Last week
The FTSE 250 improved 0.9% while the FTSE 100 increased 1.6%. The BOE minutes and the US Fed Reserve re- stated they would sanction further Quantitative Easing should economic growth falter. A rise in US Durable Goods Sales showed there is still life in the US consumer. The AIM All-Share at 777.5 increased2.8%.

This week
Trading is focused on the variance in the pace of economic recovery and so has become sensitive to new data. This week’s Key UK data is Tuesday’s UK GDP (Gross Domestic Product) for the second quarter, and the same from the US on Thursday. The UK is expected to expand at an annual pace of 1.7%, just ahead of the US’s 1.6%. There will also be Consumer Confidence indicators for Europe and the US and there will also be a number of reports on US manufacturing.

Pause for thought
And herein lies the problem with QE. Yes, it’ll put more money into the economy. But it could go into the financial sector and stay there.

Company Reports

TEG Group (TEG) – £27.1m at 36p
Composting and waste-to-energy plants operator TEG Group reported a sharp rise in revenues in the six months to June 2010. Revenues grew from £4.48m to £8.8m, while the underlying loss was halved to £391,000. The loss excludes the negative goodwill credit relating to last year’s acquisition of Banham Compost. The majority of the improvement came from the sales of equipment to third parties. The operating income grew from £1.36m to £2.15m. This is repeatable revenue whereas equipment sales can be lumpy. The contract with the Greater Manchester Waste PFI is still a major revenue contributor and it will continue to be until late next year. The Sherdley Farm plant operated by TEG is too small to be commercial so it will be closed and become a demonstration plant instead. TEG acquired Midlands-based composting business Simpro late in the first half so it made little in the way of contribution in the period. Simpro operates from six sites and is an excellent geographic fit. There will be an amortisation charge of £300,000 a year. Simpro is part of a consortium that is a secured preferred bidder for an anaerobic digestion plant in Milton Keynes. This could be operational by the third quarter of 2011.

Finance
Net cash was £2.7m at the end of June 2010. There was a small operating cash inflow from operations in the first half. Share issues raised £6.4m in the six month period. These more than covered the cost of capital investment and the acquisition of Simpro. There is £1.29m of potential deferred consideration in the balance sheet.

AEC Education (AEC) – £7.51m at 17.5p
Asia-focused educational courses provider AEC Education increased first half revenues by 169% to £8.64m thanks to a full six month contribution from London-based language course provider Malvern House. There was a decline in profit from £403,000 to £346,000 in the six months to June 2010. The early part of the year was hit by the UK Border Agency’s review of its policy on student visas. That cost the business around £250,000 in lost profit. AEC is linking with a number of UK universities in order to offer their courses and qualifications in Asia.House broker WH Ireland forecasts an increase in full year profit from £1.22m to £1.42m. The shares are trading on less than 8x prospective 2010 earnings.

Finance
Net cash was £2.41m at the end of June 2010.

M&A
This puts AEC in a strong position to make further acquisitions. AEC looked at UK acquisitions but these were too highly priced. The main strategy is to acquire in Asia but South America is another growth area.

eg solutions (EGS) – £9.51m at 66.5p
Operations management software supplier interims showed that after stripping out £67,000 of acquisition costs, the profit improved from £56,000 to £145,000 in the six months to July 2010on a 15% increase in revenues to £2.41m. The figures benefited from the acquisition of XTAQ in March. The mix of sales is changing and three-quarters of revenues are likely to be software in the future. July and August were quiet. The company already has 78% of this year’s expected revenues in the bag and there should be more contract news to come. Arbuthnot forecasts a full year profit of £310,000 for a prospective P/E of around 30x.

The company would like to make another add-on acquisition like XTAQ, which has a product that is different but fits with the existing product range and helps to broaden the range of sectors covered by eg solutions. Financial services remains the dominant sector.

Finance
Net cash was £630,000 at the end of July 2010.

Public Service Properties (PSPI) – £79m at 77.25p
All of the UK properties are leased to European Care Group, which is the sixth largest independent social care provider in the UK. This is one of the reasons why the whole portfolio is 100% let. The German properties are nearly all leased to one operator.


Rental revenues edged up from £9.37m to £9.58m in the six months to June 2010. The underlying profit rose from £3.05m to £3.62m. That excludes non-cash, foreign exchange charges, interest rate swap charges and asset write-downs. The write-down of asset values increased from £908,000 to £4.83m in the latest period. PSPI has a stated net asset value of 117.1p a share. Adjusted for goodwill and deferred tax, the NAV is 143.3p a share. The share price is trading at a 37% discount to the stated NAV and the prospective P/E is 8.9x given the forecast PBT of £10m.

Finance
Nursing home properties investor and developer Public Service Properties Investments is putting the £24m it raised in an open offer at 70p a share in April to good use. PSPI is investing in a number of extensions to its UK nursing home properties. Many of these will be completed early next year. The total programme in the UK is valued at £20m over 18 months. The rents will then increase by 8% of the gross capital expenditure. The average unexpired lease term for the portfolio is 22 years. The overall gearing level is 58% on a loan to value basis. The interim dividend has increased by 25% to 2.5p a share and the total year dividend is expected to be 7p a share. Cash flow is strong enough to finance this level of dividend and the management plans a progressive dividend policy.

K3 Business Technology (KBT) – £35.9m at 140p
K3 Business Technology boss Andy Makeham is excited by the prospects for the enterprise software company’s newly formed managed services division. Makeham describes it as “the most exciting opportunity to drive organic growth since the business started”. K3 has a customer base of 1,500 companies and the vast majority of these are potential customers for managed services and hosting. In the past, managed services work for non-K3 software was passed on to other companies. These revenues can now be kept within the group. The basis of the managed services division is Edinburgh-based DigiMIS, which cost an initial £803,000 plus up to £1.325m of deferred consideration dependent on performance over the two years following its acquisition.

The software operations are recovering and the business offering Microsoft’s Dynamics AX software has moved into profit and is winning new business, while the retail software division is benefiting from its focus on multi-channel retailing as the high street continues to find trading tough. The software business in the Netherlands will benefit from IKEA’s decision to make its software the recommended platform for smaller franchised stores. This decision took 12 months so last year there was a lack of work, but a number of stores will install the software over the next decade.

K3’s figures are complicated by the change in year end to June, which means that the latest figures are for 18 months to June 2010. Adjusting the figures so they are for 12 months, shows revenues growing one-fifth to £43.8m in the year to June 2010, including £1.4m from acquisitions. The comparative figure for 2008-09 marks the bottom of the market for K3 and trading has recovered since then. Underlying pre-tax profit recovered from £5.17m to £6.64m. Ian Spence of IS Research expects underlying profit to increase to £7.9m this year which gives a prospective P/E of6.3x for the June 2011 year end.

Finance
The business is highly cash generative. Net debt was £11m at the end of June 2010 and it could fall to below £8m by next June. A new bank facility has been agreed with Barclays, which includes a £7m acquisition facility so the final outcome depends on whether this is used.

M&A
K3 is looking for more acquisitions but it recently walked away from an acquisition after due diligence was completed because terms could not be agreed. Makeham wants to buy businesses to enlarge the customer base, add to IP or expand the geographic reach of K3 in Western Europe.

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