Last week
Responding to the robust revised GDP growth rate the FTSE 250 closed at 9779.9, a 0.2% improvement on the week, while the FTSE 100 at 5201.6 increased by 0.1%. The AIM All Shares at 686.5 was -0.2% lower. It was reported on Friday that the British economy expanded 1.2% quarter-on-quarter, rather than the 1.1% initially estimated. Double dippers paused for thought as the latest estimate of US second-quarter GDP was indeed revised down from the previous 2.4% but the second estimate came in at 1.6% which was better than the 1.4% forecasts.

This week
There are Nationwide House Prices on Monday and Halifax ones on Wednesday. There is plenty of EU and US economic statistics and although economies are showing growth prospects remain uncertain and an L shaped recovery may be the best that can be hoped for. The US market fell on Monday due tp lower than expected earnings figures.

Pause for thought
“The Central Bank is ready if needed to boost the US Economy”.
Chairman Federal Reserve

Company Reports
Lombard Medical Technologies (LMT) – £19m at 0.88p
Medical device developer Lombard Medical Technology is growing the revenues of its Aorfix abdominal aortic aneurysm stent in the five main EU markets. These markets (France, Germany, Italy, Spain and the UK) accounted for £622,000 of the £1.45m generated in the first half of 2010, compared with £348,000 of the revenues of £1.25m in the first half of 2009. The revenues from US clinical trials are falling as is the contribution from the Greek market. Aorfix is an endovascular stent graft for the treatment of abdominal aortic aneurysms, which are a balloon-like enlargement of the aorta that can rupture and cause death. The selling point of Aorfix is that it can handle bends in the aorta. The market is worth $1bn, with one-half in the US and 28% in the five main EU markets. The market value is expected to grow to $1.5bn by the end of 2015.

Lombard is making progress towards regulatory approval in the US. The next steps are engineering, bench testing and shelf-life and manufacturing and quality assurance. These two modules will be filed by the end of 2010. Clinical data on a minimum of 120 patients should be filed in the first half of 2011. Lombard is changing its manufacturing set-up by transferring stent graft production from Didcot to Prestwick and Didcot will concentrate on assembling the device. This will help to increase capacity. The reported interim pre-tax loss edged up from £4m to £4.18m. Research and development spending increased from £2.33m to £2.49m, while marketing costs rose sharply. The R&D tax credit declined from £545,000 to £471,000.

Lombard raised £12.1m (£13.3m gross) at 1p a share. There was a £3.26m cash outflow from operations in the first half of 2010, which is slightly higher than the first half of 2009. There was £10.25m of cash at the end of June 2010. The cash should last until the fourth quarter of 2011. That is long enough for the business to show it has progressed but not long enough to for it to be cash generative. It could provide enough time for Lombard to get a reaction from the US regulators from the filing of its clinical data.

Source BioScience (SBS) – £15m at 7.375p
Interim figures from Source look flat with revenues edging up from £6.71m to £6.86m but there was a £500,000 boost from the publicity about Jade Goody’s cervical cancer in the first half of 2009. The healthcare division offers screening and diagnostics testing services, predominantly to the NHS, and revenues from other tests are growing. Pre-amortisation profit declined from £164,000 to £144,000 but there was a net reduction of £54,000 in the contribution from interest income. That shows that the underlying businesses improved their profit contributions, although this is masked by a higher depreciation charge for the life sciences division following investment in a new Dublin DNA sequencing laboratory and two Illumina Genome Analyzer IIx sequencing machines. Investment in this equipment is an alternative way of spending the company’s cash.

There has been no real change in the money being spent by clients in Source’s business areas but they are becoming more focused about what the money is spent on. Chief executive Dr Nick Ash believes that changes in the ways that funds are used present opportunities. A higher depreciation charge due to the investment in equipment will mean that 2010 profit is likely to be flat at around £300,000 even though revenues are expected to grow from £12.7m to £13.7m.

There was £5.52m in the bank at the end of June 2010 and Source is not earning much interest income because of low interest rates. There is no more deferred consideration payable on past acquisitions so this is cash available for investment.

