Monday 12th October 2009

The FTSE 100 closed the week up 3.5% at 5161.87, while the FTSE AIM All-Share improved 5% to 664.2. Last week was busy for world economic news and UK house prices and at least superficially all seems well . This week there will be further economic evidence to form an opinion on whether the market is over-brought on fundamentals. Inflation will be on Tuesday which could fall to by 0.1% to 1.5%. Wednesday could see unemployment reaching 2.5m and Average Earnings improve by 3%. It is news that drives small caps and the market seems to be reacting well to good news while poor news is seemingly already discounted in the price.


Hanson Westhouse (HWH)£7.73m@67.5p – Broker
Hanson Westhouse intends to start making markets in the shares of its clients. It says that this should not take up much of its capital – possibly around £1m.
Hanson Westhouse has around 40 clients, of which 35 are on Aim. Management believes that floating has helped to show potential clients that it has a strong balance sheet. Revenues fell sharply in the six months to June 2009 and the business made an underlying loss. Fees and commissions have improved since the end of June 2009. At its peak the business had an annual turnover of around £7m – it may not be much more than half that this year.
Robert Hanson is severing his connection with Hanson Westhouse so it intends to change its name to Westhouse.

Hanson Westhouse has six times its required regulatory capital and it has the finance to grow its business. There was £517,000 of cash in the bank at the end of June 2009 and the position has improved since. There are also investments – quoted and unquoted – held by SovGEM, the shell the broker reversed in to, which will provide additional cash as they are liquidated. That is unlikely to happen in the short-term. That portfolio has increased in value by one-third so far this year.
More likely to take on teams rather than acquire other brokers.

Inland (INL)£20m@12p – Brown Land Property Developer
Steve Wicks turned pennies into pound in Country and Metropolitan and set up Inland after rising near £50m in 2007. Inland are developers of urban regeneration projects around Southern England predominantly specialising in buying brownfield property and enhancing its value through obtaining planning permissions for residential and mixed-use developments. Inland currently gained planning permission on 11 sites for around 300 plots. The finals for June 2008 reported a loss of £10.5m without substantial write downs the loss would have been £3.93m. House builders, last year were not buying land with planning consent. The NAV was marked down from £50m to £40m, which is 25p a share and no further right downs are envisaged. By developing some plots, themselves and selling the houses turnover of £4.5m was generated and rental income was £0.71m.
Inland own a 25 acre site ex-military site in Farnborough, part of which is being developed. There is very significant potential from a Joint-land development venture in a 30 acre site in West Drayton, where there are potential for over 2000 plots plus commercial opportunities. Inland estimate that its portfolio has a gross value of £420m. Recently House builders have been raising money via right issues and could soon be paying development land again. Meanwhile Inland are building out plots in Byfleet, Queensgate Farnborough, which should generate sufficient cash and profits to meet obligations. The 52% discount to NAV seems to discount bad news.

Bank borrowing stood at £6.6m and there is a revolving credit facility of £10m with the Royal Bank of Scotland, due to be renewed shortly. The schedule for paying deferred consideration of £9.5m on the estate has been renegotiated to manageable terms so that £3.5m is due to be repaid in the current year. Administration costs are around £2m as most activities are outsourced when required.

Brainspark (BSP)£1.36m@0.41p – Investment company
Brainspark started out as a technology investment company a decade ago and has made little progress since then. It still has a small portfolio of investments but wants to build up a business with wholly owned operations that are away from the traditional technology focus. Brainspark intends to spin off its China IPO and technology investment interests in a separate vehicle. Brainspark would then be a shell. China IPO has ended its advisory agreement with London Asia.

There was £183,000 in the bank plus available for sale investments of £403,000 at the end of June.
Brainspark wants to expand through acquisition. It appears likely to acquire a theme park operator in which it already has a 0.47% stake. Brainspark is also considering a TV production company, an interactive mobile content provider and an Italian stockbroker.

Public Service Properties Investments (PSPI)£51.1m@76p – Property investor
PSPI is trading at a discount to its NAV of well over 75%. The reported NAV is 153.1p a share at the end of June 2009, compared with 155.1p a share six months earlier. When this figure is adjusted for goodwill and deferred tax on unrealised gains the NAV is 193.7p a share, against 196.9p a share at the end of 2008. That is after a 4p a share dividend payment in May 2009 so the underlying NAV has grown slightly. An unchanged interim dividend of 2p a share has been declared.
Revenues improved from £7.6m to £9.37m in the six months to June 2009. The write-down on the portfolio valuation was less than 1%. Profits increased from £4.52m to £5.34m.
Revenues are assured by index-linked long-term leases, although there is always a worry that the tenant could get into financial difficulties. There are also longer-term concerns about potential budget cuts and public funding for care home occupants.
PSPI’s portfolio is dominated by UK healthcare sector properties. They account for 69% of the value of the portfolio with the German properties accounting for 20%. The rest is in Switzerland and the US. The US properties are post offices and they do not fit in with the core business. However, they provide a good return and, if they were sold, PSPI would need to find an even better investment that it can reinvest the money in.

Net debt was nearly £148m at the end of June 2009, giving balance sheet gearing of 145%. Loan to value is currently 54%. The maximum loan to value that PSPI is willing to go to is 70% but in reality it is unlikely to want to go as high as that. Germany is likely to be the focus of acquisition activity. No property acquisitions have been made so far this year but PSPI has been putting money into refurbishing existing properties. This will help to improve rental income. Enough cash was generated in the first half to cover the period’s capital investment.

