For the last 19 months interest rates have been held at 0.5%. Prospects remain for further QE should the economy need it, while gold at around $1,364 is hovering near to new highs. In this economic narrative the FTSE 250 improved 1.3% while the more international FTSE 100 advanced 1.2%. Indifferent US unemployment figures where announced on Friday showing a further net loss of 95,000 jobs. The Aim All Share at 799.7 continues it rally and improved 1.8%.
Plenty of macro–economic news allows the potential high volume trading opportunities. In the UK, House prices, and Inflation are reported on Tuesday followed on Wednesday by Unemployment and trying not to forget Consumer Confidence on Friday . In the US Inflation will be reported on Friday and Balance of Trade on Thursday should show improvement.
Pause for thought
Since the Federal Reserve stated in September a willingness to support another large round of QE almost every financial asset has rallied expect the dollar – so is QE2 working without buying the assets?
Animalcare (ANCR) – £23.8m at 118.5p
Animalcare has completed the sale and closure of its livestock products related businesses and it will focus on its pet treatments business from now on.The livestock products business was sold for £3.25m in September – £2m was paid up front and the rest will be paid before the end of 2010. The Travik Chemicals business is being closed. In the year to June 2010, Animalcare’s revenue increased 13% to £19.9m. Both sides of the business grew revenues but the growth in the livestock products side came from low margin electronic tags for sheep. All the growth in profit came from the companion animals business. Underlying pre-tax profit increased by 50% to £3.02m. That figure excludes the £3.58m of exceptional charges that mainly relate to the jettisoning of the non-core businesses. They also include a £212,000 pay off to the former chief executive.Ongoing revenues rose from £9.7m to £11.2m and ongoing operating profit jumped from £2.3m to £2.87m. Brewin Dolphin forecasts a profit of £3.1m in 2010-11, rising to £3.4m the following year. The shares are trading on 11x prospective 2010-11 earnings, falling to 10x the following year.
The cash raised from the disposal will move the company into a net cash position. House broker Brewin Dolphin forecasts net cash of £2.3m by the end of June 2011. The latest dividend was raised from 2.5p a share to 3p a share.
Animalcare is keen to acquire further treatments that it can sell through its existing distribution routes. Some treatments are too small to interest larger companies but they generate steady revenues.
Northbridge Industrial Services (NBI) – £29m at 193p
Patience proved a virtue for Northbridge, equipment rental, when it finally secured the acquisition of Australia-based oil and gas equipment rental business Tasman during the summer. The industrial equipment manufacturing and rental company originally tried to buy Tasman back in 2008 but it could not raise the cash it needed to fund the deal. In July, Northbridge paid A$16.8m (£9.7m) for Tasman and it raised £7m at 125p a share. Tasman generated an operating profit of A$3.5m (£2m) revenues of A$11.5m (£6.5m) in the year to June 2010. Tasman’s founder wanted to secure the management succession of the business although he will continue to run the company for the time being. Tasman is attractive because it enhances Northbridge’s product range in the oil and gas sector. It supplies smaller scale equipment than Northbridge, such as blow out preventers, drill pipes, and mud pumps. There are no significant synergies between the two businesses and Northbridge’s focus is renting more products through Tasman. Northbridge’s interim figures do not include Tasman. Revenues still increased from £6.1m to £7.83m in the first half of 2010. Pre-tax profit improved from £1.12m to £1.43m. There was no contribution from the Jabal Salab zinc project in Yemen and the contract has been terminated. Northbridge hopes to secure the minimum agreed payment from the contract. House broker Arbuthnot forecasts a rise in full year profit from £2.2m to £3.9min 2010. A full year contribution from Tasman could push the 2011 profit to £5.4m. The shares are trading on 8x forecast earnings for 2010 with a modest increase in earnings expected for 2011 because of the additional shares issued.
Net debt was £2.35m at the end of June 2010 but the Tasman acquisition was just after the balance sheet date. The net debt figure is expected to be £4.62m by the end of 2010. Northbridge has to continue investing in its rental fleet but if it does not make any more acquisitions that debt figure should be much lower by the end of 2011.
Northbridge is looking for more add-on acquisitions that will increase the product range. Larger equipment for niche markets would be the preference.
