Last week

Given the number of ‘unfortunate’ surprises   last week such as; double-dip, Egyptian unrest and Japan- credit downwards rating, the UK market’s performance is resilient.  GDP in both the US (+3.4%) and UK  (-0.5%) were  lower than expected implying  less room for interest rates rises despite the delicate offset with raising  inflation. The FTSE 100 fell -0.3% with the FTSE 250 off just -0.1% and the AIM All Share at 944.5 was -1.1% lower.

This week

It’s a quiet week for UK Economic statistics with House Prices on Monday, Money Supply on Tuesday and the Construction Index on Wednesday. Assuming Egypt is contained and given the prospects for corporate activity we forecast the FTSE 100 will end the week higher than 5881.37. 

Pause for Thought

UK Economic output may grow by 1% during the first quarter of 2011 as businesses catch-up with orders they could not completed in the Big Freeze.

Northbridge (NBI) – 218.5p at £33.57m

The trading statement for the December year –end , from this acquisitive industrial services provider confirmed that the finals are in line with market expectations. The results to be announced in the week of the 21st of March therefore should show a PBT of £3.7m on turnover of £18.5m giving and EPS of 23p and a prospective P/E of 9.5x with a dividend yield of just over 2%. The strengthening demand in the second half is continuing past the year end. Tasman Oil tools was acquired in July 2010 and is reported to be performing well and it’s integration within the group should   maintain the growth rate when it makes a full year contribution in 2011.  Current earning’s estimates are for an EPS of 25.6p to give a prospective P/E of 8.5x but earnings seems likely to up-graded.

Northbridge are investing in the hire fleet, which can potentially lead to providing clients with a complete outsourcing solution. There is also greater geographical coverage so Northbridge are less reliant on the UK economy while the (higher margin) rental demand from utility companies, the public sector and the oil and gas industries remains robust and product sales and enquires are ahead of last year. Revenue at the interims were 28% ahead with gross margins at 63% as large contracts have been won South Korea and Syria while the Middle East continues to grow. Further acquisitions of hire fleets seem likely.

Financials

Net gearing is 31% and the working capital ratio of 0.84x reflects the increased investment in the hire fleet.

Driver Group (DRV) – £4.6m at 17.5p

Driver Group, the global construction consultancy fell into loss in the year to September 2010 but cost savings helped to reduce the loss in the second half.  The construction dispute resolution and advisory services provider reported a pre-exceptional operating loss of £414,000, compared with a profit of £1.3m the previous year. The first half loss was £252,000, so the second half loss was £162,000.The second half revenues were 14% lower than the first half revenues. Full year revenues fell from £20.5m to £16.4m. The main fall in revenues was in the UK but the Middle East also made a lower contribution. The spread of advisory work across the life of projects is helping Driver to generate revenues even when there are fewer new construction projects.

On top of the operating loss there are severance costs for reducing employee numbers, as well as a £122,000 write-down on the Edinburgh office eventually sold for £600,000. The pre-tax loss was £809,000, compared with a profit of £1.05m. Start-up costs in new territories added to costs in the period.  Fee earners have been cut from 146 to 110 over the year. Remaining staff have taken pay cuts and this will save £500,000 in a full year. Two non-executive directors are leaving and Steve Driver will switch from executive chairman to non-executive chairman. A new chairman will be appointed in next few months. Growth is set to come from eastern Europe and Africa. There are also growth areas in the UK, including energy and nuclear, while transport-related revenues are holding up.  A new office has been opened in Qatar and Driver will be in a strong position to pick up World Cup-related work.  Driver has already secured £9.29m of work out of forecast revenues of £17.6m for 2010-11. The UK is continuing to decline in importance with the rest of Europe a greater percentage of work than before. House broker WH Ireland expects Driver to return to profit in the year to September 2011. A £500,000 profit puts the shares on a prospective multiple of just over 9.2x. Steve Driver sold 1.6m shares at 21.5p leaving his holding at 2.6m which is around 9.2%

Finance

Driver has decided not to pay a dividend in order to conserve cash. Net debt was £459,000 at the end of September 2010.

NEXUS (NXS) – £3.9m at 0.36p

Finals for this supplier of specialist IT managed services reported a 13.7% increase in revenue to £5.8m with a strong performance from Resilience. This business supplies high end firewall appliances directly, or via resellers, to the world's largest companies and inevitably this can lead to delays and uncertainty as to timing of new orders.   The Loss before tax fell to £0.685m compared to  £4.4m as non-performing businesses such as Ned Force have been disposed of.  It should be noted that the operating loss before exceptional was £136,000 which at 53% gross margin represents a  £250,000  increase in turnover to achieve operating break-even. Forecast for the 30th September 2011 is for slightly more than breakeven and the management are indeed focussed on delivering an improved performance for the first half. 
Financials
The working capital ratio of 0.56x is mitigated by the company renegotiating loans and the management are further strategic reviewing the business to reduce costs and bring forward cashflow.  Net debt is around £790,000

Next Fifteen Communications (NFC) – £46.9m at 84.5p

Next Fifteen Communications has made a good start to its financial year and it is on course for revenue and earnings growth of more than 10% this year. The US continues to grow strongly with Asia not far behind. The UK is starting to pick up but the rest of Europe remains flat. The group has won work for social network gaming companies, Zynga and Playfish. Although these were not directly won by the digital agency Beyond, the expertise it provided helped to gain the work.
The most recent acquisition is 85%-owned technology-focused investor relations provider Blueshirt. The US-based company is performing well and Dyson believes that a large US flotation, by a high-profile company such as Facebook, could spark the IPO market back into life. There are already signs of improvement but IPO levels remain relatively low. Edison Investment Research forecasts a rise in revenue from £72.3m to £80.6m in the year to 1 August 2011. Underlying profit is expected to rise from £6.61m to £8m, while fully diluted earnings per share are forecast to grow from 7.5p a share to 8.4p a share putting the shares on a prospective P/E of 10x. The interim figures will be published on 5 April.

Finance

Net debt was £851,000 at the end of July 2010. Since then £1.92m has been spent on Blueshirt but the business has been cash generative.
M&A

Chief executive Tim Dyson says that digital remains the main focus of acquisitions. Dyson says that the money spent on digital does not all come from the normal PR budget and it enables the group to generate revenues from other parts of the marketing budget. Next Fifteen is also looking for acquisitions in emerging markets and in the healthcare sector – pharma and medical technology.

Servoca (SVCA) – £11.7m at 9.5p

Educational, healthcare and security staff provider Servoca has been hit by tough trading conditions as government spending is cut back. Revenues fell from £57.6m to £50.2m in the year to September 2010. Around £2.5m of the shortfall was down to closed businesses. The underlying profit fell from £2.21m to £2.01m. All of the parts of the business reported lower profits but central costs were lower.Education was a particularly tough market. Increased candidate availability did not help the business but demand for supply teachers remains resilient.  Healthcare is still the dominant business but demand for locum doctors has declined. Private sector demand for nurses has increased.  Domiciliary care business Phoenix was acquired from its administrator in August. Its trading has been better than expected and Servoca plans to expand in this sector. The security services division gets a greater proportion of its revenues from the private sector but it is the smallest of the three divisions. New management has been appointed. At the moment revenues are dominated by recruitment activities but the outsourcing parts of the business will become increasingly important in future years. House broker FinnCap forecasts a flat profit of £2m in 2010-11 for a prospective P/E of 5.9x. 

Finance

Net debt was £2.96m at the end of September 2010. This figure should reduce over the next 12 months unless suitable acquisitions are found. There are still £3m of tax losses available.

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