Last year
Helped by the unexpected economic improvement the year-on-yea index growth results are: the FTSE improved 12.6% (5,899.94), FTSE 250 improved 27.4% and the Aim Index is the winner with a 44.1% rise. GDP growth was 1.7%, inflation is 3.3% and unemployment 7.9%. If growth is faster and interest rates remain low then the 2011 performance will be even better. Interference from spending cuts & tax rises and sovereign debt shocks may, however make it a bumpy ride.

This week
There is little in the UK to get excited about, but the Eurozone have GDP and Retail Sales to announce which will clearly show a mixed picture (Germany v Ireland)! On Wednesday the US Fed minutes may renew interest in whether QE2 will lead to a QE3. As on Thursday the US jobless claims will be announced and and improved December is being assumped.

Pause for thought
Our FTSE 100 year-end target is 6,900 a target helped by commodity inflation and overseas earnings while the growth of the domestic indices is likely to be lower.

Company Reports

Merchant Securities (MERC)£10.8m at 23p
Broker and wealth management services provider Merchant Securities grew profit in line with expectations in the six months to September 2010 even though revenue growth was slower than hoped. Revenues grew from £3.27m to £3.84m with the growth coming from wealth management and an increase in corporate transactions. Institutional broking revenues were flat even though the market had fallen by one-third. The underlying pre-tax profit jumped from £289,000 to £524,000. There are £205m of funds under management and more of these funds have been converted to a discretionary basis. Merchant Securities has eleven managed funds. The upcoming Retail Distribution Review will provide opportunities.

All the corporate finance and broking activities have been integrated under the Merchant Securities brand. The move to new offices in Gresham Street will enable further expansion.

House broker Arden forecasts an improvement in full year revenues from £5.4m to £7.6m. Arden expects a full year profit of £600,000 giving a prospective P/E 6/5x.

Finance
Net cash was £2.4m at the end of September 2010.

ILA Group (ILA)£11.98m at 1.75p
Personal security alarms mainly aimed at ladies and devices supplier Ila Group Ltd is raising £1.4m gross at 1.2p a share in order to market its brand and products internationally and develop new products. Ila is keen to expand in the North American market where retailers are showing interest in its products. It has already done a deal with Shoppers Drug Mart in Canada as well as QVC in the UK. Ila’s original customer Marks & Spencer has reordered. Ila lost £881,000 on revenues of £136,000 in the six months to June 2010. These are the first figures since Ila reversed into Aim shell Baylon, which was previously known as Molectra Group.

Finance
At the end of June 2010, there was net cash of nearly £35,000. That was before the £1.4m was raised at 1p. The main uncertainty is the rate of growth of the business, particularly in North America. That could require significantly more working capital.

M&A
Ila is also looking at potential acquisitions that would fit with the company’s product range and distribution network. There could also be opportunities to invest in new brands.

Oxford Advanced Surfaces (OXA)£46m at 23.5p
Oxford Advanced Surfaces is a developer of advanced materials, which it will then licence to manufacturers. There are two core technologies: anti-reflective coatings and Onto reactive chemistry. The former is likely to generate revenues first, through its coatings for spectacles. The anti-reflective VISARC coating can be used for lenses of spectacles and Oxford believes that it could potentially earn royalties of more than $10m a year from this use of the nano-particle technology – and even more if non-prescription sunglasses are included. Oxford’s coating is easier and quicker to use than the existing method which has to be done as a batch process. The technology could be licenced to optical labs or their suppliers of coating chemicals. Displays and solar panels are other potential uses for this coatings technology. The Onto technology is initially being focused on the printed electronics area. It will enable flexible printed electronic components and equipment to be made. The first licence deal could be secured before the end of 2011.

Finance
The cash outflow was £1m in 2009 and net cash was £8.2m at the end of June 2010. This means that the company has enough cash to keep it going.

Environmental Recycling Technologies (ENRT)£21.43m at 4.38p
ERT has had a chequered past but it has put the high cost base and AIM fines behind it. ERT owns the patent to Powder Impression Moulding process which can convert waste plastic into new products. Total revenues edged up from £427,000 to £492,000 in the six months to June 2010. The cost base has been reduced. Although interest charges rose, the profit fell from £813,000 to £770,000. UK licensee 2K Manufacturing, which will use the PIM process to produce a plywood alternative called EcoSheet, has begun commercial production.

Finance
ERT recently swapped £750,000 of debt and other creditors for shares at 3.75p each and prior to that £350,000 was swapped for shares at 2.5p each. The latter was combined with a placing at the same share price raising a further £350,000. Net debt had been £2.37m at the end of June 2010 with the majority owed to Yorkville. The cash outflow from operations is likely to continue for a while even if royalty revenues start to build up. The cash outflow would have been more in the past year without a large chunk of money owed being paid for in shares.

Fuse8 (FUZ8)£4.35m at 34.5p
Leeds-based digital marketing consultancy Fuse8 has grown its revenue in the six months to September 2010 even though some clients have been slow to commit to spending. Revenue rose 6% to £1.63m but costs rose faster as Fuse8 geared up for growth and built up its business development resources. The reported pre-tax profit includes a charge relating to the reversal of the business into Award International Holdings in June. Stripping that out, profit dipped from £390,000 to £238,000. Less than 15% of the business comes from the public sector and most of that is on retainer. The spending review does not appear to have hit Fuse8. The company expects to add more business in the second half. House broker FinnCap forecasts full year revenue growth of 9% and pre-tax profit growth of 17% – indicating a profit of more than £680,000 in the year to March 2011 for a prospective P/E of 9x.

Finance
Fuse8 managed to generate cash from operations even though it had to pay out flotation fees. Net cash was £241,000 at the end of September 2010.

M&A
Fuse8 paid £400,000 in shares at 3.2p each for Delete Digital Marketing, which was owned equally by former Media Square directors, and current Fuse 8 non-executives, Jeremy Middleton and Graeme Burns. This gave Fuse8 a London office, which will help to attract more multinational clients. Management is looking for more acquisitions that will enlarge the business in what is a fragmented sector with few large players. One area that could be added to is that of data management and understanding of customers. Generally, though, acquisitions will build up critical mass. A relatively large acquisition that would add millions of pounds in revenue will be needed at some stage in order for Fuse8 to achieve the scale it wants to.

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