Sigma Capital (SGM) – £7.4m@ 15.75p – Asset management
The property and renewable energy funds manager booked a profit of £3.58m on the demerger, which was partly offset by a £1.88m write down on the value of a property. Revenues fell from £3.31m to £1.34m in the six months to June 2009 due to the lack of fees from new property partnerships. Profits rose from £506,000 to £1.58m but there would have been a loss without the two one-off items.
Edison forecasts a full year profit of £1.27m. Excluding the gain on the disposal of Frontier IP and the write down of the property, the loss would be £435,000.
Management believes that this is a good time to be buying property so this part of the business should strengthen. Sigma also intends to launch new funds covering sectors such as biomass and small scale wind.

Net cash is £4.43m – including £628,000 raised by Frontier IP. Sigma’s net asset value is 20.8p a share.

SciSys (SSY)£14.2m@50p – IT services
SciSys is benefiting from cost cutting and the completion of unprofitable contracts. Although revenues are expected to be flat this year at £38.2m the underlying operating profit is expected to improve from £900,000 to £1.3m. The interim operating profit was £600,000. The improvement in margins is expected to continue for the next couple of years. Canaccord forecasts an improvement in operating margins from 3.4% in 2009 to 5.7% in 2011. These margins could possibly reach up to 7% over the long-term.
The government and broadcast divisions are doing better than expected but the space division is behind budget. The government contracts are in areas where spending is less likely to be cut.
SciSys is winning new contracts so this augurs well for future revenues. These include contracts with the government, BBC and European Space Agency.

Net cash is £1.3m and the dividend has been reinstated.

Motivcom (MCM)£19.8m@68p – Promotions
Reported profits were flat at £1.4m, although pre-amortisation profits fell from £1.77m to £1.62m. Revenues fell from £55.9m to £49m.
The core motivation division was hit by reduced spending by clients but new clients and a solid contribution from vouchers means that the profit contribution doubled to £510,000 even though revenues fell by 12%.
Cost savings are offsetting the lower activity levels in the events division. There was a decline in contribution in the first half but the full year contribution should be similar to last year.
The promotions division was hit by higher take ups for some promotions where Motivcom gets a fixed fee. This was partly offset by higher employee benefits income.
Numis is maintaining its full year profit forecast at £3.5m, up from £2.9m in 2008.

Net debt was £136,000 at the end of June 2009 but this is a low point in the year for cash. The end of the year cash position is always much stronger.

Proton Power (PPS)£8m@7.5p – Fuel cells
The company’s manufacturing partner is already assembling fuel cell stacks and is gearing up for full scale production. The plan is for Proton to become a supplier of a fuel cell-based power pack that has a number of different uses rather than a large number of different products.
Proton has signed an agreement giving Michigan-based engines and transmissions supplier L-3 Communications exclusivity over its fuel cell systems in propulsion systems, marine and universal power supply applications in the North American market. L-3 can also sell the products internationally. The military is a key market for L-3.
Revenues fell from £455,000 to £289,000 in the six months to June 2009. The loss increased from £1.29m to £2.05m. Interest is being shown in Proton’s technology by light duty vehicle manufacturers.

Proton still has cash and available bank facilities but it will need to start generating significant revenues early next year or more cash will be needed.

Baobab Resources (BAO)£13.4m@11.5p – Minerals explorer in Mozambique
Baobab is exploring for iron ore, base and precious metals in Mozambique. It is one of the best performing Aim shares over the past month, having risen around 150%, thanks to news of its Tete iron, vanadium and titanium project. This has a 47.7m tonne inferred resource. An independent assessment concludes that there is 400 to 700m tonnes of mineralization to a dept of 250 metres below the surface. This project could underpin an operation process up to 10m tonnes per year for 30 years. A financial modelling exercise is underway. Further updates will be published later in October.

Baobab says that it has enough cash to last it until next year.

Northbridge Industrial Services(NBI)£11p1m@134.5p – Industrial equipment and generators hire Going Ex-dividend in on Tuesday
The equipment rental and sales company reported a fall in revenues from £6.87m to £6.1m in the six months to June 2009. A 38% increase in rental revenues helped to improve margins. Pre-tax profits improved from £1.03m to £1.12m.
A one-for-four open offer at 110p a share in June 2009 raised £1.46m after costs. This will increase the average number of shares in issue in the second half and make it more difficult to increase earnings per share.
Net debt was £3.08m at the end of June 2009 as Northbridge invested in its rental equipment fleet. This investment continues. Northbridge has additional land at its factory site which would enable it to increase its production capacity. The interim dividend is being increased from 1.3p to 1.4p a share.
Northbridge has won a $2.9m a year contract at the Jabali zinc project in Yemen. The contract with Aim-quoted ZincOx lasts for three years and will make a significant contribution in 2010. Northbridge will supply generators, transformers and other equipment.

A one-for-four open offer at 110p a share in June 2009 raised £1.46m after costs. This will increase the average number of shares in issue in the second half and make it more difficult to increase earnings per share.
Net debt was £3.08m at the end of June 2009 as Northbridge invested in its rental equipment fleet. This investment continues. Northbridge has additional land at its factory site which would enable it to increase its production capacity. The interim dividend is being increased from 1.3p to 1.4p a share.
Northbridge continues to look for acquisitions that will add to the product range of equipment and help the company to expand geographically.

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