Monday 21th September 2009

LAST WEEK
The FTSE 100’s run continues with a 2.9% gain on the week. Over the year the FTSE has improved 6%, the All Share is up 6.5%, while the FTSE Fledgling is 29.4% higher on the year with a rise of 3.4% on the week. Small Caps outperform!
The FT reported comments from brokers that there is a tide of private investors – frustrated with the low interest rates on offer in cash savings accounts and wary of buying into property – have turned to equities.The macro-economic picture has a cautious texture. The news that public sector borrowing rose to £16.1bn last month sent a few shivers through the market. This borrowing is up from £9.9bn last year, but is in line with Chancellor Darling’s forecasts and lower than many had predicted. The Government’s debt now stands at 57.5% of GDP. The recession has dented tax receipts and increased unemployment benefit payouts, which increased £900m over the month. Taxes will go up and the next Government will need to cut expenditure.

COMPANYREPORTS
Tenon Steady Finals
Ultimate Finance Strong Finals
Independent Media
Surprising Interims
Net Dimensions
Profitable and at a Discount to cash
Cassidy Brothers
Profitable and discount to assets

DIRECTORS DEALINGS
The rules covering Directors Dealing makes this a more useful as a medium term indicator.

Buys:
– Antisoma, 225k@30p
– Capital & Regional, 3.6m@24p
– Coms, 4.3m@3p
– Deltax Medical, 250k@8.5p
– Guoco Leisure, 350k@22p
– Ingenious Media, 9.4m@40p
– Pure Water, 5.675m@2p
– Symphony Intern., 80k@28p

SELLS
– Petmin, 2,4m@16p
– Rurelec, 5.78m@17p

COMPANY REPORTS
Tenon (TNO) – £109.2m @ 57.25p – Accountants

Accountants Tenon produced another good set of results and it is looking forward to the increase in income tax rates next April generating even more business.
Chief executive Andy Raynor says that Tenon’s clients will want to do as much as they can to protect their income from the higher rate of tax of 50%. There is National Insurance on top of that. Once tax starts to take more than half of any additional income people take more notice of tax planning. Some individuals may decide to sell their business before the tax hike and this could help the corporate finance side of the business.
Business recovery is currently the star of the business and it grew its revenues by 41%. This area is likely to continue growing for the next couple of years even if the economy does recover.
Business recovery accounts for just under one-third of total group revenues of £151m in the year to June 2009. Some other parts of the business reported lower revenues, including low-margin strategic tax work and corporate finance, so revenues dipped by 6%. Profits before amortisation and exceptionals rose from £16.5m to £17.6m.
Net debt was £21.1m at the end of June 2009. On top of that there is deferred cash consideration of £3.8m, most of it payable within one year. There are bank facilities of £44m which last until November 2012 so there is still plenty of scope to make additional acquisitions.
Tenon has not been particularly active on the acquisition front in the past year but this could be set to change. It was difficult to assess how much an accountancy business was worth when the economy was still heading downwards. Now that the economy appears to have bottomed out it will be easier to assess the underlying value of the businesses.
Tenon still believes that there will be more consolidation in the sector and that the partnerships are no longer an ideal ownership structure. General accounting practices with a limited range of services would be ideal because Tenon could enhance the range offered to clients. Leeds, Bristol, Birmingham, Northampton and Bedford are areas that Tenon would like to enhance their presence.
Profits are expected to improve to around £19m in 2009-10. That puts the shares on just over 8x prospective earnings. The 1.5p a share dividend represents a yield of 2.6% and the dividend is likely to grow steadily over the years.

