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Hoodless Brennan Small Cap News Flash including Microgen, Volex, Spiritel, Nighthawk Energy, Chaarat Gold and others
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Microgen (MCGN, 79.5p, £69.08m) Has announced the proposed disposal, subject to an EGM, of the Billing Services division (BSD) for £7.5m. In the 6 months to June BSD had revenues of £2.9m (£3.3m) and an operating profit before group overheads of £0.74m – so annualising and putting the group on a normalised 30% tax rate would suggest a prospective exit PER of 7.5x – reasonable but not exceptional. Trading in the third quarter has been ahead of plan and cash has built from £15.2m at June to £17.5m at September - though that does include £0.8m income from the 54% Scisys stake sale. The Aptitude business has moved into profit in Q3 – ahead of management expectations with work on-going for a major Asian client and good prospects in the USA. The Financial Services division has seen some impact from the recession but its performance has been protected so far by the high levels of repeat revenues and multi-year contracts. With existing forecasts to December 2009 for £6.7m PBT with 5.3p EPS the group is sitting on a 15x prospective PER with EPS growth of some 5 to 7% in the following year. The balance sheet will represent some 36% of the total market cap – giving the management the potential for acquisitions, share repurchase or higher dividends. A continued BUY with a raised price target of 95p.
Penna Consulting (PNA, 260p, £67.00m) Interims to September 2009 saw revenues up 68% to £48.4m (£28.9m) and pre-tax profits of £2.5m (£2.3m) though the reported number included £1m one off exceptional Barkers related acquisition costs so the underlying performance saw PBT rise to £3.5m (£2.3m). More impressive is the like for like performance that saw revenues rise 11% to £32.0m (£28.9m) and pre-tax profits surge 47% to £3.4m (£2.3m). The group ended the period with £6.7m of net cash and increased the interim dividend to 3p (2p). Barkers contributed for one quarter and produced revenues of £16.4m with £0.1m PBT. Forecasts for the year around £7.4m look more than achievable with 20.1p EPS and a DPS that seems set to rise from a forecast 6.6p towards the 9p level. The group is thus sitting on a 12.9x prospective PER with a forecast yield of 2.5% which we believe will increase to 3,5%. We maintain our BUY recommendation, last iterated on 24/09/09 at 240p with a 300p price target.
Volex (VLX, 81.5p, £46.38m) Interims to October 2009 saw revenues decline to £110.19m (£133.86m) with underlying pre-tax profits of £4.36m (£2.79m) so adjusted EPS surged to 6.3p (1.6p). The results were helped by the currency movements with operating profits growing 48% or 11% on a constant currency basis, though revenues would have fallen 29% on constant currency. Actual PBT reported was £1.70m (£2.79m) post £2.9m of reorganisation and facilities rationalisation programme. The group ended the period with net debt of £11.2m (£14.8m at the April year end). The group is implementing a sector focussed strategy and has already formed the healthcare division with a global view, similar changes will be made to the Telcom/Datacom, Industrial and Consumer segments in the second half. Despite limited visibility the group is confident of a stronger second half and thus results ahead of existing market expectations – which are currently £8.5m PBT with 10.4p EPS and put the group on 7.8x prospective PER or less. The strong results and outlook bode well and we raise the price target 93p – assuming numbers 5% ahead of expectations and an 8.5x target PER. Thus we move from our Hold, last recommended on 07/10/09 at 81.5p, to a BUY.
Velosi Limited (VELO, 84p, £39.2m). Velosi, the provider of asset integrity and HSE services to a number of major national and multinational oil and gas companies announced the recommencement of operations in Nigeria. Velosi offers services such as Risk Based Inspection (RBI), Maintenance Hazards & Operability Analysis (HAZOP), Health, Safety & Environmental Impact Assessment (HSEIA) amongst others. Nigeria operations will recommence under a new local manager which means that the territory is expected to make a contribution to group revenues from 2010 onwards. This looks like reasonable news flow from a strategic bias but the agreement is not expected to materially affect the performance of the group as a substantial portion of provisions had already been made in prior year accounts. Velosi’s business looks to confer some defensive attractions and is worth noting from a valuation point of view. The company outperformed market estimates at the interim with a 10% rise in pre-tax profits and looks set to record a strong full year. The market is looking for 13.4p for 2009 which suggests a valuation of only 6.3x this year, falling to under 6 next year. BUY.