Source BioScience has cash to spend on acquisitions but it says that price expectations still remain too high. Chairman Laurie Turnbull says that European valuations are more realistic that those in the UK or US. He reiterates that Source has strict criteria and there is no need for it to make an acquisition just for the sake of it. Given its size, though, Source needs to eventually spend some of its cash on acquisitions in order to take advantage of having a listing.

NWF – £46m at 99.5p
Distribution and feed
Underlying profits improved from £6.2m to £7.1m on flat revenues of £379.8m in the year to May 2010. The total dividend was raised from 4.1p a share to 4.3p a share. Fuel distribution made a slightly lower operating profit of £3.8m last year, but that was still flattered by the cold weather in the winter. NWF estimates that it gained an additional £800,000 in profit during the period.

The growth in profit came from food distribution where the contribution jumped from £2m to £3.1m. Efficiency is improving and helping to improve returns even though the warehouse is effectively fully utilised. Higher margin/stockturn business is being added. Feeds had a better second half but still reported a decline in profit from £2.8m to £2.1m. Dairy cows are the main market and milk prices are stable. The market is flat but NWF is trying to sell more high margin feed products.

Charles Stanley forecasts a profit of £6.3m in 2010-11 which gives a prospective P/E 10x and that assumes no repeat of the £800,000 windfall profit from fuel this year. Feeds is likely to be flat and food distribution will be the only area to grow profit.

NWF has secured new debt facilities until October 2013. The facilities total £51m, including a £10m revolving credit facility and a £1m overdraft. The rest is an invoice discounting facility. May is a low point for borrowings and net debt, including hire purchase, was £13.9m. Peak borrowings tend to be around December but that should only be an extra £7m or so of debt. Finance director Jonathan Ford believes that debt can be reduced by around £2m a year through cash generated from operations. That suggests that there is plenty of headroom in the bank facility to make acquisitions.

Fuel distribution appears to be the most likely area for acquisitions. A new depot is being built in Mansfield and NWF is keen on further geographic expansion. Chief executive Richard Whiting says that there are more than one hundred firms that are smaller than NWF Fuels.
NWF is also interested in food distribution activities in the south and add-on feed acquisitions.
Iceland-based investor Atorka owns 25.2% of NWF and issuing shares to help fund acquisitions will help to dilute that stake.

Arena Leisure (ARE) – £120m at 30.75p
Profits at racing course and media rights owner grew by one-quarter to £1.2m in the six months to June 2010 and that figure was struck after £500,000 of opening costs for the Lingfield Park Marriott hotel that opened in May. There are concerns about declining revenues from the betting levy. The likes of William Hill moving operations overseas means that the levy could reduce by one-quarter to £70m in 2011. Growth in revenues from the At The Races joint venture and growth in attendances could help offset the reduced levy income. KBC Peel Hunt forecasts a full year profit of £3.8m which gives a prospective P/E of 30x.

Net debt rose £6m to £47.7m at the end of June 2010 but since then Arena has received a £12.5m advance for its SIS contract. Net debt should fall to £32.3m by the end of the year.

Avon Rubber (AVON) – £32.4m at 117.5p
Protection and diary industry equipment, Avon Rubber says both of its divisions have been trading strongly this year. The progress in the first half has continued into the period between 1 April and 17 August 2010. The fourth quarter of last year was relatively strong but Avon’s momentum continues to be positive. The US fire departments have received delayed funding and this is good news for the part of the business selling respirators to the fire service. Homeland security markets are growing and defence orders are still coming through as planned. The dairy equipment division is benefiting from higher sales – up 11% in the third quarter – and cost reductions from outsourcing production to Europe. House broker Arden forecasts a full year profit of £6m in the year to September 2010, compared to £3.5m last year. Forecast earnings are 12.3p a share for a prospective P/E of 8.2x. The profit estimate is unchanged although the revenue forecast has been edged up 7% to £117m.

Net debt fell from £14.4m to £13.5m in the quarter to June 2010. Capital spending on increasing capacity will use up much of the cash generated this year so net debt is expected to be around £15m at the end of September. Total bank facilities are £23.4m.

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