Last week
With fewer signs of double dipping recessions ahead of the summer, the FTSE 250 improved 5.1% to 9745.79, while the FTSE 100 recovered 6.1% to 5132.94. The Aim All –Share at 668.8 increased a more pedestrian 2.3%. The miners and financials and relief that a BT strike was avoided lead the improvement while the slower pace of UK growth is accepted.

This week
The UK unemployment rate is on Wednesday and has been at around 8% for 12 months and will increasingly become a recessionary watch indicator. As a increase can be anticipated if all the redundant public sector workers do not find private sector employment.

Pause for thought
Hedge funds and other financial speculators are threatening the good order of the chocolate market. Cocoa prices have reached their highest levels for 33 years, increasing 150% in the last 18 months, and financial speculators are being accused of inflating prices to make a financial profit
Sunday Independent

Company Reports

AdEPT Telecom (ADT) – £4.53m at 21.5p
Voice and data telecoms services provider AdEPT Telecom is focusing on generating profits in order to reduce its debt so that it will be more attractive to investors. Underlying pre-tax profits improved from £2.04m to £2.2m even though revenues were 10% lower at £25.7m in the year to March 2010. A reduction in overheads helped offset the lower revenues. Margins are expected to continue to improve but revenues are also set to fall again this year. A decline in call volumes led to a reduction in revenues from fixed line telecoms from £27.6m to £24m in the year to March 2010. Mobile revenues grew by 86% to £320,000 thanks to the increased use of smartphones and data revenues were 73% ahead at £1.1m. AdEPT is not a mobile service provider and this is always going to be a relatively small part of the business. Data, though, should provide more opportunities for growth. AdEPT is one of 20 companies that are approved to sell data products to universities and colleges connected to the network. This will boost the credibility of the business with other customers as well. Corporate failures are always a risk but the bad debts related to failures last year were little more than £90,000. AdEPT is increasingly focusing on larger clients who can generate more in revenues and the 200 largest customers are spending more than £1,000 a month.

Although house broker Astaire forecasts a slight dip in profit to £2.1m this year, the debt will continue to reduce. Astaire forecasts net debt of £7.5m at the end of March 2011, falling to £5.6m at the end of March 2012. Giving a prospective P/E of 3x, A reduction in the interest charge will help profits to rise in the coming years.

The cash generated from last year’s profits has helped reduce net debt by £1.6m to £9.2m. This debt was built up during the period after AdEPT’s flotation in February 2006 when the company made five acquisitions. Net debt peaked at £11.3m in March 2008. AdEPT has not made any acquisitions for two years so all surplus cash has gone to reducing debt and that is set to continue.

Debt reduction is likely to continue for another 12 to 18 months at least. Longer-term, though, this remains a fragmented sector with hundreds of companies involved and AdEPT should be well-placed to take advantage of consolidation opportunities.

Begbies Traynor (BEG) – £49m at 54.75p
Insolvency practitioner Begbies Traynor reckons that it is in a strong position to benefit from the expected upturn in insolvencies. Begbies’ Red Flag Alert statistics show that there were more than 127,000 businesses in financial distress by the end of the second quarter of 2010. The number of companies has fallen by one-fifth compared with the previous quarter, however, the average debts of the troubled companies has increased by 60% to around £545,000. Begbies reported an 11% increase in revenues to £69.1m in the year to April 2010. Underlying pre-tax profit was 6% higher at £10.4m with all of it effectively coming from the insolvency business. Begbies has closed some underperforming activities but it continues to offer forensic, corporate intelligence and risk consultancy services. These activities made a small profit in the period.

The number of insolvencies always grows after the economy comes out of recession and even if this rise is delayed it will still happen. The Red Flag Alert statistics highlight that there are already 52,000 companies that depend on public spending experiencing financial difficulties. Their position could become much worse. Construction and IT have shown slower rates of recovery than other sectors.

Net debt was £20.2m at the end of April 2010. Begbies has renegotiated its bank facilities. It has a £30m facility lasting four years and a £5m overdraft maturing in April 2011. The enlarged facilities mean that Begbies can make further acquisitions. The final dividend has been increased by 12% to 1.9p a share. The total dividend for the year is 3.1p a share.

