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Hoodless Brennan Daily Small Caps News Flash Including Melorio, 2 Ergo, Torotrak, Carclo, Iomart, Gladstone and others
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Melorio (MLO 137p £53.6m). The support services group provides interims to 30 September 2009. Melorio provides training and qualification services across the information technology, construction and logistics sectors. Results showed strong like for like organic growth against a difficult backdrop. Revenue increased by 182% to £26.2m (H1 2009: £9.3m), EBITA was up 85% to £6.3m (£3.4m). Adjusted EPS of 9.7p (7.1p) were up 37%. Good cash flow conversion led to a reduction in net debt to £12.0m (£14.4m). The group is currently trading in line with FY expectations of 21p which puts it on an inexpensive looking 6.5x. While debt is a little high interest cost was covered 4.9x by EBIT at the interim and the business looks on a sound footing. We retain our BUY with a target price of 161p.
2 ERGO (RGO, 125.5p, £41.1m). The provider of mobile enabling technologies for announced strong results for the year ended 31 August 2009. 2ergo’s Multiserve Platform encompasses years of R&D addressing the growing need intelligence solutions for platforms between mobile network operators, the internet and customer facing applications. Revenue reduced -30% to £22.6m (FY 2008: £32.6m). However, gross profit increased 26% to £10.1m and overall gross margin an impressive 18% to 48%. EBITDA before impairment (the £3.2m impairment charge in respect of Broca plc, since acquired, is reversed ion the balance sheet and added to goodwill but there is no impact on the P&L) increased 21% from £4.1m to £5m EPS on the same basis was 9.87p (8.54p) 16% up and well ahead of broker estimates of 8.3p (and our expectations of around 8.9p). Cash reserves of £6.4 m at the year end meant that the company was able to complete a buy-back and cancel 1m shares at £1.4m. Going forward the group is confident of increased demand as trends move increasingly towards accessing internet via handsets. The Americas region reports first profits, expansion into Asia and Australia and broadening of product set through acquisitions bode well for further progress with a growing number of global clients. The rating is around 12.8x actual EPS, going forward we expect an upgrade to 2010 forecasts which should see the company trading at well under 12x. With cash in the bank with which to complete acquisitions or fund further share buy backs and a robust outlook we retain our Buy recommendation and increase our price target to 145p.
Andor Technology (AND, 143.5p, £38.6m) The developer and manufacturer of high performance digital cameras and solutions announced excellent FY results for 30 September 2009. Turnover increased 34% to £33.1m (2008: £24.7m), clean EBIT by 63% to £3.4m ( £2.1m), PBT by 67% to £3.5m ( £2.1m) and EPS by 79.4% to 11.6p (6.45p) strongly ahead of the 8.9p market estimate. Cash generation increased 411% to £5.8m (£1.1m) and the year culminated in net funds of £7.9m. Going forward the group has a 30% year-on-year growth in its opening order book for 2010 and the additional ability to grow acquisitively by utilising its net funds. The group has performed strongly and shot through our earlier 81p price target (21/4/09). On current forecasts the company looks relatively expensive yet upgrades must be in the pipeline. If we crudely assume 30% earnings growth for next year in line with the order book (which does not seem unreasonable given the 79% growth recorded this year) we would arrive at EPS of 15p and a much more reasonable looking rating of c.9.5x FY Sep 2010 rating. Imbued with cash which provides ability to grow inorganically, a strong growth profile and increasing US exposure, there looks to be plenty still to go for in this share. BUY.
Renew Holdings (RNWH, 37p, £22.16m) Final results to September 2009 saw revenues of £316.6m (£390.6m) with underlying pre-tax profits of £5.5m (£6.7m) with EPS of 6.1p (8.8p) and a flat 3p DPS. The group is shifting its business from Specialist Building to Specialist Engineering as the latter has solid regulatory drivers. The order book stood at £202m (£219m) with Specialist Engineering showing a very solid improvement to £82m (£46m). The group ended the period debt free with net cash of £14.6m – giving a very strong support to the current market capitalisation. We repeat our 46p price target and maintain our BUY recommendation.