Spiritel (STP, 0.54p, £3.4m) has issued up to £10m loan notes and acquired Edge Solutions Ltd, for a total sum of £9.3m. The loan notes are convertible at 40p per ordinary share with a 10% yield and are repayable at the group's option, no later than November 2014, with a 20 per cent redemption premium. The new funds will be used to allow the Group to continue its buy and build strategy, as a consolidator of the highly fragmented telecoms reseller sector. Spiritel will pay an initial sum of £3.6m in cash for Edge Solutions. A further payment of up to £5.7m may be payable in cash by January 2011 on an earn-out. Spiritel will acquire Edge for an estimated 15.5x pre-tax profits. Edge reported revenues of £5.5m, EBITDA of £0.7m and PBT of £0.6m. Edge is currently trading at a level of profitability significantly ahead of last year and as at 30 April 2009, had net assets of £0.4m. Edge is a provider of voice and data services to 200 corporate clients, including Thistle, Guomen and blue chip financial institutes. Edge's client base delivers a market leading average customer spend of over £2,000 per month, with an annual churn rate of less than 2%. The key benefits of the acquisition will arise from the widening of the customer base to c.2500 businesses, providing Spiritel with the cross selling opportunities. The acquisition will be advantageous operationally, with a reduction in operational costs and management believe it will be immediately earnings enhancing. The market will upgrade estimates to reflect this morning’s announcement. We retain our BUY recommendation.
Blinkx (BLNX, 19.5pm, 54.2m). Blink the world's largest video search engine reported ‘record’ financial results for the six to 30 September 2009. Revenue more than doubled to $13.1m, gross profits increased by 88% to $8.5m while loss from operations also increased substantially from $4.3 to $7.4m but included $1.4m of non-recurring costs relating to infrastructure investments. The group is still very much in the investment phase and raised another £5m at c.17.9p underwritten by Autonomy. The group is seeking to land grab one of the fastest growing areas of internet use with some success and has broken into Nielsen's Top 10 Video sites with video streams in the UK and US growing by some 177%. Whilst yet very speculative in nature, the growing revenue and profile coupled with support from major holder Autonomy suggest that the company could be a major winner in a strongly emerging area of new media. SPECULATIVE BUY.
Nighthawk Energy (HAWK, 39.25, £129m) The company announced an encouraging update on Xenia (within the Revere project). The Xenia gas pipeline fully operational and flowing in excess of 650 thousand cubic feet per day from eight wells, relatively minor but five 5 wells are to be brought on stream imminently and 22 new wells are permitted. Notably the company has acquired a 50% interest in Bourbon County pipeline for $500k which will reduce transportation cost. This looks like an excellent deal with the economics suggesting a payback on costs within 12 months. In terms of estimates a P50 best case estimate of 6.8m barrels of Stock Tank Oil Originally In Place ("STOOIP") is given but no estimate for gas as yet, though the company outline that this is expected to be significant (and likely more material than the oil estimate). That said STIOIP for the whole Revere project is sitting at a material 217m gross with ultimate recovery factor and reserve yet to be determined. Revere remains a much smaller project than the deadline grabber Jolly Ranch, but signs of growing commerciality albeit from a small base are encouraging.
Chaarat Gold (CGH, 23.5p, £26.5m) Chaarat Gold announced results from channel sampling on the Tulkubash Zone at its Gold Property in Kyrgyzstan. The sampling looks encouraging with grades from Adit-2 at 4.60 g/t Au and 4.88 g/t Au at the Drill hole the highlights. The Tulkubash Zone is one of three parallel striking mineralization trends which include the Main Zone and Contact Zone where a JORC compliant resource estimate of 3.3m ounces at 4.3 grams per tone was reported in 2008. The latest sampling gives further confidence in the deposit and management believes.
Amino Technologies (AMO, 43.5p, £25.2m) state in their trading update for the year ended 30 November, profits for the year will be significantly below market expectations and the group will post a material loss in H2, due to slippage and component shortages. The group continues to have a strong balance sheet, with net cash of £8.0m at the end of October 2009. This is clearly disappointing and we expect the market to downgrade estimates. Management have reduced the cost base and improved order book intake. We reduce our recommendation from a Hold to a SELL.
Intellego (IHP, 0.6p, £1.0m) state sales in the H1 to 30 September 2009 will be 23% lower than the previous year at £0.85m due to an increase in the time taken to complete negotiations and sign large orders. Thus a higher loss is expected in H109. Management suggest the BPP contract won last month combined with a strong sales prospect pipeline, will enable the Group to recover H1 sales in H2 and enable sales growth for FY 2010, albeit at a slower rate. We are sceptical about the latter. On 22/10/09, we initiated with a Speculative Buy based on a historic revenue multiple of 0.5x. We reduce our recommendation to a SELL.
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