LAST WEEK
The FTSE closed 4.3% higher at 5011.4 while the Small Cap and Fledgling improved 5.8% and 4.1% respectively. The FTSE’s rally seems understandable as it is supported by corporate activity and the progress being made by the economic recovery. There a few doubters wondering if it all recovering a little quickly given the prospects of slow growth. Small caps should continue to relatively outperform. Gold also had a good week and closed at $1,011 an onz.

COMPANY REPORTS
Advanced Medical Solutions
AMS
£39m @ 28p
Woundcare products supplier

AMS was hit by large one-off charges relating to a potential acquisition that fell through. Without this, and the costs of moving to larger premises, the underlying performance of AMS remained good.
Revenues were flat at £9.9m in the six months to June 2009. A small decrease in gross margin was more than offset by favourable currency movements. Underlying profits dipped from £1.02m to £889,000. That is before the £763,000 charge for the failed acquisition and £186,000 spent on the site move.
Both divisions improved their contribution – wound closure made a smaller loss. Even though there was destocking the advanced woundcare business made a higher operating profit. The reason for the fall in pre-tax profit for the group was lower income from fees paid by partners for the development of new products. There are some development projects being worked on but there is little in the way of revenues from them.
The outlook remains positive and the 2009 figures will be weighted even more to the second half. AMS should be able to maintain or beat the pre-tax profit of £2.93m in 2008.
Net cash was £4.2m at the end of June 2009. There was a cash outflow from operations of £985,000 in the first half of 2009 plus additional investment in the company’s new premises. AMS should be able to continue to maintain a net cash position while it completes the move to new premises.

Alliance Pharma (APH)
£37.7m @ 19.25p
Drug Distributor
Alliance Pharma has been one of the best performers on Aim during 2009. The shares have risen from 2.625p to 19.25p – an increase of 633%. Alliance, which buys up well-established, niche drugs, finally started making significant profits in 2008 and they are increasing rapidly.
Alliance reported a profit of £2.4m in 2008 and it has already beaten that figure in 2009. In the six months to June 2009, Alliance reported an increase in interim profit from £1m to £2.9m, as revenues increased from £9.9m to £13.2m. Alliance is on course to make a full year profit of more than £6m. That means that, even though the share price has soared, Alliance is trading on less than eight times prospective earnings for 2009. There is even a maiden interim dividend of 0.07p a share.
The improvement in the share price has been sparked by healthcare investor MVM Life Science Partners buying a 9% stake in March and Nigel Wray building up his stake to 11.1% during 2009. Probably just as important is RAB Capital taking advantage of the rise in the share price to sell nearly all of its stake. That removed a potential stock overhang.
Alliance does not have to spend on marketing on the majority of the drug portfolio because they dominate their niche markets and competition is limited. Some of the drugs were launched in the 1950s. There are other drugs which do require some marketing spend, such as Nu-Seals, a low dose aspirin that has strong market share in Ireland.

One of the things that has held back the Alliance share price in the past has been the high level of debt. Net debt was £30.4m at the end of June 2009 and £34.3m after recent acquisitions. Most of the debt is from a facility secured on the value of the drugs acquired. These drugs are highly cash generative.
The financing is secure until 2012. There is still £10m of tax losses available so more of the cash generated can go towards reducing debt.
There is £7.5m of convertible unsecured loan stock paying an interest rate of 8% included in the net debt figure. This is convertible up until 30 November 2013 at 21p a share. The share price is getting back to that level and should hopefully be much higher before 2013. That means there is a good chance that a significant chunk of this loan stock will be converted into shares. Although the holders are fixed-income institutions so they will probably leave it as long as possible to convert. The loan stock is traded on Aim so they could sell it in the market – it is trading close to par.
Alliance continues to look for more niche drugs to buy. It acquired nausea treatment Buccastem and skin cream Timodine from Reckitt Benckiser in August for £7.5m. This deal should be significantly earnings enhancing in 2010. Alliance has the ability to finance more deals like this.

UNIVERSE GROUP (UNG.L)
£3.87m@3.875p
Universe is a supplier of payment and loyalty systems.

Strategic stake building at Universe Group as the AIM-quoted Brulines Group has bought a 7.05% holding. The shares appear to come from former Universe boss Ray Mackie who has cut his stake to below 3%. Other major holdings include Unicorn Asset Management 8%, Rathbone 4.9% and Ennismore 15.8%.

Universe is a supplier of retail payment and loyalty systems. Brulines supplies systems that measure the dispensing of beer and provide reports on amusement and gaming systems. Brulines also has a subsidiary called Edensure that monitors the loss of fuel at petrol forecourts. This appears to be the area where there is overlap between the two companies. Universe has petrol forecourt operations as well.

At the current price Universe is valued at £3.87m and moved back into profit in the first half of 2009 but had net debt of £2.06m at the end of June 2009. House broker Arbuthnot forecasts full year profits of £500,000, which puts the shares on a P/E of around 10x prospective 2009 earnings. Shares in Brulines are 103.5p which gives a market cap of £28.9m. The shares are trading on less than a PE of 8x for the year to March 2010.

A merger should give scope to cut costs, particularly those related to being a quoted company. The sum of parts in Universe have for some time seem undervalued so further stake building may be anticipated.

INTELLEGO (IHP.L)
£1.04m@0.725p
Provide e-learning consultancy and training

The AGM statement reported that progress is being made. Following the changes last year and the improvements that are underway since the appointment of a marketing director, Intellego intend to accelerate plans and increase marketing expenditure and further growth is anticipated . At the full year revenues assisted by acquisitions improved 40% to £2.34m but losses were exaggerated by restructuring costs and increased to just over £0.5m.

Intellego have developed and launched a new library of courses for retailers which appropriately enough includes a course on selling skills. As well as customer services, health and safety, buying and merchandising, team leadership and loss prevention. These modules build into a complete training programme for retail staff. These services are provided on a hosted basis so will continue to have high gross margins. E-learning is a cost effective and efficient way to train staff and should suit restricted training budgets in these recessionary times. At current margins sales only need to increase to £2.74m for the company to break–even and once that is established the company have further acquisition plans.

MAINTEL (MAI.L)
£16.4m @ 152p
Telecom Services

Full-year profits many be upgraded after ringing a high note at the interims. As a 39% PBT improvement to £1.13m was reported. The balance sheet remains strong with £1.4m cash at the end of the period. A significant maintenance order of upto £1.4m was announced in April which will impact in the second half. Current forecast from house broker Finn Cap are for £2.4m giving a P/E of 8x and a yield of 4% after the interim dividend was raised by 24%.

New business wins in the core area of maintenance have pushed contracted base revenue to over £10m for the first time by the end of the period and the maintenance pipeline remains strong. This may well be attractive to a large services business. The management have been buying shares back for cancelation.

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