Eckoh (ECK, 5.625p, £11.24m), the provider of hosted speech recognition services, reports interims to 30 September 2009. Sales fell by 14% to £8.6m (H109: £10.0m), but an improvement in gross margins by 5% to 38.6%, due to a shift in the sales mix from Client IVR to higher margins sales in the Speech Solutions division, drove adjusted PBT to only fall by 3% to £0.175m (H109: £0.181m). Growth from the Speech Solutions divisions will offset the decline in Client IVR sales. Management are focusing on winning new, long term contracts with blue chip companies in the speech solutions areas. Eckoh will add specialist technologies to broaden its offerings, especially in the mobile area. An increase in capex reduced net cash to £1.5m (FY09: £2.4m). The market estimates 2010 pre-tax profit of £0.7m and EPS of 0.36p – we believe this is extremely bullish and expect the market to halve estimates. Assuming H1=H2, we would expect adjusted PBT of c. £0.35m and EPS of c. 0.18p. The stock trades on a 2010 PER of 31.3x and an EV/EBITDA of c.26x – an unwarranted premium to the market. We reduce our recommendation from a Hold to SELL.
Pubs ‘n’ Bars (PNB, 2.75p, £1.1m) Following our strong sell recommendation on 28/09/09 over concerns on funding, their bank has failed to provide additional funding. The group has been placed into administration.
Tenon Group (TNO, 50.75p, £97.1m) announced the proposed Acquisition of RSM Bentley Jennison, a UK-based professional services, accountancy, business advisory and risk management services firm. A fully underwritten at 45 pence has raised £40m to part fund the proposed acquisition. The Proposed Acquisition will create the 7th largest accountancy and business in the UK by income. Consideration will be capped at £76.3m broken down into; initial cash of £40m; shares of up to £17.5m; deferred consideration up to £18.8m over 3 years (subject to performance); an additional £9.0m may become payable (£5.0m cash/£4.0 shares) if contingent assets in RSM Bentley Jennison are realised at par value. The deal looks a good synergistic move for Tenon, which will benefit form scale and significant cost synergies estimated at least of £6.3m.The price looks reasonable if a little above the valuation of Tenon (EV/EBIT historic of 5.6x compared to EV/EBIT historic of 7.5x though that includes the deferred element dependent on performance). Thus while on the surface it does not look materially enhancing synergies may help rectify this and the board believes after integration costs, the acquisition will be EPS positive in its first FY (2011). In all a good looking deal which, if approved, should see Tenon consolidate a strong UK position. While this years rating can be expected to increase as a result of this deal, at 6.6x 2011 the stock looks good value. BUY
Zytronic (ZYT, 180p, £26.41m) Finals to September 2009 benefitted from the growth in touch sensors and sales rose 8% to £15.9m (£14.7m) with underlying PBT of £2.60m (£2.05m), EPS of 11.6p (7.3p) and DPS of 5p (4.5p) - slightly ahead of expectations. Zytronic’s sensors have already been selected for use in a Coca-Cola dispenser (effectively an industrial application) and are now seeing the first approvals for the white goods market. Zypotouch sensor sales grew 54.9%, helping offset the rest of the group’s sales which fell 6%. Similarly, international sales grew substantially to 85.9% (79.4%). Forecasts around £2.7m with 12.93p EPS and DPS around 5.3p puts the group on 13.9x prospective PER and a 2.9% yield. We maintain our BUY recommendation, last iterated on 01/07/09 at 172p, and a price target of 193p.
Advanced Medical Solutions (AMS, 27p, £38.96m) Its ‘ActivHeal’ advanced wound dressings have delivered annualised cost savings of 54% in tests with University College London Hospital’s NHS Foundation Trust (ULCH). We move the shares from a Hold, last iterated at 28p on 26/10/09, to a BUY with a 35p price target, noting we are approaching the year end and the rating for next year could be as low as 10x.
Brady (BRY, 65p, £18.40m) Has announced its Aquarius metals trading software has been selected by Xstrata Peruvian copper operations. The rating remains well up with events so a continued HOLD.
Cohort (CHRT, 95.5p, £38.95m) Interims to October 2009 saw revenues of £37.3m (£33.9m) with underlying PBT of £1.3m (£2.93m), EPS of 2.42p (6.25p) and DPS of 0.65p (0.55p). The group ended the period with £3m of net funds, down from £3.7m at the April year end, due to working capital which is expected to reverse in the second half. The group saw 2 of its subsidiaries, MASS (electronic warfare) and SEA (advanced surveillance and hardware house), have good first halves while SCS’s first half (defence consultancy) was so poor the group is lowering the overall expectations for the year. SCS made a loss of £0.9m (including £0.4m recognised from H2 the previous year) but is expected to return to breakeven for the year. Forecasts between £3m and £4m for this year and £7m or so next year suggest EPS around 6.6p rising to 13.5p in 2011. With ratings of some 14.5x falling to 7.1x suggests there may be some support in the future for the share price, but not yet – HOLD.
