Last week
At 5195.3 the FTSE 100 is -1.5% lower on the week and is off -2.2% lower since the last report, while the FTSE 250 is -0.2% down on the week. The AIM All-Share at 688.2 is 0.83% higher since our last report. M&A activity maybe effecting corporate financier’s holiday plans but the unexpected 12,000 rise in US Unemployment reported on Thursday could affect US growth prospects.

This week
There is little UK economic news other than Mortgage Lending on Tuesday while on Friday there is another version of GDP that could lead to a revision.

Pause for thought
“A Top Hegie takes home £30m”
Sunday Times
Northern Bear (NTBR) – £4.69m at 25p
Newcastle-upon-Tyne-based building services firm Northern Bear plans to use its regional presence as a way of encouraging local authorities to use its services. Chief executive Graham Forrest will use the argument that the local economy will get more benefit from using businesses that are based in the area rather than larger companies that are based elsewhere in the UK. Forrest hopes to take work off larger firms such as Mears. Results for the year to March 2010 were better than house broker Seymour Pierce expected. Underlying profit still declined from £3.08m to £1.27m on revenues 16% lower at £35m. The company’s fork lift rental and fire protection businesses are doing particularly well at the moment. Seymour Pierce forecasts a profit of £1.4m for 2010-11 for an EPS of 5.2p and a prospective P/E of 4/8x but there is room for upgrades if current trading continues to improve.
Net debt was flat at £9.2m at the end of March 2010 but some customers have been slow in paying. Loan repayments of £1m a year should be within the company’s ability. The main bank facility is due for renewal in September. Steve Roberts has taken on the role of finance director. Forrest says that he wants to reinstate the dividend when the company’s profit reaches £2m.
Northern Bear is still keen to make acquisitions once the share price rises so it is easier to fund the purchases. Forrest would prefer to issue shares at nearer to 40p a share. He says that there is little competition for acquisitions at the moment but it is difficult to find mature targets with the consistent profitability that he seeks. The valuation multiple that the company will pay has been cut from three times pre-tax profit to 2.5 times pre-tax profit. Around one-fifth of the purchase price will be dependent on future performance. On top of that some of the smaller, non-core businesses will be sold back to management.
Cyprotex (CRX) – £11.2m at 5p
Drug discovery services provider Cyprotex got off to a slow start this year but it still managed to grow revenues in the first half of 2010. Revenues edged up from £2.45m to £2.48m, while pre-tax profit dipped from £157,000 to £50,000. The second half is normally stronger than the first half and July was the best ever month for Cyprotex. The second half will also benefit from a near-five month contribution from the recently acquired Apredica and the related purchase of Cellumen. This enhances Cyprotex’s position in the preclinical ADME Tox contract research sector and gives it a US base. Cyprotex plans to undertake a rebranding of the group.
Cyprotex had net cash of £1.42m at the end of June 2010. The cash figure hardly changed in the period because cash generated from operations almost covered the investment in the equipment for the laboratory that will start to offer high content toxicology assays in the near future. The bulk of this investment has been completed so the business should be able to improve its cash position from now on. Cyprotex paid £1m in cash as part of the consideration for Apredica, although £450,000 of that has been loaned back to Cyprotex and will be repayable over two years. Cyprotex intends to pay dividends to shareholders and this could happen as early as next year.
Highams Systems Services (HSS) – £1.81m at 2.6p
IT and actuarial staffing provider Highams Systems Services returned to profit in the year to March 2010 and there are signs that the recovery is set to continue. The IT and actuarial recruitment consultancy swung from a loss of £370,000 to a profit of £131,000 even though revenues fell from £10.5m to £7.55m. There was a sharp reduction in admin costs and gross margins also improved. Those costs should not need to rise substantially if revenues go back to previous levels. There is a rough two-thirds/one-third split between contract and permanent revenues. Contract numbers are stable and there is a recovery in the permanent recruitment side. The actuarial side of the business has a higher degree of permanent work than IT. The markets appear to be recovering and pay rates are starting to pick up again. Surrey-based Highams joined Aim on 16 December 1996 and it has an experienced management team. The plan is to open a London office to go with the one at Caterham. The focus will continue to be on niche markets with new solvency and IFA rules providing opportunities to increase business. In July, Highams changed its nominated adviser and broker from Charles Stanley to Seymour Pierce.
There was net debt of £227,000 at the end of March 2010. Former Teather & Greenwood boss Ken Ford is chairman and he can help Highams raise cash to finance any acquisitions.
Highams would like to add-on other niche staffing businesses. These could be additional IT-related client bases or new non-IT sectors.
Orosur Mining Inc (OMI) – £14.9m at 23p