Education Development International (EDD, 140p, £80.7m) the provider of accredited qualifications and assessment services announced FY results to 30 September. Revenue increased by 32% to £28.3m (2008: £21.5m), adjusted EBIT of £8.6m (£3.3m). adjusted EPS of 16.2p (6.2p) strongly ahead of market estimate of around 11p (assuming that was on a clean basis). Strong cash generation of £8.5m (2008: £4.5m) led to year end net cash of £9.5m (£3.2m) and a total dividend of 1.6p (0.42p), a 1.1% yield. The performance reflects the successful integration of acquisitions and diversification of product offering. EDI continued strong growth in sales of vocational qualifications and assessment in the UK, which increased by 50%, reflecting increased government spending but mainly market share gains. International sales rose 29%, (10% like-for-like excluding currency gains) led by South East Asian and German markets. On the surface the rating looks reasonable to full but current estimates should rise. For example the company is trading at only 8.6x this year’s actual adjusted EPS. With a strong performance and further growth in the pipeline we reiterate our BUY recommendation and raise our price target to 180p.
Media Square (MSQ, 15p, £4.5m) Media Square the marketing communications group announces interims to 31 August 2009. Revenue of £24m (31 Aug 2008: £32.6m). EBITDA was a loss of £1m (£2.8 m). Headline EBIT loss was £1.5m (£2m profit). Net debt reduced slightly to a still high £15.5m (£17.1 m), the group is in discussion to dispose two none core business units which are expected to reduce debt further by February 2010. EBIT margin reduced by 12%, reflecting the drop in revenue, partly mitigated by cost reductions. Headline EBIT loss for the period was £1.5 million (£2m profit). It has been a difficult period for the marketing company with clients spending less and deferring projects with the 26% decline in T/O reflecting the large number of clients in automotive & financial services clients. The company continued to see deferrals in spending decisions but the underlying customer bas remains steady. This is a turnaround story based on major restructuring initiatives which have had a limited effect on H1 but should impact H2 and more markedly next year. The exit from a number of properties, (reduced space by c.40k sq ft since 2007) with 11 main agencies compared to over 40 in 2007. Central costs will be c.£2m a year compared to £6m in 2007 and headcount ahs been significantly reduced headcount while remuneration policy now aligns management, employee and shareholder interests. The main aim is to improve margins and management control which had become lax during the aggressive buy and build phase. The first 2 months of H2 have started well with profitable trading as a result. While revenues remain depressed the group is on course to post a much better H2 operating result. Since we turned positive at 10.5p the shares have appreciated nicely (returning 43%). We downgrade to HOLD at 15p. The rating is a demanding 15x February 2011 EPS with still high levels of debt. Further evidence of turnaround together with a recovery in spending outlook could lead us to be more positive,
Torotrak (TRK, 29p, £46.60m) Interims to September 2009 saw revenue rise to £1.4m (£0.9m) with a loss before tax of £2.19m (£1.96m). The group ended the period with £12.3m of cash resources. The group is confident of a stronger second half enabling the group to reach breakeven at the profit after tax for the year. The work with US major Allison Transmission is progressing well, as are the programmes with European bus and truck manufacturers, including the mechanical KERS energy recovery system. With transmissions on garden equipment and now off-road vehicles the acceptance of the Torotrak system is becoming clearer for all to see. With major emphasis on reduction of CO2 the infinitely variable Torotrak system and the KERS energy recovery seem well set for substantial growth in the years ahead. However the valuation is, in our eyes, well up with events so we maintain our HOLD recommendation.
Carclo (CAR, 98.5p, £56.31m) Interims saw sales of £41.06m (£42.69m) and underlying pre-tax profits decline to £1.83m (£3.38m) and unchanged 0.65p DPS. Technology plastics held flat at £2m operating profit with margins improving to 7.5% (6.8%). Precision Products dropped substantially to operating profits of £0.8m (£2m) following the declines in the automotive aerial market and aerospace cables. However the outlook in H2 for Precision Products is stronger thanks to its Wipac lighting systems that are finding a market on supercars. Similarly the Conductive Ink Programme (the ability to print circuit boards) is, according to the company, “well placed to generate substantial revenues from the application of its technology”, probably in flexible OLED displays. The group are happy with market forecasts of £5m PBT with 7.4p EPS followed by £5.8m and 8.2p EPS, putting the group on prospective PERs of 13.3x falling to 12.0x the following year. Moved from a Sell to a HOLD, due to the management’s confidence in the stronger H2.