Cyril Sweett Group (CSG, 36.5p, £20.86m) Has been appointed by Tameer Holding Investment LLC as the project quantity surveyors for its flag ship development in Abu Dhabi. To March 2010 the company is sitting on a 7.0x prospective PER, so we maintain our HOLD recommendation, last iterated at 36.5p on 16/11/09.
Sanelco (SEO, 0.40p £12.31m) Has signed orders worth £0.75m for several induction furnace systems. We maintain our HOLD recommendation due to the high level of debt and which raises the danger of a dilutive capital raise.
Photo-Me International (PHTM, 39.75p, £143.0m), the instant service equipment group, reports interims to 31 October 2009 are line with expectations. Revenues up 9% y-o-y in Sterling terms to £117.7m, but down 2% if constant exchange rates, reflecting the weakness of Sterling against the Yen and the Euro year-on-year. The reduction in net debt drove a 44% reduction in finance costs. The latter coupled with improvements in gross margins led to a 72% improvement in adjusted PBT to £11.2m (H109: £6.0m). However an exceptionally high tax rate of 44% (2008: 30%) due to depreciation exceeding capital allowance drove EPS to increase by only 49% to 1.77p (H109: 1.2p). Net cash of £2.57m (FY09: net debt £23.5m) has encouraged the group to resume with an interim DPS of 0.25p, which illustrates cash generation of the business. Management believe improvements in day-to-day management combined with initial volume of the Photobook Maker will benefit H2. Bearing in mind, H2 is traditionally weaker than H1, the Board is hopeful (not confident) H2 will be profitable. For prudence, assuming the group break-evens in H2, we would expect EPS of 1.8p, which puts the stock on 22x – a premium to the market. We believe the new management team is transforming the business, but we continue to view this stock as expensive. The high rating combined with a reduction in demand for ID photographers, a reduction in retail base, increased competition and volatility in exchange rates encourages us to retain our SELL recommendation.
Cinpart (CINP, 14p, £11.00m) has announced its Derlite subsidiary has won a contract for spark electrodes with Burner Systems International which is already a significant customer. The contract worth £0.65m secures a “substantive proportion” of the projected Derlite sales.
Cosalt (CSLT, 8.5p, £34.37m) has won a 3 year contract with Babcock Rail for the supply of personal protection equipment, like high-viz jackets and safety footwear. We recently upgraded from a Hold to a BUY, on 30/11/09 at 8.5p, which we reiterate.
White Young Green (WHY, 7.85p, £4.16m) has announced the long expected restructuring and EGM to approve, without which the group could enter administration. The restructuring proposals sees some £22.9m of debt converted into 29.993m new shares and £30m of debt converted into 27.6m “a” preference share sand 2.4m of “B” prefs.to equity. The lenders have instructed that the “B” prefs and 8.631m of the new equity be injected into a new employee benefit trust. In return the lenders will make available £50m of new debt facilities, £8.25m of working capital facilities and £38m of corporate bonding facilities. The group will transfer from the full list to AIM. As a result the existing shareholders will hold 15%, the lenders 60.5% and the new employee benefit trust 24.5%. As part of the proposals the group is prohibited from paying a dividend to ordinary shareholders till the refinanced lending facilities have been repaid (approximately 2013). Post the debt restructuring the shares will be split from one 5p face value into 1 ordinary and 4 deferred shares and then consolidated on a 1 for 10 basis – giving an issued share capital of 35.289m shares of 10p face value. Existing shareholders should vote for the proposals and HOLD.
Horizonte Minerals (HZM, 8.25p, £4.9m) has added a further Nickel exploration project to its pipeline. This arrives through the successful priority application with JV partner LGA for the Tucuma nickel exploration licence in the western part of the Carajas, the established mineral district of northern Brazil. The project was identified by the Company, as prospective on the basis of favourable geology and geophysical data from previous exploration work in the region and the target is a 3km long c.600m wide nickel anomaly at 0.5%Ni. While too early to factor as anything more than prospective the project demonstrates Horizonte’s business model in action (i.e. intimate early stage projects prove them up and shift them on) and adds to positive recent news on the Lontra deposit.
S&U (SUS.L, 437.5p, £51.4m), the home credit and motor finance provider reports an IMS from 1 August 2009 to 8 December 2009. The home credit division (c. 67% of total profit) and the motor finance division continue to perform well, with trading in line with management expectations. The quality of debt and impairment levels has improved. Strong cash generation has reduced net borrowing by £6m to £27m. The group has significant headroom for organic growth and acquisitions. The market forecasts 2010 PBT of £8.9m, EPS of 54.8p and DPS of 32p and in 2011 PBT of £9.5m, EPS of 58.4p and DPS of 32p. The stock trades on a 2010 prospective PER of 8.0x falling to 7.5x in 2011. The stock is a yield play with a prospective 2010 yield of 7.3% growing to 7.5% in 2011. Given an interest cover of 8x, we believe the DPS is sustainable.