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26 August 2014 Last Week/ This Week…………..
………. comments on the investment sentiment driving market direction. Clearly the hindsight summary of Last Week has 20/20 vision. OMG’s investment narrative hopefully improves your macro investment view, although any firm forward looking opinions we make will not be supported by trading suggestions.
LAST WEEK
……the FTSE 100 ended up 1.3% at 6,775 near a 5 week high, the FTSE 250 improved 1.4% while the Aim All-Share at 764 increased by 1%. The BOE Minutes showed that 2 of the formerly unanimous 9 Rate Setters have decided that a raise is required before the election. Similarly in the US the Fed’s Chairwoman in an annual policy review, cautioned that there was ’considerable’ uncertainty at the employment level. Suggesting that there is no immediate policy action required. Compassion Fatigue on various world critical events seem to have set-in, perhaps partly as the accelerator fuel of political positioning is on a well needed summer rest……….
THIS WEEK
……..the company interim reporting season for the December year-end starts. It usually the larger companies reporting first. This may give some trading opportunities particularly in the less well followed smaller companies. On Tuesday Mortgage Lending figures are reported – a slight decline taking the edge off house prices would be noted by the BOE Interest Rate Setters. On Friday Consumer confidence is reported –in July it dropped for the first time in Six months- in current context lower confidence is economically correct but politically sad…………. Markets are likely to improve.
Pause for Thought
The UK Government owes £1.6 trillion to creditors around the world, which is equivalent to 91% of GDP.
According to IMF
Once the economic recovery is sufficiently robust official Interest rates may raise – bond prices fall/ yields go up – So investors buying bonds now at low yields could be locking in capital losses or uncompetitive returns.
Recommendations
FitBug – About to race ahead?
Massaging International -Cheap as Chips
Red24 – Not a hostage to fortune
Palace Capital (PCA) High Yield / Discount to NAV
Source BioScience (SBS) The right perscription for growth
Hayward Tyler Powered Growth
FITBUG (FITB) 0.45p-0.55p Mkt Cap £0.8m Next Results; Interims to June annc. September
The Finals to December reported in May did not make good reading , but the share price knows that already. Fitbug provide online personal health and well-being services, and have been doing so losing money for doing so almost before gym membership was fashionable. The product is now wide spread and most smart devises will have some sort of App that tries to get the user out of their seats to do some exercise. Fitbug have a sophisticated and content rich application of connected health products for the mobile healthcare market, and were able to state that orders at £1.2m for 2014 were already 60% higher than the whole of last year. Customers include Tesco, Dixons and PC World in the UK as well as having clients in Australia, South Africa and the US as since the beginning of the new financial year ten distribution partners have been appointed hopefully providing room for turnover growth in the second half. On Thursday it was announced that a £1.75m loan had been secured – that should be enough to deliver a leverage impact for the second half of the year! The loan is from mainly the existing board and is repayable by 31st July 2015 and carries a mere 5% interest rate.
As show of confidence in the Futbugs ability to deliver some contracts- this is hard to beat – as always you make your on minds ……
Messaging International (MES) 0.9-1.1p Mkt Cap £1.15m; Next Results Interims to June annc. September
The significance of the announcement last Tuesday of a joint funding from the BIRD Foundation went largely unnoticed. MES have a $900k grant towards the “Secure RCS Messaging project, with the project due to be completed in late 2015. MES are providers of converged messaging products and services and last year end to December 2013, were it not for the £1.2m expenditure on R&D would not have reported a £89k loss on turnover of £3.75m. Client’s include, print and US Cellular in the USA, Rogers, Bell, Telus in Canada and Dhiraagu in the Maldives. Stable revenues are ensured by either hosting messaging services for a per-message fee or by selling software licences, which are usually linked to the number of messages that can be sent through the system or to the number of active users. The gross profit margin is 37% allowing for cash inflow from operations of £418k and net cash of £765k after buying back £400 shares for cancellation ….. Not sure that much more needs to be said.
RED24 (REDT)12.5- 12.75p,Mkt Cap £6.2m, Next Results: Interims November
The shares fell from 18p last week following the announcement of the loss of a banking client. This is estimated to reduce the March 2015 year end profits by £250k – profits therefore could be around £0.7m which gives a prospective P/E of 12x., with an estimated yield of 4%. There is around £2.3m net cash and this could be used to expand the product range into perhaps medical assistance.
Red24 is a crisis assistance company that provides a range of security and business support services, offering preventative and reactive advice to help organisations and individuals to avoid or manage security and business risks to themselves, their families and their businesses. Its products and services are distributed through leading international financial service companies. This an attractive business model as it provides high earnings visibility and although the occasional contract can be lost the company has the £2.3m cash, sufficient product and clients diversity to bounce back. Although the product is very sticky once imbedded into a client offering, contracts do come up for renewal every two /three years and there is usually a 6 month notice period so the prospects of losing another is not the critical point as the fundamental protect the downside while the prospects of accelerating growth with an infill acquisition could cause a rerating.
Palace Capital (PCA)
£41m at 327.5p
Property investor Palace Capital’s latest acquisition has been made at the recently calculated asset value but it is a better deal than it appears. AIM-quoted Palace acquired Weybridge-based Property Investment Holdings (PIH), which owns 17 properties, for £32m – up to £3.65m in shares and the repayment of £27.7m of bank debt plus assumption of other liabilities. The net initial yield is 7.35% if it is adjusted for vacant properties.
DTZ valued the PIH property portfolio at £32m on 11 July but this valuation was for the banks and reflects the value that could be obtained if the properties were immediately sold to pay back the banks. Palace has shown that it can increase the value of its properties through selling non-core assets and improving income generation on other assets. Earlier this year, the £39.25m purchase of Quintain’s Sequel portfolio of secondary, regional property was acquired at a discount to NAV and a 13.2% yield. After a few weeks as part of the group the Sequel portfolio was valued at £56m at the end of March 2014, up from £44.2m at the time of acquisition.