Finsbury Food Group (FIF) – £12.65m at 24p
Cake maker,Finsbury Food Group was hit by a declining cake market but it still managed to generate cash to reduce its debt. Revenues fell from £178.9m to £168.3m in 2009-10 with the fall exacerbated by the withdrawal from some low margin business. Underlying pre-tax profit rose by 7% to £5.4m thanks to a reduction in costs. The bright spot was the bread business, where Finsbury has spent £2m increasing its capacity, particularly for its Genius brand. Like-for-like bread sales grew by 9% last year, while the underlying operating profit more than doubled. House broker Panmure Gordon believes that Finsbury could edge up its profit to £5.8m in 2010-11 for a P/E of 3.2x.
Net debt reduced by 11% to £36.5m at the end of the financial year. The rescheduling of some deferred consideration should help Finsbury reduce its debt further this year.
@UK (ATUK) – £2.92m at 4.5p
E-procurement software and services provider @UK is hopeful that the government spending review in October will provide an impetus for the business. However, history shows that this is not guaranteed. When @UK floated on AIM five years ago local authorities were supposed to be embracing online technology to cut costs but most of them lacked the underlying motivation to follow through with the investment. The more immediate need to save money should provide the motivation now. The company generates revenues from spend analysis and annual software licences.
The company’s e-procurement platform, which makes sure agreed prices are paid for goods and eliminates paper work and errors, already has more than one million users but revenues remain relatively modest. There are 35 local authorities and more than 100 NHS trusts signed up, as well as thousands of suppliers. One of the core parts of the business is providing e-commerce sites to those suppliers. A deal with Barclaycard means that a purchasing card can be embedded in the e-procurement system and in order to attract public sector customers Barclaycard has said that it will pay the setting up costs. Using an embedded purchasing card has VAT advantages and some NHS trusts have already signed up. Barclaycard knows it will generate revenues from the embedded card and it will not need to send out individual plastic cards. The company was one of the best performers on AIM in September due to the announcement of its new green marketplace providing sustainability analysis and the carbon footprints of products, yet the Barclaycard deal is likely to be much more significant even if it has been slow in taking off.
Small amounts of cash have been raised from share placings in recent months. This is enough to finance short-term working capital. Breakeven is not expected until 2011-12.
Synairgen (SNG) – £14.8m at 24.5p
Respiratory drugs developer Synairgen has started a phase II proof-of-concept study for the treatment of exacerbations of asthma and it has taken on Deloitte‘s pharma licensing team to help it sign up a partner for its technology. The initial focus was on using inhaled interferon beta to treat rhinovirus infections in asthma and chronic obstructive pulmonary disease (COPD) but management sees a greater opportunity in the flu market. Advanced model work for the treatment of flu will start before the end of the year.
Taking on Deloitte will speed up the process of signing up a partner that can finance the trials for Synairgen’s treatments.
Synairgen had £5m in the bank at the end of June following a £2.93m outflow in the previous year.
CVS (CVSG) – £55.5m at 98.5p
Vet practices owner CVS provides a good example of how disappointing the market can knock a share price. It issued two profit warnings for the year to June 2010 and the share price has halved since its peak earlier this year. The first warning was related to snowy winter conditions and the second was down to poor fourth quarter trading. Like-for-like sales were 2.8% lower in the fourth quarter, with a reduction of 1.4% in the first quarter of this financial year. If anything, CVS acquired more turnover than expected in the last financial year but most of the deals were done late on, meaning a large contribution in the current year but a much more modest one last year.
CVS chief executive Simon Innes admits the mistakes and accepts that the sharp share price fall is at least partly down to poor management of expectations. This is positive because it means that CVS should avoid the slip ups in the future. Revenues grew from £76.6m to £85.5m in the year June 2010, while pre-tax profit dipped from £4.44m to £3.84m for a P/E of 8.7x. Excluding amortisation and transaction costs, pre-tax profit improved from £8.4m to £9.31m. Investors’ remain cautious about trading and whether CVS is losing out to online pharmacies. CVS has started up its own online operation. Customers are more price conscious than they used to be. The Animed Direct online dispensary uses the same wholesaler as the vet practices and this means CVS does not have to hold large stocks. CVS is also able to sell a wider range of products.
Net debt was £41.9m at the end of June 2010. Cash raised in a placing and generated from operations covered most of the costs of acquisitions.