Small Cap Wrap: Month: April 2010

AIM Breakfast - Archive

27 Apr 2010

This week: Good Energy creates a buzz, Surgical Innovations is a winner and Mercury Recycling falls

Clinical Computing (CLC 3.25p / £3.6m)
International developer of clinical information systems and project and resource management software last week announced its preliminary results for the year ended 31 December 2009. Total revenue increased 12.5 per cent to £3,179,365 (2008: £2,825,032), whilst recurring maintenance revenues increased to £1,716,862 (2008: £1,515,615). CLC reported an EPS of 0.2p (2008: loss 0.7p.) Significantly, operations generated £219,502 of cash (2008: operations used £742,523 of cash.)  Commenting on outlook, Howard Kitchner, Chairman of Clinical Computing, said: “The Group is in a position with both of its business units where it has completed the majority of the significant development efforts for its primary product lines.  The Clinical business will be impacted by its ability to meet the evolving government initiatives in its key geographic markets which its customers will be required to comply with over the coming years. The Hydra business is expected to continue to deliver stable results as companies continue to require tools to manage projects effectively and show accountability to management.  The Group will continue to manage its cost structure in line with opportunities across both business lines.” We hope to get to know this AIM minnow better, but writing on this stock for the first time and purely looking at numbers and charts, it looks to be a turnaround situation.

Faroe Petroleum (FPM 144p / £145.86m)
Independent oil and gas company focusing principally on exploration, appraisal and undeveloped field opportunities in the Atlantic margin, the North Sea and Norway, last week announced a gas and condensate discovery on the Fogelberg prospect (Faroe 15 per cent), located in PL433 in the Norwegian Sea. Following a period of coring and extensive data acquisition, the well reached a vertical depth of 4,736 metres below the sea surface. The objective of the well was to prove hydrocarbons in the Garn, Ile, Tofte and Tilje Formations in middle and lower Jurassic reservoirs. Gas and condensate was encountered in the Garn and Ile formations, while the fluid contacts and content within  the deeper Tofte and Tilje formations remain inconclusive at this stage, although they may be water bearing.
The gross size of the discovery has been estimated to be in a range between 105 and 530 billion cubic feet (between 19 and 95 million barrels of oil equivalent) of recoverable gas and condensate of which Faroe Petroleum has a 15 per cent net share. The volumetric uncertainty  remains relatively  large at  this stage due to the position  of  the  Fogelberg  well  which  is  located  relatively  high  on the structure. An appraisal well is likely to be needed to prove the down-dip extent and the actual size of the discovery.
Faroe was awarded the Fogelberg licence in 2007, as one of its first licences on the Halten Terrace in the Norwegian Sea. Since then, Faroe has built a significant portfolio of seven licences in this prolific area.  The discovery reduces the risk on several of the company’s identified exploration prospects in this area, which will now become the focus of potential follow up drilling, in addition to appraisal of the Fogelberg discovery itself.
Graham Stewart, Chief Executive, commented: “The second well in the programme, to be operated by Wintershall, is the Maria well (Faroe 30 per cent) which is scheduled to commence drilling in the next few weeks.” Expect further news as drilling commences and evaluation results continue to emerge.

Focus Solutions Group (FSG 42.5p/ £12.59m)
Focus Solutions, a provider of software and consultancy solutions to the financial services industry, has announced it is trading in line with market expectations for the year ended 31 March 2010 with PBT of £2.1m, EPS of 7.2p and net cash of £2.4m. The group continues to win new business, diversifying its customer base and has successfully expanded its geographically spread, reducing exposure from UK and Ireland. The trading outlook highlights the strong pipeline and demand for focus:360. The stock looks attractively priced trading at a 2011 P/E rating of 7.3x.

