HB Markets Daily Smallcap Newsflash including 2 Ergo, Forbidden Technologies, RSM Tenon and others


2 Ergo (RGO, 90p, £29.35m) Interims to February 2010 saw revenues of £10.21m (£11.17m), an improvement in gross profits to £5.03m (£4.86m) and a fall into underlying losses of £0.20m (profit £2.25m). Net assets increased to £22.8m (£15.5m). The group is executing a change in model that is seeing growth in direct/business partner revenues (£5.8m from £5.1m) with a corresponding increase in gross profits from £4.44m to £4.83m while wholesale reseller channel saw revenues fall from £6.03m to £4.37m with gross profits declining to £0.20m (£0.42m). The group remains confident, boosted by the growth in Smart phones and the use of Apps that are the entry point for many potential clients to mobile marketing programmes. While it may take time for the change to deliver the expected profit (existing forecasts are around £5.5m PBT with 13p EPS) which put the group on a potentially optimistic 6.9x PER, there is clear established momentum and we thus maintain our BUY stance with a 145p price target.

Coolabi (COO, 6.75p, £3.26m) the media company focused on intellectual property assets has awarded licenses for its Scarlett & Crimson brand to Poetic Gem for clothing and Myridium for perfume. Both ranges are to launch in autumn in high street stores & on-line and are expected to underpin growth of the brand in teen and preadolescent markets complementing the existing successful cosmetics and accessories range created for Boots and Superdrug. HOLD

Dawson Holdings (DWN, 3.88p, £2.79m) Interims to March 2010 saw revenues of £39.4m (£44.6m) with underlying pre-tax profits, before exceptionals and amortisation, of £0.6m (£0.6m) and adjusted EPS of 0.5p (loss 0.3p). The group ended the period with £1.5m of net cash (£0.1m at the end of September year end). The international exposure (some 45% of revenues) helped reduce the impact of continued difficult UK conditions. All 3 operations (Media Direct, Books and Marketing Services) were profitable. Media Direct saw a direct impact on the desire to advertise reducing volumes for the in-flight advertising, both in the UK but severely so in the Middle-East, leading to a revenue decline from £15,2m to £12.7m and a drop in underlying operating profits from £1m to £0.3m. Books did well overseas as did e-books – helping to offset continued UK declines, leaving revenues at £22.5m (£23.8m) with underlying operating profits down to £0.6m (£0.9m). The Books MD has moved on and the group is seeking a replacement. Direct Marketing Services saw revenues decline to £4.2m (£5.6m) with underlying operating profits of £0.2m (£0.5m) primarily due to lower overall advertising rather than lost accounts. Forecasts of £1.1m PBT look achievable if not a bit light, giving 0.8p EPS which puts the group on a 4.9x prospective PER. We were sellers down to 5.5p – the valuation is too low and we return to a BUY with a 5p price target.

Forbidden Technologies (FBT, 20p, £15.87m) Finals to December 2009 showed revenues of £0.28m (£0.12m) with a loss before tax reduced to £0.09m (loss £0.11m). Post an issue of 2.5m new shares at 10p (with 2.5m options with an exercise price of 12p) which raised £0.30m and £0.15m introduced by the directors the group ended the period with net cash of £0.21m (£0.06m) giving underlying cash usage of £0.30m – primarily due to adverse working capital movements. The valuation of Forbidden remains difficult to justify, despite the optimism that the group is on the verge of “achieving scale”, but it would be foolish to fly in the face of a confident statement – so we move to a HOLD and await developments.

Hydrodec (HYR, 8.25p, £29.85m) Trading update is encouraging with volumes recovering from the lows of Q1 and the group recently received its first orders from a US based OEM. The raw material position is more in-balance, suggesting the group may see a recovery in margins with a similar improvement in Australia. The easing of raw material costs is leading the group to confidence it has sufficient resources for the remainder of the year and beyond. While encouraging we see the shares as ahead of events and maintain the SELL recommendation.

i-design Group (IDG,14.0p, £1.97m) Following a successful pilot, the group has secured a multi-year contract with Cardtronics Inc, a US based ATM network operators with c. 33,7000 ATMs globally. This is the first US contract for the group, a milestone. i-design has secured exclusive rights to sell advertising space on behalf of Cardtronics and is deploying its unrivalled third party advertising solution, atmAd.  The agreement covers c.3,000 ATMs, of which c. 2,200 of are located at retail sites in the US, with the balance located in the UK and managed by Cardtronics' UK subsidiary, Bank Machine. The contract provides a revenue share agreement on all third party advertising secured for the ATMs. The market forecast pre-tax losses of £0.54m and EPS of -0.04p in 2010. We retain our HOLD recommendation