South America-focused miner Orosur Mining Inc reported a strong fourth quarter performance which helped it to generate $11.7m in cash from operations in the year to May 2010. The cash was generated from the San Gregorio open pit gold mine in Uruguay, which produced 56,050 ounces of gold in 2009-10, compared with 70,147 ounces in 2008-09. The higher gold price meant that the dip in revenues was not as steep and they fell from $63.4m to $59.6m. Reduced operating costs meant that a $15m loss was turned into a $98,000 profit last year – although that was boosted by around $1.4m of gains on asset sales. Fewer ounces of gold were produced because the gold grades were lower in the areas mined last year. Higher grades were mined in the fourth quarter which was why it generated nearly one-third of the year’s revenues. The average cost of gold production increased from $705/ounce to $827/ounce because overheads were spread over fewer ounces. Orosur predicts that 55,000 ounces of gold at a cost of $825/ounce will be produced in this financial year.
Orosur plans to develop the Arenal Deeps underground part of the San Gregorio mine area. A feasibility study should be completed by the end of September. Development of this underground mine should commence before the end of the year. At the beginning of 2010, Orosur acquired Fortune Valley Resources, which brought with it interests in Chile and Argentina. The best of these prospects is the Pantanillo project, which is in the Maricunga gold belt of Chile. This project has been explored by Anglo American and Kinross Gold in the past. Following an initial drilling programme a resource will be announced for Pantanillo shortly.
Orosur has net cash of £8.66m. The $11.7m of cash generated from operations almost covered the net capital expenditure and exploration spending so the decline in the cash figure was small. The assets sales, including an office, raised $2.72m, which also helped finance the spending. Even if cash generation does not cover capital investment this year the cash pile is large enough to cover any shortfall.
Westhouse Holdings (WHL) – £5.33m at 46.5p
Aim adviser and broker Westhouse has secured £3.5m to spend on growing its operations.
The cash is coming from a subscription for a perpetual convertible loan by Bermuda Commercial Bank. BCB may syndicate up to £900,000 with some of Westhouse’s existing investors. The interest rate is 5% until the end of September 2015, when it increases to 8%. Westhouse does not have to repay the loan but it is likely to be converted in the future. The conversion price is dependent on the level of Westhouse’s shareholder funds but it will be a minimum of 50p a share and a maximum of 60p a share. If the share exceeds 90p a share for 90 consecutive trading days then Westhouse can insist that the loan is converted into shares at a price based on the conversion terms at that point. The shares issued would equate to up to 38% of the enlarged share capital.
Westhouse will use the cash to build up its expertise in the investment trust, clean energy and agribusiness, and technology sectors. Westhouse is keen to add new clients but it only wants to take on new clients which it can make money out of over a two year period.
Westhouse already had £1.7m in the bank at the end of July 2010 and it still has non-core investments to sell.
First half trading has been difficult but M&A work has picked up since the end of June.
The share price fell by 13% to 46.5p following the announcement of the convertible.
The interim figures will be published towards the end of September.
Maxima (MXM) – £19.9m at 79p
IT services provider Maxima Holdings has simplified its structure and reduced admin expenses, which has helped to offset a decline in revenues in the year to May 2010 and put it in a stronger position for this year. The two divisions are business solutions, which includes the Microsoft Dynamics and business intelligence operations, and support enablement services. One year ago there were 11 operating units. Maxima is expanding its Indian operations which is helping reduce costs and add more specialist people. Part of the fall in revenues from £56.6m to £51m was down to the ending of the QAD partnership. There were still some QAD revenues during the year and there will be some QAD support revenues this year. Recurring revenues account for 60% of the total. Management are keen that recurring revenues do not go significantly above two-thirds of the total because Maxima needs to be winning new product business in order to continue to grow its services revenues. Stripping out amortisation and exceptionals, Maxima’s underlying profit fell from £7.11m to £4.86m. Probably around one-half of that reduction related to QAD, which did make a contribution last year but won’t make any more profit contribution from now on. The £1.83m of exceptional charges mainly relate to redundancies, excess property costs and the cost of renegotiating new bank facilities. Chief executive Graham Kingsmill expects cloud computing to be a significant growth area for Maxima. The link up with IBM is important to its ability to offer these services. Organic growth remains the focus. The order book is growing and margins are improving. Equity Development forecasts a modest improvement in underlying profit to £5.07m in the year to May 2011. That excludes £750,000 of further reorganisation costs. The lack of contribution from QAD means that the growth in profit from the rest of the business could be around one-fifth. The shares are trading on a modest prospective multiple of 7xfor 2010-11.
Strong cash flow has reduced net debt from £15.5m to £11.8m by the end of May 2010. The new bank facilities total £15m.

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