Good Energy Group (GEGP.PL 58p / £4.53m)
PLUS quote renewable energy business yesterday announced a further improvement in its operating and financial results for the year ended 31 December 2009. Revenue increased to £18,290,012 from £17,673,909 and profit before tax to £662,607 from £509,022. We consider it an interesting time to become involved with this company as the introduction of a dividend programme in 2010 may become reality if this good performance continues. Juliet Davenport, Group CEO said: “We now have more than 26,000 customers supporting our community of over 1,000 independent renewable generators…..We’ve also seen some significant government announcements on Green Accreditation, Feed-in Tariffs and Renewable Heat Incentives, all of which are potentially beneficial for our business.”
During the period, Good Energy successfully completed a funding for the new wind farm at Delabole, and is now looking into the further development of small to medium-sized wind farms to supply energy to Good Energy Ltd. The timing feels right for this company, particularly if you are looking for some yield. In 2009, Good Energy made good progress and increased the number of gas customers to 2,675 from 1,384 and the number of generators to 1,079 from 533, and its financial performance improved all round. It has a growing electricity customer base despite the difficult market conditions and its gas business is developing well.
We last wrote on this new energy company in February this year, although the share price hasn’t moved since then. Good Energy is unique in the supplier industry by buying and selling 100 per cent renewable electricity. Good Energy supports a pioneering community of more than 1,000 independent renewable generators that use wind, small-scale hydro, solar power and sustainable biomass to generate heat and power. We imagine, given its positioning in the market place, Good Energy will continue to steal the limelight. Good Energy looks good to go…a good time to get involved.

Gulfsands Petroleum (GPX 322p / £386.13m)
Oil  and  gas  production,  exploration and development  company  with  activities  in  Syria,  Iraq,  and the U.S.A., last week gave an update on  the company’s  operations at Block 26, Syria where Gulfsands holds a 50 per cent interest and acts as operator. Operations have concluded on the Hanoon-1 exploration well, the second well in the 2010 exploration drilling programme. The  Hanoon-1  well,  located  approximately  8 kilometres  to  the north of the Khurbet  East field, targeted the Cretaceous Shiranish and Massive Formations, the  latter being the  producing formation in  the Khurbet East  field. The well targeted a structure with pre-drill estimated reserves of 5-15 million barrels of oil. Hanoon-1 was open hole tested; however no hydrocarbons were recovered to surface. The formation generally consisted of tight dolomite and limestone with spotted viscous oil shows. It is considered likely that the quantities of oil observed at surface had emanated from oil filled natural fractures that were detectable from wireline logs. Consequently, the Hanoon-1 well has been interpreted as having a non-commercial oil reservoir and has been plugged and abandoned. The cost to Gulfsands for its 50 per cent share of the Hanoon-I exploration well is estimated at approximately US$2m before cost recovery and approximately US$700,000 after cost recovery.
On a much more positive note, average daily gross oil production at the Khurbet East Field continues at a rate of approximately 16,700 barrels per day with the result that cumulative gross oil production has exceeded 8 million barrels, with minimal water production and minimal pressure depletion being observed to date. Ric Malcolm, Gulfsands CEO, said:”The results of Hanoon-1 will now be evaluated in order to understand the implications for future exploration in the area north of the Khurbet East field.”
Gulfsands is currently in a bid situation from Oil India Limited and Indian Oil Corporation Limited. 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.

Mercury Recycling (MRG 9p/ £3.04m)
Mercury Recycling, the recycler of fluorescent tubes, reported disappointing finals to December 2009 which saw a 9 per cent fall in sales to £2.79m (2008: £3.07m) with PBT of £0.33m (2008: £0.53m) and an EPS of 0.83p (2008: 1.20p). Net debt including finance leases fell to £0.18m (2008: net debt £0.44m). The company blamed difficult trading on the recession, where manufacturers of new lamps have seen a 30 per cent decline in sales. Furthermore trading in the early part of the year was impacted by the bad weather but since then the company says trading has recovered and is showing signs of improvement. This should be an exciting stock with the European Waste Electronic and Electrical Equipment (WEEE) Directive driving demand for recycling but it seems the company hasn’t fully leveraged the opportunity blaming the authorities for not raising public awareness of the necessity to recycle hazardous tubes and lamps. This particular mercury has gone off the boil.

Milestone Group (MSG 1.475p / £1.57m)*
AIM quoted provider of digital media solutions and technology, last week announced two customer contracts, one new and one extension, for its end-to-end digital solutions team. First, The Unlearning Foundation has appointed Milestone to consult, design, develop and implement a mobile application platform for iPhone and Blackberry devices.  UNL currently produces cognitive therapy audio files, which they now wish to distribute via mobile applications. Second, following the successful completion of the first phase of the Music Monk project announced on 11 February 2010, Music Monk has retained the services of Milestone to continue the development of their product offering and have signed a contract for the development of a new Blackberry application.  This will be aimed at live music and event goers around the world and delivers the core functionality required by Music Monk’s market leading business proposition.
The company has a clear strategy of actively growing a portfolio of controlling and non-controlling stakes in digital, content or service companies. MSG is now firmly focused on generating revenue to help support the business expansion and we believe that this stock is also well worth a look now that the turnaround is complete, that there are three focused business units and that we expect to see perhaps further deals for interesting technology going forwards.