Porvair (PRV) – £27.7m at 66.5p
The metals filtration division had slumped into loss in the first half of the previous year. Although revenues recovered from £9.5m to £11.3m, or 24% in dollar terms, this division is still not back to the previous levels of activity. A £1.1m operating loss was turned into a £276,000 profit. A reduction in costs helped the improvement. The good news for this side of the business was the latest three year deal with Alocoa. Porvair supplies more than 90% of the aluminium giant’s aluminium filters.

The microfiltration business reported flat operating profits because of a decline in higher margin aviation sector sales. Porvair supplies inerting filters for aeroplanes. Revenues grew 5% to £18.4m and aviation sales should improve in the second half. Group revenues grew from £27m to £29.7m in the six months to May 2010. If £637,000 of exceptional costs are stripped out of the comparative period, Porvair reported a jump in profits from £38,000 to £1.28m. Porvair’s focus is on regulated markets which have good growth prospects over the long-term. These markets include nuclear, aviation, environmental laboratory supplies and aluminium. Growth drivers include rising demand for energy, an improving aviation sector and the global recovery. Investment in new products is turning into revenues. Nearly one-quarter of revenues come from products launched in recent years.

Analysts increased their profit forecasts by 15%. House broker Altium forecasts a risen in underlying profits from £1.7m to £2.3m in the year to November 2010. That is around 50% below peak levels and there are scope for further upgrades later in the year if Porvair continues to make progress. The shares are trading on 18 times current forecast earnings for 2009-10. That could fall to 16x next year.

Porvair had net debt of £14.3m at the end of May 2010 and bank facilities totalling £18.5m that last until the end of 2013. Exchange rates have kept the debt figure higher than it would have been but cash generated from operations will reduce debt levels over the next few years.

Porvair is looking for bolt-on acquisitions so it could spend some of the cash generated on them. Management is keen to keep debt at manageable levels and to pay dividends. The interim dividend was unchanged at 1p a share.

i-design (IDG) – £2.19m at 15.5p
Cash machine advertising technology developer i-design is winning new contracts but is still some way from profitability. A lack of software licence revenues and lower advertising sales revenues meant that overall group revenues dipped from £1.38m to £911,000 in the six months to March 2010. The licence deals in the US and South America will come through in the second half. If there are no new licence deals this year then revenues could be near to the £2.4m generated in 2008-09. The interim loss increased from £368,000 to £660,000.

The new contracts will increase the cash machines using i-design’s technology from 5,600 to 9,100. The US contract with Cardtronics also covers 800 cash machines operated by Bank Machine in the UK. Cardtronics has many more cash machines so there is scope for widening the contract. The i-design management is still talking with UK banks but it is difficult to say when they will turn their minds to generating revenues from cash machines when they have other things to think about.

Net cash was £1.02m at the end of March 2010. There will continue to be a cash outflow in the second half. The company will still have cash at the end of September 2010 but if it does not start generating cash then it might have to raise more.

Belmore Resources (BEL) – £1.91m at 5p
Plus quoated, Belmore Resources’ joint venture partner Lundin Mining has increased the number of drill rigs it is using on the Kilbricken silver-lead-zinc discovery in Ireland from four to six. It has decided to do this because of the positive drill results so far. Lundin is earning a 70% stake in the Kilbricken project in return for investing €14.7m in exploration. Belmore will retain 30% of the project. Lundin is a good partner because of its zinc mining experience in Ireland. So far, Lundin has spent around one-fifth of the total amount it needs to in order to earn the 70%. The two most recent drill holes have shown high levels of silver and lead. Lundin plans to drill another 50 holes in the next nine months. That may provide enough information to calculate the initial size of the resource and that would indicate what Belmore could have and what it could be worth. There should be more news from the drilling in August.

There was £453,000 in the bank at the end of February 2010. Most of this came from a €330,000 placing last October, which is earmarked for other projects. Even so, the cash outflow from the company is low so it won‘t need to dip into the additional cash for some time. The European project that the cash was earmarked for has been delayed by disagreements over permits.

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