Individual Restaurant (IRC, 13.25p, £7.90m) AGM statement from the Piccolino and Bar & Grill branded restaurants confirms continued signs of recovery in trading patterns with EBITDA (excluding the bad weather impacted first 2 weeks) to April matching last year and pulling ahead marginally in May. The group is warning that some England games coincide with trading hours – pretty lame given it has been coming for 4 years and the group has had plenty of time to plan events to take advantage. Forecasts around £1.1m with 1.2p EPS put the group on 11x. The caution expressed by the group encourages us to drop from a Speculative Buy to a HOLD.

InterQuest (ITQ, 65.5p, £21.06m) The IT staffing company announced FY trading in line with expectations though with visibility not yet recovered to pre-recession levels. Company has seen a rise in recruitment for first 5 months of 2010 particularly from financial services. Core business contractors working for outside clients up 7% - better than the highest number reported in Q4 2009. Increased in fee income from permanent recruitment seen in Q4 2009 (40% > than first three quarters average) has been maintained in 2010. New business ventures are performing well in line with hopes. Shares have performed strongly since our buy at 48.5p (8/01/10) & surpassed our 60p PT. We upgrade our price target to 72p which reflects around 9x earnings and provides slightly over 10% upside. Though caution volatile markets may threaten progress in financial services recruitment. Maintain SPECULATIVE BUY

Media Square (MSQ, 10p, £3.62m) Finals to February 2010 saw a revenue decline to £47.3m (£61.2m) with underlying pre-tax losses of £2.54m (profit of £0.47m), marking a return to an underlying H2 operating profit of £0.4m. The group wrote down £15.9m goodwill during the period. The year saw operating costs reduced by £10m with further reductions planned for the current year. Net debt ended the period at £19.9m (£13.4m). The new year has started encouragingly. While the underlying operating profits would not justify a positive stance yet the group does have sufficient revenues to encourage a risk move to a SPECULATIVE BUY for the 1 year turnaround view.

Nature Group (NGR, 32.5p, £12.78m) Prelims to 31 December 2009 are ahead of market expectations.  Following the full consolidation of Gibraltar operations, revenues increased by 77% to £6.0m (2009: £3.4m), PBT increased by 1.1x to £1.65m (2009: £0.51m), EPS by 1.3x to 4.05p (2009: 1.75p), a maiden dividend of 0.6p has been proposed and net cash of £1.0m (2009: £0.40m) - an impressive performance. The dividend modest maiden dividend of 1.8% is encouraging and highlights the group’s conviction in enhancing profitability and cash generation. The outlook for the statement highlights confidence in terms of new opportunities identified and potential for establishment of new operating locations in the future. We believe there is scope for the market to upgrade 2010 PBT and EPS estimates of £2.0m and 4.6p respectively. The 2010 rating of 7x is cheap. We reiterate our BUY recommendation with a target price of 42p.

RSM Tenon (TNO, 42.25p, £136.09) is now a listed on the LSE main market with trading of AIM shares cancelled. We hope the move will in time herald a rerating of the underrated company. BUY

Scapa Group (SCPA, 11.5p, £16.65m), the global supplier of technical adhesive tapes, reports prelims to 31 March 2010. Sales up 2% to £176.7m (2009: £174.0m), adjusted operating profit moved into profitability to £1.6m (2009: -£1.0) and higher finance costs of £3.7m, led to adjusted pre-tax losses of £2.1m (2009: £3.4m). We are impressed by the strong trading in H2, with sales up 10% on the previous period, vs. H1 down 6%. Improvements in trading coupled with the benefits of the cost cutting exercise have delivered a good performance in H2. Cash has been very well controlled, with net cash of £4.8m (2009: £6.8m) following funding of £5.7m in exceptional costs and one-off restructuring projects. The European and Asian businesses are recovering well and North America is showing early signs of improvement. The group will benefit from the restructuring in the current financial year and as a result is expected to generate profits of £2.8m and EPS of 1.5p in 2011. The group is fairly rated on earnings of 7.8x this year. We continue to see the group as attractive to potential bidders given the low EV/sales of 0.07x. We retain our SPECULATIVE BUY recommendation.

Stanelco (SEO, 0.2p, £6.16m) As we feared the group has announced a heavily diluting placing and open offer of up to 2,806m new shares at 0.125p to raise £3.5m. The theoretical ex-rights price is 0.165p – leaving the group still well ahead of what we would regard as fair value. SELL to the 0.18p level.

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