Iomart Group (IOM, 46p, £45m): The managed hosting provider announces H1 results to 30 September 2009. There was strong revenue growth of 47% to £8.4m (H1 2009 £5.7m) and a landmark EBITDA profit of £0.84m (loss of £0.36m). Net cash at end of period was £4.5m (£13.7m) despite the acquisition of Rapidswitch for £5.25m.The group burned £8,637k of cash in the period. EBIT loss reduced from £857k to £384k. The group is continuing to develop its cloud capability with new services launched during the period and continues to win new business. Good visibility for H2 means that the company is comfortable with FY expectations. There is a great deal of excitement surrounding this cloud computing company and this is reflected an aggressive rating (57x Mar 2010, 17x Mar 2011) - this discounts significant growth expectations. With evidence of progress towards breakeven and beyond and exposure to a market in which we see significant upside we maintain our HOLD.
Gladstone (GLD, 28.5p, £13.77m) Final results to August 2009 saw turnover rise 2% to £9.73m (£9.55m) with underlying PBT of £2.05m (£1.92m) and EPS of 2.51p (3.99p), ahead of expectations around £1.6m PBT. Outlook for the leisure industry related software is relatively flat – but the move to a SaaS service is enabling profitable growth opportunities. The group is in a bid offer, having received interest from 3 parties, one of which has indicated a 33p bid level. With forecasts fro the current year around £2.5m PBT with 3.4p EPS the group would not look expensive - so HOLD and await developments.
Hamworthy (HMY, 258.5p, £117.4m) Hamworthy which designs and manufactures marine and offshore fluid handling systems announces interims to 30 September. Revenue fell 11.0% to £100.4m (H1 2008: £112.7m), EBIT declined by 20.6% to £10.2m (£12.8m), while underlying EPS decreased 25.8% to 16.7p (22.5p). The order book is dramatically lower at £196.3 m (£309.1m). However strong cash generation from operations of £15.9m (£13.3m), means net funds were £63.9m (£56m) and the interim dividend was raised 5% to 3.2p (3.05p). A good set of results in challenging circumstances with the company showing some ability to control costs to mitigate the sales decline. However, the outlook statement is fairly bleak. Project initiation hindered by the weak global economy/availability of finance with order intake for original equipment not yet recovered from low levels of October 2008 and unlikely to improve quickly. However the company is comfortable with March 2010 expectations. The balance sheet is robust and Hamworthy should offer decent long term prospects. We were holders back in April at a lower valuation and as the company has risen to 8.5x March 2010 numbers and 14.5x next year’s pessimistic outlook leaving the shares look at least fully valued. HOLD.
Coffeheaven (COH, 19.25p, £25.67m) Interims to September 2009 showed revenues of £11.94m (£23.28m) with pre-tax profits of £0.24m (£0.10m).The group is ending the restructuring programme that has seen the withdrawal from Romania and Slovakia. Underlying the group’s continuing operations achieved a 16% growth on a constant currency basis. With 2010 forecast of £1.2m PBT looking a stretch we move to a SELL to the 15p level, despite the group having received a tentative bid approach.
Antonov (ATV, 50p, £8.30m) Our fears that the UK shareholders in Antonov would not be best served by the company have been proven correct with the company applying for a delisting from AIM. This is simply a method for the key funder to take control of the group. We have been sellers since August at 60p on such fears. The application for delisting triggers an automatic re-iteration of our SELL recommendation.
CML Microsystems (CML, 34p, £5.08m) Interim results to September 2009 saw sales decline by 13% to £7.18m (£8.23m) though the loss before tax reduced to a loss of £1.13m (£1.30m). The company has stated it sees “little benefit in retaining a listing of the Company’s shares”. The potential of delisting triggers an automatic SELL recommendation.
imJack (IMJ, 7.5p, £8.36m) The group has updated on a new business model for its educationally orientated social network software and portal. An original attraction was the software was to have been free, with advertising generating the income. Instead the group has now identified 4 key income streams, the base platform subscription, additional software tools, advertising, sponsorship and e-commerce revenues as well as consultancy and support services. The re-branded software, now known as Kwercus, will be launched in January 2010 and the group is in preliminary discussions with a “major national organisation” for the national roll-out of its product. The company has been dependent on the funding of a key shareholder to date, and will have drawn down £0.5m on the facility by the end of December 2009. The failure of the group to penetrate 4,000 schools by the end of November 2009 has limited the ability to generate revenues – so the group will require further financing. With a dire warning that without such financing the group would be unable to continue we move the share from a Speculative Buy to SELL due to the unknown level of dilution for existing shareholders. Successful funding by the end of January 2010, the group’s own timetable, would force us to review the recommendation given the scale of the potential opportunity.
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