Small Cap Wrap: Month: August 2009

AIM Breakfast - Archive

13 Aug 2009

This week: a care group that’s taken care of, an oil company oiling up for action and a plant nutrient business that’s taken root.

Claimar Care Group (CCGP 32p / £16m)
This week one of the UK’s leading providers of domiciliary care to individuals living in their own homes was bid for by Housing 21 for 39p per share, payable in cash. This is three times the share price before the announcement. At 39p per share, Housing 21, the national provider of older people’s services, is paying £39m including net debt, which is 0.7x sales or 8.8x EBIT. It is one of the largest companies specialising in retirement services in the UK and has charitable status. As a larger group, greater efficiencies can be achieved and operating costs in an environment of challenging public expenditure reduced. It would appear that Claimar has found the right home since it began looking with its strategic review that was announced in April this year. On the surface this doesn’t look to be a bad deal for Claimar shareholders.

Crimson Tide (TIDE 1.5p / £4.7m)

More good news this week from another of the market’s tiddlers, this time from Ireland based Crimson Tide. The company, which supplies mobile data solutions for business, reported in its half year results its first positive operational cash flow since its flotation in 2006. The company has a neat business model whereby customers initially contract for typically three years for mobile solutions, paying a monthly subscription. This model avoids the significant up-front costs normally incurred implementing mobile solutions. Crimson Tide receives increasing monthly contracted revenues as more subscribers are added, contracts are upgraded and/or terms extended. As Debbie Harry sang, the tide is high.

Hightex (HTIG 6.9p / £10.2m)

Hightex, the German manufacturer of hi-tech membranes used in modern architecture such as the new sliding roof above the centre court at Wimbledon, announced another contract win this week. This time it is with its joint venture partner to supply the complete roof system for the new National Stadium in Warsaw. This stadium is being built to host the UEFA 2012 European Football Championship, which will take place in Poland and the Ukraine. We understand the contract is worth approximately €13m to Hightex of which 80 per cent of these revenues will fall in 2010 with the balance coming in 2011. This goes a long way to provide visibility of its 2010 revenues and must be welcome for a business which has suffered from lumpy and unpredictable revenues in the past. We suspect there may be further contract wins to come.

Imaginatik (IMTK 7p/£9.3m)

We covered Imaginatik two weeks ago and this week it has raised £1.6m in an institutional placing at 6p. For the uninitiated the company builds software to help companies generate strategic business concepts. With a blue chip client base included Siemans and BAE Systems and strong recurring revenues we can see why the placing was over-subscribed resulting in a placing discount of only 4 per cent. Mark Turrell, the ever energetic CEO, said the placing leaves the company “well positioned to pursue our growth strategy”.

Motive TV (MTV 0.57p/£2m)

Motive released its interims this week but given the rapid evolution of the company into a set top box technology business the numbers are of are of historic interest only. Trading at the legacy television production units remained difficult with the warning that Motive may beunable to continue supporting some of its weaker subsidiaries. Revenues in the first half to 30 June were down to £1.86m compared to £2.71m in the comparable period last year resulting in a loss of £440,000 (£515,000 last year). However, the big story is Motive’s move into digital terrestrial technology (DTT) to broadcasters worldwide. In the UK, this DTT set-top box will operate as an enhancement to the Freeview box, offering catch-up television and video-ondemand (including popular movies) in addition to the full range of DTT channels. This it will do without an internet connection and without purchasers having to pay for broadband, cable or satellite subscriptions, making this an extremely easy option for consumers. Tune in soon for the next installment.

Oilex Ltd (OEX 12.85p/£17.5m)

Oil and gas producer Oilex has risen more than 40 per cent since we last wrote on them a month ago, this is not surprising since they have now successfully completed the farm out for JPDA (Joint Petroleum Development Area) off shore East Timor; a highly attractive offshore oil exploration opportunity with potentially significant oil resources. On August 3rd, Oilex entered into an agreement with Japan Energy E&P JPDA Pty Ltd, a subsidiary of Japan Energy Corporation, to farm down 15 per cent of its 25 per cent interest in the offshore production sharing contract in JPDA. Oilex retains a 10 per cent interest in this highly prospective offshore block, but now has been refunded for its past costs and has the funding for its first two wells. On the 10th August, an important approval was received from the JPDA Designated Authority for an extension of one year to the first term of the production sharing contract, which previously ended on 15 January 2010 and will now end on 15 January 2011. The extension of the term will allow adequate time to complete drilling programs to evaluate this highly prospective block. Oilex is likely to commence drilling in Q3 or Q4 of 2009. We like Oilex for a number of reasons; it continues to restructure its assets and operations to reduce costs, is continuing to produce, and is seeking opportunities that may provide early production with positive cash flows that are close to infrastructure and markets. We still believe that this oil and gas stock is one to keep an eye on.