The general meeting to pass the resolutions required to make the acquisition will be held on 26 August. The last stated NAV was 356p a share at the end of March 2014. The half year ends in September so there will not be much time to improve the valuation of the properties acquired. The year-end figures should show the progress made. An added attraction is the yield of 3.7%.
BusinessPalace is a commercial property investor with a highly experienced management team. The focus is on property outside of London because Palace’s management believes that the yields are much more attractive. The property portfolio has been acquired via three main acquisitions. The initial acquisition was a portfolio in the north of England, followed by the Sequel acquisition and then the latest acquisition of PIH.
Managing director Neil Sinclair, who is 70 years old, was a founder of Sinclair Goldsmith Chartered Surveyors which ended up as part of Colliers International. The other executive director Richard Starr is a 39 year old chartered surveyor. The executive and non-executive directors’ expertise and contacts enable them to assess and secure deals.
Finance A £20m placing at 310p a share helped to finance the acquisition – the directors subscribed for £760,000 worth of shares. A £16m facility has been agreed with NatWest, which lasts for five years and is secured on the properties acquired. There will be some additional investment required in some of the properties acquired. Net debt was £13.1m at the end of March 2014. An initial total dividend of 4.5p a share was paid for 2013-14 and a total dividend of 12p a share is promised for this year with the cash generated from rental income able to cover this payment.
Source BioScience (SBS) £36.5m at 12p
Laboratory services provider Source BioScience reported a one-fifth increase in earnings per share for its interims but the full benefits of the acquisition of Vindon Healthcare and additional investment in its other operations have yet to show through. Vindon has operations in the US and Source has been able to use these facilities as a base from which to offer its molecular biology and DNA sequencing services but they were up and running for a matter of weeks in the first half of 2014 and they will take time to build up revenues. The profit contribution from DNA sequencing was lower at the interim stage because of the investment in new facilities. The company already has a leading market position in Europe and wants to achieve a similar position in the US. There is also further scope to bring together the interests of the laboratory services operations and the Vindon stability storage business. The physical integration of the operations is completed but the commercial consolidation in terms of the product ranges is still ongoing.
House broker N+1 Singer forecasts a 2014 pre-tax profit of £2.97m, up from £1.55m, which puts the shares on a prospective 2014 multiple of 15. The existing operations have the ability to grow and additional services can be added so that this multiple will reduce over the coming years.
Business Source has three divisions. The healthcare division provides diagnostic and testing services for cancer, sexually transmitted infections and other diseases plus other laboratory products. Cervical cancer tests provide a large proportion of income but the diversification into other areas has reduced that dependence. This is the largest division in terms of revenues and profit. The life sciences division provides DNA sequencing services and products. The stability and bio storage division is predominantly made up of the Vindon storage equipment manufacturing and storage services business that was acquired last autumn plus support services for clinical trials, which was already part of the group.
Finance Vindon was not included in the first half of 2013 so the growth in profit and revenues in the first half of 2014 is boosted by its contribution but there is organic growth. In the six months to June 2014, revenues increased by 46% to £12.8m, while underlying pre-tax profit jumped from £800,000 to £1.4m. Earnings per share increased even though shares were issued to finance the Vindon acquisition. Net debt was reduced from £5m to £4.7m over the six month period. Source generated £851,000 from operating activities even though there was a decrease of more than £1m in creditors due to the timing of payments.
Hayward Tyler Maket capitalisation: £36m @79p a share
Currency concerns and worries about the shut down at three of EDF’s nuclear power stations have hit the share price of specialist pumps manufacturer Hayward Tyler but this represents a buying opportunity.
Although currency movements will hold back profit growth this is balanced out by the fact that trading has been better than expected as demand for power generation equipment in China increases. House broker finnCap is maintaining its 2014-15 profit forecast at £4.3m for earnings per share of 6.7p but management believes that earnings per share can grow by greater than 10% a year suggesting potential for earnings per share of 7.2p.The faults in the boiler units at the EDF nuclear power stations relate to the boiler spine so it is not anything to do with any products supplied by Hayward Tyler.
Hayward Tyler has a strong brand and good relationships with major customers in the power generation and oil and gas sectors. In power generation there are opportunities to grow organically and through investment in new nuclear power stations in the UK, while rising offshore activity in the oil and gas sector provides a positive outlook for that customer base. The large installed based means that aftermarket revenues make up the majority of group revenues.
Th shares are trading at less than 12 times prospective 2014-15 earnings, which does not reflect the strong market position or growth prospects.
Business Hayward Tyler supplies boiler circulating pumps (BCPs) for power stations and subsea motors for the offshore oil and gas sector. Although the company is small relative to larger rivals, such as KSB, because it has been trading for two centuries it has the largest installed base of boiler circulating pumps in the world. That provides the strong aftermarket income. Hayward Tyler also supplies subsea motors that enable more oil to be extracted from offshore fields. These can sell for up to £1m, which is more than treble the BCP price. The shareholder base has been widened through the sale of the majority stake of Indian engineer MBE. Hayward Tyler is keen to make acquisitions to widen the product offering. The longer-term strategy is to make revenues from the sale of new equipment similar in size to aftermarket revenues.
Finance
In the year to March 2014, profit improved from £2.4m to £4m. Net debt was £8.3m at the end of March 2014. Hayward Tyler has started paying dividends, totaling 1.3p a share last year, and they were five times covered by 2013-14 earnings. A reduction in the tax rate will help earnings to grow even though the current forecast for 2014-15 of £4.3m represents modest growth.
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