list grows and contracted revenues increase, and as the Law surrounding this area, business productivity issues and brand protection drive clients to Zeta.
*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.