Motivcom (81p/£23.6m)
Motivcom recently announced strong final numbers for the year ending 31st December 2009, with profit before tax increased by 46 per cent to £3.1m (2008: £2.1m) with basic earnings per share up 52 per cent to 7.65p (2008:5.02p), continuing the unbroken profit record.
The company is focused on providing it’s client’s with programmes to incentivise and encourage their employees, such as reward schemes to recognise an individual or a team’s performance through (an online reward point banking system) and Spree Card (a prepaid Mastercard).  For top performers who achieve their targets there are incentive travel schemes.  The motivation programmes improve absenteeism and staff retention, as well as staff loyalty.
Motivcom is the only listed business in the sector and enjoys around seven hundred blue chip clients, including Virgin Media, Scottish Widows, O2, Land Rover and Barclays.  The experienced management team combined with the small fall back in the share price since the results were announced at the end of March could make this an attractive time to pick up some shares.

Offshore Hydrocarbon Mapping (OHM 11.75p / £8.39m)
Provider of remote electromagnetic sensing services designed to detect the presence of offshore oil and gas (CSEM), and of integrated CSEM, Seismic and Rock Physics analysis, last week announced its interim results for the six months ended 28 February 2010. First half revenues were adversely impacted by delayed CSEM projects but a growing order backlog should drive a second half improvement. In the period, the company did a placing of £2.5m and £3.36m was conditionally raised post period end. Dave Pratt, Offshore Hydrocarbon Mapping’s Chairman, said: “We are beginning to see a renewed upward trend in activity for both our CSEM and Rock Solid Images business lines.  At the same time we have made advances in the integration of CSEM, seismic and well data which positions the group well for winning further business.”
The OHM Group has always believed that the future of CSEM lies with the careful integration of these data with seismic, the remote sensing geophysical tool of choice for oil and gas companies. Following OHM’s acquisition of Rock Solid Images in 2007, OHM leads the way in this integration effort, through its WISE (Well driven Integration of Seismic and Electromagnetics) products and services. The realisation that integration of data sets creates significant value is becoming well accepted in the industry and expertise in this area would appear to be a very positive differentiating factor for clients in considering their choice of contractor.
Group revenues amounted to £3.25m in the six months to 28 February 2010 compared to £6.2m for the six months to 28 February 2009. The Group is expected to have a much stronger second half than in the last financial year when total revenue fell back to £3.0m in the six months to 31 August 2009. The pre-tax loss for the six months to 28 February 2010 of £6.2m included a £2.1m one-off non-cash charge on conversion of vessel charter commitments into shares, which significantly reduces OHM’s ongoing fixed costs and working capital requirements.
The order backlog at Rock Solid Images continues to remain at record levels bolstered by their reputation for excellence in offshore West Africa and from innovative solutions which guide well placement for optimum production in the burgeoning shale plays in North America.  New software tools which will significantly enhance both speed of throughput and ability to scrutinise large seismic data volumes are in the final testing stages and should come into full production in the next few months, increasing the volumes of data they can analyse every month while further enhancing the quality of their services. Bid levels, particularly for marine CSEM services, are substantially higher than this time last year. OHM has recently been awarded several CSEM acquisition projects in the Asia Pacific market, with additional awards in the North Sea. Some of these projects have been won in competitive tender and this success underlines the competiveness of its new cost structure and the value of their WISE integration capabilities. OHM now has three CSEM acquisition projects in backlog, and expects to add more as the year progresses.
Although at present OHM remains cautious on financial performance, successful execution of these projects should drive improved revenues in the second half year and the upward trends gives growing confidence for the future.