Ultimate Finance Group (UFG) – £2.6m @ 13.25p – Invoice Discounting

Ultimate Finance Group has reaped the benefits of being choosy about which businesses it lends to and this has helped it grow steadily over the past year.
A maiden dividend of 0.25p a share helped the share price rise 4.875p to 13.25p following the results. Former chief executive Brian Sumner took the chance to sell 500,000 shares – he still owns 4.6%.
The invoice discounting and factoring company’s underlying profits improved by one-third to £406,000 in the six months to June 2009. This adjusts for the £167,000 of restructuring charges in 2007-08. Lower interest costs helped boost the second half profits.
Ultimate had already announced that its facility from Lloyds TSB has increased from £18m to £25m. The facility lasts until 3 July 2012. However, the interest rate was increased. Ultimate was using £16m of the facility at the end of June 2009.
New enquiries increased by 77% last year but only a limited number of these were taken on as clients. Ultimate is also lending less as a percentage of its customers’ turnover. The amount of client turnover financed still increased by one-quarter to £213m. The northern and south eastern offices are moving into larger premises and the sales force is expanding.
Ultimate is in a good position to make add-on acquisitions if it can find the right quality of business that has been careful about whom it lends to.
Arbuthnot was appointed as nominated adviser and joint broker, with WH Ireland, in July 2009.
Ultimate is on course for profits of £500,000 this year. The shares are trading on around 8x prospective earnings for 2009-10.
The company’s cautious approach may have reduced its short-term growth rate but it has meant that it is in a strong position to take advantage of the opportunities available in a tough market where competition has weakened.

Independent Media Distribution (IMD) – £16.2m @ 47.5p – Online Advertising Distribution

Independent Media Distribution has reported better than expected interim revenues and profits.
IMD distributes advertising online to TV and radio stations. It also offers booking management and other software and services to the broadcasting sector.
The loss of a reseller led to a fall in revenues but 50% of the work has been won back at better prices because IMD no longer has to pay the reseller. More work could be won in the second half. IMD also had to cope with lower revenues from the radio sector.
Revenues from new products helped offset some of the shortfall but revenues still declined from £3.76m to £3.65m in the six months to June 2009. Profits fell from £629,000 to £463,000 but that shortfall should be made up in the second half. Business start up losses fell but the new French business is still losing money. The German business is profitable but it has been hit more by the recession.
IMD returned to a net cash position at the end of June 2009. The business is highly cash generative and net cash was £799,000 at the end of the period. That enabled IMD to pay an interim dividend of 0.5p a share. That is lower than the corresponding interim but 43% higher than last year’s final dividend.
IMD World made an initial contribution in the first half. This service is offered to agencies adapting or reversioning existing adverts to local markets. These adverts are then distributed around the world by IMD, sometimes directly sometimes through partners. This is lower margin work but IMD has distributed to more than 50 countries so far.
The new archiving service IMD Index will generate revenues in the second half.
IMD is a highly cash generative business which is not directly affected by the level of advertising spending – TV advertising spend has declined by 17% over the past year. IMD delivers the advert once and it does not matter how many times it is shown.
House broker Charles Stanley forecasts an improvement in full year profits from £1.1m to £1.3m. That suggests a strong second half. The recent rise in the share price means that the shares are trading on 16x prospective 2009 earnings. The nature of the business means that it warrants a higher rating than those companies directly exposed to advertising spend.

Net Dimensions (NETD) – £3.93m@19p – Licensing of computer software

Cheap as chips. Net Dimensions reported strong interims for the 6 months to 30June, a trading period including the height of the recession. Thus a 3% increase in turnover to $3m with a PBT of $0.41 against $0.09m, is a strong performance. There is net cash in the balance sheet of £4.1m which is greater than the market cap. Annualising the EPS would give a prospective P/E of 10x. The company reported that the second half is usually stronger than the first half.

The latest version of its flagship product The Enterprise Knowledge Platform 5.6 was launched and 26 new clients have been signed up. Net Dimensions provide companies, government agencies and other organizations with enterprise solutions to help deliver and manage corporate training solutions, career development, assessment and certifications programmes and support client with regulatory compliance needs

The new brokers Arden Partners have yet to put out a note but these fundamentals make this a firm base to build up from.

CASSIDY BROTHERS (CDY) – £2.2m@ 42.5p – Toy and nursery good manufactures

The finals surprised with a PBT of £324,000 on turnover of £3.9m as these numbers showed marginal improvements. The fall in UK sales due to destocking and the impact of the collapse of Woolworths was more than replaced by new international business not least from Australia.

The sales of George Foreman Grills and the Postman Pat steering wheels are receiving increasing numbers of international enquiries and orders. Five new products are being developed including a toy Dysons.

The NAV is 64.5p a share so this does seem cheap but historic earnings have been volatile and mainly loss making. The shares are also illiquid with the Cassidy family owning around 70%.

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