Last week
The FTSE 250 was down -3.4% at 9276.39 with the more international based FTSE 100 off -4.0%. The AIM All Share at 653.3 was down -3.0%. The unhelpful net increase of 125,000 in US Jobless in May gives an unemployment rate of 9.6%, if you look hard enough the underlying trend in earnings is improving but may be at a slower rate than hoped but not a sign of double dipping.

This week
The BOE Interest Rate Decision in 12am on Thursday 8th. Although the debate has started about when interest may need to rise given the Budget spending cuts and tax raises the Monetary Policy Committee (MPC) will leave rates alone at 0.5%. On Tuesday there is EU unemployment and while Spain is at 19% the average is brought down.

Pause for thought
The UK Small Cap has gone from dodo to fashionable three times in my career and I fully expect a fourth.
Graham Shore FT

Company Reports
Clarity Commerce Solutions (CCS) – £15.6m at 38.5p
IT services and leisure software provider Clarity Commerce Solutions reported full year figures ahead of expectations. Clarity increased its profit by two-thirds to £1.9m in the year to March 2010 compared with a forecast of £1.8m. Revenues rose 8% to £19.1m. Clarity has bought back help desk and training services business Cyntergy for less than one-third of the disposal proceeds. The main growth is expected to come from the leisure software division, where Pret a Manger is a customer. House broker Arbuthnot forecasts a profit of £2.5m this year, rising to £3.7m next year. The shares are trading on 7x prospective earnings for 2010-11.

Former Host Europe finance director Stephen Sadler has taken up the same post at Clarity.

Net cash was £1.24m at the end of March 2010. There was also £1.4m of potential deferred consideration over the next two years. Cyntergy was acquired after the year end. The business is cash generative so the cash pile will rise even after the deferred consideration is paid. Clarity could pay a dividend but it does not intend to yet. It may start next year.

Zoo Media (ZOO) – £9.81m at 41.5p
Post-production and premedia software and services Zoo Digital is starting to widen its customer base so it will not be so dependent on the Hollywood film studios. Sheffield-based Zoo has developed software that speeds up the production and translation of DVDs and their packaging. It can also be used to design posters and point of sale materials. The software helps companies to save money.

An agreement with print-based packaging manufacturer Multi Packaging Solutions Inc and a strategic investment in Zoo by MPS should herald the start of a revenue stream coming from the customers of MPS. The two firms will jointly market Zoo’s software and services to MPS’s customer base, which includes firms involved in entertainment, pharmaceuticals and consumer goods. The pharma sector could be an important customer base because drug packaging needs to be translated into other languages and it must be accurate. MPS is currently focused on North America with 14 factories under its ownership but it intends to expand in Europe and Asia. MPS is investing $1.2m (£800,000) at 40p a share and will be issued with warrants to subscribe for 2.15m shares at 50p each. The warrants lapse at the end of June 2013. The venture needs to have generated revenues of between $5m and $10m for the warrants to be exercisable. Revenues will be in the form of software licences and usage fees. Zoo has been increasing the amount of revenue it generates from existing customers as well as adding new ones. The accounts have switched from sterling to dollars. Revenues increased from $11.3m to $15.1m. Exchange rate movements have been a significant factor in the past couple of years. The reported figures show a swing from a profit to a loss. The underlying pre-foreign exchange loss fell from $1.9m to $600,000. House broker FinnCap does not include any revenues from the MPS venture in its forecast for the year to March 2011. It still expects revenues to grow to £16.1m and a pre-foreign exchange profit of £900,000. There could still be some contribution from the MPS deal in the second half. The share price has nearly trebled over the past year. The shares are trading at 13x prospective 2010-11 earnings.

Zoo had net cash of $1m at the end of March 2010 with a further $1.2m to come from MPS. There is a $5.05m convertible loan which lasts until October 2011. The conversion price is 48.75p a share.