Richoux (RIC 6.5p/ £2.73m)
Richoux, the owner and operator of Richoux restaurants, reported prelims to 27 December 2009. Following the closure of the Amato restaurants, revenues declined by 10 per cent to £5.0m (2008: £5.6m) and pre-tax losses increased to £0.25m (2008: £0.07m). Net cash reduced to £2.96m (2008: £4.34m) but this still exceeds the current market capitalisation. The gross profit before pre-opening costs percentage for the four established Richoux restaurants increased from 15 per cent to 18 per cent during the year but there was a decrease in the total  gross profit before pre-opening costs percentage from 8 per cent to 5 per cent due to the performance of Amato and the new Richoux restaurants in High Wycombe and Old Compton Street, both of which have now been closed. However, management reported that trading in the core Richoux chain remains strong and these remain cash generative at the restruarant level remains.  Growth will come from two new new brands Zippers and Frankies Easy Diner.  Zippers is a new mid-market family orientated restaurant (which has opened in Chatham)  and initial trading has been in line with expectations. New leasehold premises have been acquired in Andover, Hampshire and the new restaurant is expected to open in autumn 2010. Frankie’s Easy Diner is to be a family orientated American diner style hamburger concept.  New leasehold premises have been acquired in Chatham, Kent and this  expected to open in summer 2010. Time and again the core Richoux brand has demonstrated its resilience on the one hand but its reluctance to transfer out of its core Central London locations on the other.  Given this solid base the question is whether CEO Salvatore Diliberto (ex City Centre Restaurants, The Black Angus Steak Houses and ASK Restaurants) can provide the icing on the cake.

Sarantel (SLG 2.63/ £7.64-m)
Sarantel  has provided a trading update for the first half to March 2010 which has seen revenues of £1.4m (2009: £1.7m) with net cash of £1.6m (2009: £2.2m) at the period end with a further £0.26m tax credit to be received. GPS sales, an area we expect to be a major driver, grew 8 per cent (17 per cent unit sales growth). The outlook is improving with the group completing audits by 2 leading military contractors – so opening the opportunity to supply to the higher added value contracts. Full year revenues are expected to be £3.1m to £3.3m (compared with £2.8m to September 2009).  The stock has gained 1.5p since we last covered it in February and our GPS now puts this stock firmly on the map.

Sareum Holdings (SAR 0.325p / £3.94m)*
Specialist cancer drug discovery business, yesterday announced the appointment of Dr Bob Jackson to its Scientific Advisory Board (SAB). Dr Jackson was formerly Chief Scientific Officer at the cancer drug discovery company, Cyclacel Limited. Prior to that, he held senior research positions at Celltech, Agouron, DuPont and Warner-Lambert. Dr Jackson has led teams that have developed 26 compounds to clinical trials, including the Aurora Kinase inhibitor CYC116. Dr Jackson’s appointment comes at an important stage in the development of Sareum’s Aurora Kinase programme and his expertise in this area will be key to the future development of the programme. Sareum’s Aurora Kinase programme is now focusing on leukaemias such as AML (acute myeloid leukaemia).  AML is a cancer of the blood and bone marrow and is the most common type of acute leukaemia.
The company also announced various updates in its cancer research programmes. Chk1 compounds are being evaluated by Sareum on an ongoing basis in orally administered in-vivo cancer models. On Aurora, new data demonstrates that Sareum’s compounds potently inhibit the proliferation of AML cells and show encouraging growth reductions in an AML in-vivo model. For its FLR 4 compounds, Sareum has recently demonstrated that they are effective in preventing lymph vessel growth in cell models, and this efficacy specifically arises from FLT4 kinase de-activation.
Sareum continues to progress its in-house cancer drug pipeline, whilst managing the research spend such that it can drive the most promising lines of development to build the asset value of its programmes. Sareum is developing seven early-stage cancer drug programmes, Chk-1 is ready for licensing and two are close to licensing. Major pharmaceuticals groups have a well-known need to build their cancer drug pipelines and to bring drugs to market quickly. We believe Sareum can be expected to react even more positively to any good news, particularly were the company to sign a deal. Sareum reacted well to the update on its pipeline news and expansion of the SAB yesterday, and was up 8 per cent on the day.

Sceptre Leisure (SCEL 42.5p/ £23.61m)
Sceptre, a provider of amusement machines, has sold its Fixed Odds Betting Terminal (FOBT) rental business for a total of £3.75m. Sceptre’s management should be applauded for selling the business on a multiple 12.5x the unit’s PBT of £0.3m and which had a book value in Sceptre’s accounts of £2.8m.  We anticipate the net proceeds of this sale (after paying back the bank that part of the proceeds attributable to the debt associated with the assets) will be applied towards the company’s stated ambition of picking up more of the 580 small operators in the UK and driving further consolidation.  The returns on these deals are attractive and we expect earnings enhancing so time to drop a few pounds into this particular slot machine?