Plant Impact, (PIM 26.0p / £8.2m)
Developer of plant stress management technologies, Plant Impact announced today that it had been invited to join the UK’s Parliamentary and Scientific Committee to strengthen its agricultural sector experience. Industry members on the committee include Pfizer, Monsanto, Merck Sharp and Dome, AstraZeneca and BASF. Plant Impact is the only SME on the committee with technology focused on crop production in the agricultural sector. The Committee’s principle remit is to provide an interface between Parliamentarians and the UK’s scientific communities, ensuring that the former are aware of new developments in science relevant to policy and that the latter are informed of policy and legislation. Crop productivity has been in the news in the UK this week when the Environment Secretary Hilary Benn launched an assessment of the threats to the security of what we eat. It is great for Plant Impact, which is developing recognised technologies geared to improving agricultural output, that it has been invited to be a part of this Committee. We believe that Plant Impact has some potentially disruptive technologies which could contribute to easing emerging agricultural sustainability issues and which have access to the large and growing fertiliser & agro-chemical markets – worth an estimated $111bn in 2008. The share price ticked up a few per cent this morning and we believe it has a long way to go.

Snacktime (SNAK 104p / £7.8m)

This is not a stock that may be on many investors menu but it is the UK’s largest national operators of snack and chilled drink vending machines. However, it’s clearly a hit with its customers as it announced this week that annual profits have risen by 64 per cent. Profit before tax for the year ended 31 March climbed to £201,933 from £122,851 the year before. “The business continues to see very good opportunities in the coming year, and we remain optimistic that Snacktime’s excellent growth record can be continued,” said CEO Blair Jenkins. The group has thousands of sites located throughout the UK, which are serviced by its five main depots located in Cumbernauld (near Glasgow), Manchester, Alcester, Wokingham, and Belfast. Each main depot is responsible through a team of area managers, merchandisers and engineers for installing, maintaining and restocking all of the Group’s vending machines. With an 11 per cent rise in the share price this is turning into a tasty little morsel.

*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 Aug 2009

This week: Cashing in on Cashbox, monetising a Chinese herb and Next Fifteen moves into the consumer space

Angus & Ross (AGU, 2p / £4.9m)
The angels are watching over Angus & Ross. Under the threat of becoming insolvent from a looming $12.5m loan repayment due in July next year, the company has reached agreement with its creditor and restructured the loan into a convertible loan note. The transaction must be approved by shareholders, who also have to vote in favour of a waiver of the requirements to make a general offer under the City Code, as Cyrus Capital will end up with a holding in excess of 70 per cent of the company‟s voting share capital. Nevertheless, this facilitates the company‟s efforts in achieving the project finance necessary to put the Black Angel Mine into production. Appropriately enough, the company is proposing to change its name to Angel Mining.

ASG Media (ASG, 1.4p / £2.2m)
ASG Media, which operates digital screens in shopping malls and leisure locations and was until recently known as Avanti Screenmedia, has issued a funding update – again. This time Neo Media Group is providing £75,000 of loans, which can be converted into shares at 1p per share in 12 months‟ time. Neo Media is a Swiss digital screen specialist and its chief executive and chairman, Christian Valglio-Giors, is non-executive chairman of ASG. Following the announcement, Neo Media, if it converts its loans, would own 61 per cent of ASG. Amidst all the financial goings-on, it‟s easy to overlook the fact that digital out-of-home retains a key attraction as a means to advertise to a mainstream market in an age of media fragmentation. But, with the retail sector struggling, ASG having made a £1.6m operating loss in the six months to 31 December 2008, and uncertainty over its financial structure, this may be a punt too far for cautious investors.