Private & Commercial Finance (PCF) – £4.55m at 8.625p
Securing additional finance in order to increase its equipment finance lending book is the key to the progress of business finance provider Private & Commercial Finance As demand for business finance is increasing, if PCF can get additional cash then there should be plenty of opportunities. Business finance accounts for more of the business than car finance. It was the other way around until recently. Pre-tax profit jumped from £263,000 to £528,000 even though turnover fell from £62.9m to £60.2m in the year to March 2010. The underlying profit was £338,000. Investment in software has improved efficiency and the quality of the loan book and that has helped reduce bad debt charges. New business written was down from £60.6m to £43.4m. Lack of finance will hold back expansion this year and Daniel Stewart forecasts profits of around £500,000 on revenues of £57.7m for a P/E of around 10x.

There is little scope to grow within the current facilities. These loan facilities, which last more than 12 months, total £120m and PCF’s loan book is £121.9m. PCF would like loan facilities of up to £250m. PCF is investigating a number of ways that it can obtain additional finance. These could be a bond, debenture, securitisation of loans or even working on behalf of a bank, which would provide finance for loans. A front runner appears to be a debenture that is similar to the one that provides finance for Provident Financial. This would be secured against the lending receivables and might even be traded on the London Stock Exchange’s new corporate bond market. Management should sort out the new finance in time for it to be in place for the following financial year. Some of the cash could be spent on acquisitions of loan books and finance businesses.

Plastics Capital (PLA) – £8.63m at 32p
Niche plastics products manufacturer Plastics Capital ended the financial year strongly as volumes and margins started to improve. The company believes that it can achieve organic growth of more than 10% a year and supplement that with acquisitions. Revenues dipped 5% to £26.7m in the year to March 2010. The underlying profit rose from £2.01m to £2.98m. Raw material price changes are passed on so they do not have a significant effect on profit except in terms of timing delays. Overheads have been reduced and the workforce has fallen over the past two years. Employee numbers in Thailand are increasing and there is still spare capacity.

Sterling weakness helped the company last year. A strong dollar and a weak Euro is good for Plastics Capital. There is $5m of trading exposure in dollars. The Euro exposure is €1.2m but that is hedged by Euro debt. The packaging side of the business has grown over the period thanks to strong sales outside of the UK. Sales of creasing matrix products for cardboard packaging and film packaging were strong. Projects using plastic bearings have been delayed. There are signs of volumes coming back although volumes are still below the level they were two years ago. Cenkos forecasts underlying profit of £3.3m on revenues of £28m in the year to March 2011. The shares are trading on little more than 3x prospective earnings for 2010-11.

Net debt fell by £2.9m to £16.1m at the end of March 2010.
Management is keen to get the company’s rating up so that it is easier to make acquisitions. They would still like to make a couple of acquisitions a year but it will be difficult to finance these at the current share price and present level of debt. Plastics Capital has not missed out on any acquisitions recently because there have not been any good opportunities. Plastics Capital is looking for good businesses that have run out of steam – not generally being sold by their owners at the moment – or ones that are in a depressed state. Management would like the company to be capitalised at £100m in a few years.

ReNeuron (RENE) – £19.3m at 4.4p
Stem cell therapies developer ReNeuron Group has started recruiting for its treatment for disabled stroke patients (ReN001). The NHS Greater Glasgow and Clyde Health Board has given permission for the ReN001 trial to take place at the Institute of Neurological Sciences at Glasgow’s Southern General Hospital. This will be the first UK clinical trial using stem cells on humans. The treatment is injected close to the stroke lesion damage in the brain and it helps the brain to rebuild damaged blood vessels, reduce inflammation and ‘re-wire’ the brain. The trial will involve 12 moderate to severely disabled stroke patients and initially one patient will be treated at a time. Four different doses will be trialled. After progress is made the trial could be speeded up. ReNeuron also has a treatment called ReN009 for peripheral arterial disease and once called ReN003 for the eye disease retinitis pigmentosa. These are not as far advanced but regulatory hurdles are less strict so they could catch up with ReNE001 over the next few years. ReNeuron wants to develop these treatments and then find a partner at a later stage in their development. The ReNE001 trial will add to the company’s costs and ReNeuron is also developing a frozen version of its CTX stem cell line.

There was cash of £5.5m in the balance sheet at the end of March 2010. That cash will last until the second quarter of 2011. There is also an equity funding line from Matrix that could provide a further £4.9m.

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