Surgical Innovations Group (SUN 3.025p/£11.3m)
We congratulate Graham Bowland and his talented team at laparoscopic instrument maker Surgical Innovations for having been awarded the Queen’s Award for Enterprise, the UK’s most prestigious award for outstanding innovation and business performance.
The award is another feather in the cap for Surgical and should help build awareness around the company’s unique “Resposable” technology which combines both reusable and disposable elements that offer surgeons and hospitals a cost effective and high quality solution for keyhole procedures.
Earlier this year the company’s US distribution arm started supplying one of the country’s largest Group Purchasing Organisations with its instruments that gave Surgical access to more than 2,200 hospitals in the US.  Although the share price has increased recently we think this is worth a surgically precise look.

Technis (TECP.PL 3p / £1.71m)
Last week PLUS quoted Telecoms and Technology IP play announced the acquisition of 51 per cent of the issued share capital of Professional IT Limited, a leading provider of software for the management of private hire and courier contracts. Aylesbury based Professional IT is a profitable company with an 11 year trading history, which provides software which enables major corporate users of private hire cars and couriers to manage allocation, invoicing, billing and payment for multiple suppliers. Professional IT plans to launch a consumer application which will make use of Technis’ expertise in mobile telecoms applications. Professional IT reported unaudited net profit of £165,970 on turnover of £1,187,164 in the year to 31 August 2008. Revenues for the year to 31 August 2009 were depressed by the effect of the recession on spending by major corporates (banks, law firms), but the company reported unaudited net profit of £23,066 on turnover of £914,078. Trading in the current year is recovering strongly and several major new contracts are expected to be announced in due course.
The consideration for the acquisition is £331,500 which has been satisfied through the issue of shares in Technis at an issue price of 4p per share. It is the company’s intention to acquire the remaining 49 per cent of Professional IT following further development of the business. The issue price of 4 pence is a good sign that Technis expects value to begin to build.
Potential discussions that Technis was in with Professional IT was flagged to the markets, as were other discussions with other companies, so the fact that this has been completed lends credibility to Technis management team that they are off the starting blocks on the acquisition trail and share price and balance sheet isn’t likely to hold them up. It is good to see that the management team of Professional IT will remain in the business to drive the value within Technis and its unique IP portfolio and technology expertise and resource.
Technis CEO Jack Kaye said: “This is in line with our strategy of acquiring companies with a strong position in a niche market which will benefit from being part of a larger publicly quoted group, and where there are synergies with the existing Technis portfolio of customer-facing intellectual property and telecoms expertise.”  Having looked further at this company, we believe that given its spread of experience and the wealth of opportunities that are currently in the market, that there could well be a run of interesting acquisitions in the offing.

Terrace Hill (THG 21.75p/£46.10m)
We have attended a management presentation of Terrace Hill, the quoted property group.  The company reported in March its prelims for the year to 31 October which shows the group is through the worst having previously suffered a 22.7% fall in adjusted NAV however the ship stabilised in the second half of last year.  THG has refinanced its debt and it now trades well within it covenants.  The group is split into three areas. Firstly, a 49 per cent stake in a legacy portfolio of almost 2,000 residential units with a gross value of £238m, £13.5m of net debt. Secondly, a 75% stake in a land bank in Scotland of which 69% of the land is awaiting planning consent.  And thirdly, and very much the jewel in the crown is the commercial portfolio with a particular expertise in out of town retail development for food retailers. A recent typical deal was the purchase of an option for £10,000 over 5.25 acres of land in Helston, Cornwall on which THG obtained planning consent for a Sainsbury’s supermarket resulting in a sale of the land to Sainsbury’s for £10m giving a profit of £5.8m.  Quite wisely, the strategy of the group now is too focus on the commercial division and it’s looking to spin out its residential portfolio into a separate fund and sell down the land bank as planning consents are obtained.  As at 31 October 2009 the adjusted NAV per share was 44.6p (and prices have risen since then) and with an estimated another 12p from a further five committed food sites and a possible 8p from four sites in legals we can see the discount reaching a staggering 33 per cent. This share is about to climb the hill very shortly.

*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.