Cashbox (CBOX, 4p / £5.8m)
Cashbox, the UK‟s largest independent operator of ATM machines, continued to pump out good news this week. The company announced that it has been awarded the contract for managing the ATM estate of pub group Tattershall Castle. The estate currently consists of some 120 machines and these will be integrated onto Cashbox’s operating platform in the near future. In
addition, the company also announced five-year contracts with London Town, Reel Cinemas and Marbury Taverns, and a three-year contract with Here For You Hospitality, covering in aggregate an initial 44 sites. The stock is up another 10 per cent this week, leading to an overall rise of 23 per cent since we first covered Cashbox in June. We say: don’t cash in just yet, this is one’s on a roll.

Epistem (EHP, 340p / £24.5m)
Biotech company Epistem gave a pre-close trading update this week. Trading over the year has been strong and in line with market expectations, and it expects to report a maiden profit after tax – a milestone any company should trumpet, particularly a biotech! Epistem is a well-managed biotech that develops drugs and biomarkers and provides contract research services to drug development companies. We like the model of a fee-for-service business that pays for its own in-house R&D. Having met the management team, we believe that this is one biotech that could go far.

Highams Systems Services Group (HSS, 1.6p / £1.1m)

Here’s one of those microcaps that can offer good returns for investors whose timing is right. The company has two principal operating companies, Highams Recruitment Limited and Highams Recruitment BV, which provide total IT resource solutions to the insurance, financial services and investment management sectors. Highams supplies personnel to major financial institutions down to start-up insurance companies and across to specialist software suppliers. This week, Highams reported losses substantially reduced in the year to 31 March 2009 to £0.37m from £1.92m the year before on revenue that eased to £10.5m from £13.6m. And the balance sheet potentially leaves the company exposed to having to return to the market for additional working capital if losses persist. So it was comforting that the company was also able to report that, since the year end, further cost savings have been implemented and that, in the first quarter of the current year, the company actually generated cash at the operating level. All in all the results were well received by the market with the stock up 18 per cent on the week. Hi fives guys.

Hutchison China MediTech (HCM, 84.5p / £43.3m)

This low-risk, high-reward specialty pharma last week announced the completion, well ahead of schedule, of patient enrolment into a Phase IIb trial of a drug, derived from a Chinese herb, in patients with ulcerative colitis (that’s inflammatory bowel disease to me and you). Results from
this trial are expected to be available in the fourth quarter of 2009. In the same week, Hutchison, also announced its interim results. Its analyst meeting was well attended and with reason: sales were up 23 per cent, to $56.7m, it reported an operating profit of $0.6m, an operating cash inflow of $7.1m and cash of $39.6m. Management pointed out that this is ‘no high cash burn biotech’. The China healthcare market maintains rapid growth and its China healthcare division did well. Its infant nutrition business caught our eye. With a number of fraudulent products in infant nutrition in China in recent times, and with the rising middle-class population, we can see how Chinese parents will focus on getting the best for their (one) baby nutritionally. Its drugs R&D division boasts discovery partnerships with the likes of Merck Serono, Eli Lilly, and J&J, which look very promising. Its potential is increasingly clear without licensing activity moving on to the agenda. Hutchison’s management team say that its in-house R&D has some real prospects, and with four projects in discovery and two in phase II, this is a great time to start taking a look at HCM. Its consumer products division, Sen, has done well in a tough retailing environment in the UK and expansion into France with Marionnaud is starting well with a massive sampling for which Hutchinson is being paid as part of building the awareness. We believe that its consumer products division has the potential to be very big indeed and wouldn’t be surprised if we start to see products being sold into China too. The management team gave the sense that it was ‘extremely engaged’ in joint venture and M&A activities. We came away with a sense of lots of positive noises and a clear strategy for each division.

Landkom International (LKI, 16.7p / £40.2m)
Another week another intriguing announcement from Landkom, the Ukrainian crop grower. This week it’s that a new grain elevator at the Krasne base is now in operation and has taken delivery of its first shipment of wheat from Landkom’s fields. The significance of this was lost on us but the market reacted well, with an 11 per cent uplift. Wheat’ll wait and see what’s announced next week.

Mediwatch (MDW, 6.1p / £8.2m)

The urology and diagnostics medtech group announced its interim results this week. In the period it signed a global marketing agreement with Inverness Medical and launched its upgraded clinic and portable systems. Revenues were up 13 per cent, to £4.9m, and with a PBT of £37,000, the investment in the US sales infrastructure would appear to be paying off. Mediwatch is a one-stop-shop in the urology market, aiming to offer the gold standard of care.
With a focus on prostate cancer, about which there is an increased awareness, this stock has a long way to go. Mediwatch is certainly one to watch and there is always the possibility of a US medtech giant wading in at a nice premium.

Next Fifteen (NFC, 53p / £28.7m)

The international technology focused PR group continues to make strides into consumer PR. Following on from the earlier acquisition of UK-based Lexis, Next Fifteen has bought US consumer PR business M Booth for $4m plus up to $13.25m in performance-related deferred payment during the next four years. This looks an interesting purchase: it strengthens the group’s operations in the consumer area and provides a platform for global expansion in this niche. And, crucially, it gives Next Fifteen the benefits of diversification. The group also issued a trading update for the year to 31 July, announcing that underlying revenues and pre-tax profits would be in line with expectations, but that one-off costs will be higher than anticipated. Chairman Will Whitehorn said the first quarter of the calendar year was ‘very tough’. Client budgets have, however, since stabilised and he is ‘cautiously optimistic’ about prospects for the coming year. We are positive on Next Fifteen and the public relations sector in general, as PR continues to benefit from the need to manage reputations in the anything-goes arena of the blogosphere.

Serabi Mining (SRB, 1.5p / £2m)
Serabi delivered some encouraging news about its Brazilian gold mining operations in its recent investor update. We have previously commented on the company’s need for more capital in order to execute on its strategy of developing further mines in the region. Without access to capital Serabi is unable to fully utilise its current assets and potential. To justify the required investments in infrastructure it must reach economies of scale that can only be accomplished from a much larger operation, hence the need to establish a larger resource and reserve base. The good news is that, while the company is awaiting funding, the profit from the current surface operations more than covers its expenses. There’s even enough cash left over to fund a small surface drilling programme to keep the operations going. Sooner or later investors may realise that backing Serabi’s ambitions for regional expansion could yield a significant return.

Sinclair Pharma (SPH, 26.5p / £27.4m)

We have written before on this specialty pharma that focuses on dermatology, oral care and gynaecology. This week it announced the launch of Sebclair in the US with the mighty Dr
Reddy’s Laboratories. Sinclair is now selling seven products in the US, with more to come later this year. Sebclair, its treatment for seborrheic dermatitis, has been launched under the brand name of Promiseb Cream. In clinical trials, it has shown a very good safety profile, with no restrictions on age, duration of use or application on the face. Seborrheic dermatitis, or dandruff or cradle cap, depending on your age and what part of the body is affected, is a common skin condition and there is a huge market, in terms of creams, shampoos and topical remedies, for such complaints. Sebclair is going into a market that needs improved product without the side-effects that steroids cause. Sinclair has a strong pipeline and we believe that we will see at least double-digit organic growth in the 2010 financial year, with more to come on top from new products. Expect further deals and product launches.

StatPro (SOG, 98.5p / £58.7m)

Software group StatPro announced sparkling half-year results this week, with profits up 63 per cent to £3.2m (after adjusting for one-off exceptional items) on revenues up 19 per cent to £15.5m. The group sells “software as a service” to asset managers such as fund managers, pension funds, private banks and hedge funds enabling them to monitor and control risk across various asset classes. Key drivers of the growth are the recovery in the performance of asset managers, new financial products, increased regulation and low interest rates. These drivers are causing the asset managers to seek flexible and cost-efficient solutions. The software as a service model involves StatPro hosting on its own servers the software and data used by its clients in return for recurring revenues. Currently the company has £28m of annualised recurring revenues with 80 per cent secured for more than one year. Market opportunities abound and, as StatPro’s marginal costs of additional contracts remains low, there’s scope for significant margin enhancement. Management gave an assured presentation to City analysts this week, so we see this as a good growth story with limited downside risk. Pro’s that are hardly static, then.

*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.