Last Week

There was little to fear last week as the FTSE 100 touched its highest level since May 2008. The geopolitical scene did not turn nasty and the FTSE 100 closed at 6062.9, a 1.1% increase. The FTSE 250 also improved 1.1% while the Aim All Share at 955.4 slipped marginally. The Chinese increased interest rates to 6.06%, while the US Trade Deficit increased by a record 33% in 2010 and by 5.9% in December to $40.5 billion. In the UK interests rates were left unchanged.


This Week

Attention will be on UK inflation with Consumer and Retail Prices on Tuesday and the BOE Inflation Report on Wednesday, also on Wednesday will be UK Employment. These figures are ahead of the (hoped for) upwards revised GDP so if inflation is over 4% and unemployment steady at 7.8% it could look like mild stagflation. We forecast a cautious week and expect the FTSE 100 to be lower.


Pause for Thought

Volume growth in companies is not going to be fast enough to sustain the earnings growth in 2011- Cazanove Capital


Patsystems (PTS)£45.3m at 24.25p

Trading systems supplier Patsystems says Asia will continue to be the main focus of revenue growth. The region accounts for 39% of revenues. Patsystems recently sold a system in Vietnam and it is looking at expanding into South Korea. In the past couple of years, Patsystems lost Lehman Brothers as a customer and then the Tokyo Grain Exchange business was wound down because of a planned merger. The contribution from the Tokyo Grain Exchange dropped £1.4m in 2010 to a negligible amount. That is the main reason why revenues were flat at £22.1m. They would have been higher but a major contract was deferred.  The model is changing so that more of the revenues are based on transaction volumes rather than perpetual licences. This is particularly good news for volatile markets, such as commodities. The ASP revenues will become more significant in 2011. The cost base was flat and it is being restructured to keep them from increasing. Stripping out movements on hedging instruments, goodwill amortisation and share option costs the underlying profit dipped from £3.92m to £3.75m. Edison Investment Research forecasts a rise in profit to £4m in 2011. At 23.25p, the shares are trading on less than 12x 2011 prospective earnings.

There was £9.3m of cash in the bank at the end of 2010 but this was lower than it might have been because of the timing of payments. The figure was £10.5m at the end of January. That cash pile will rise rapidly if it is not spent on acquisitions. It could even double over the next two years. Patsystems has a progressive dividend policy. The 2010 dividend was 0.55p a share, up from 0.43p a share. A dividend of 0.65p a share is forecast for 2011, which provides a prospective yield of 2.8%.  The strong cash position makes these dividend increases easily affordable even if the dividend grows faster than earnings.
Patsystems wants to supplement the organic growth in emerging markets with further add-on acquisitions. Management says that there are still plenty of opportunities out there. The ideal size of company would be one that generated revenues of between £8m and £12m a year. That would provide a substantial uplift in group revenues.


Avingtrans (AVG) – £14.5m at 57p

Interims, reported last week were ahead of most expectations as this specialist precision engineer serves a diversity of sectors and markets.  The trading cycle is improving and this recovery is being enhanced by cost cutting and the success of new business areas such as China. Turnover increased by 25% to £16.9m with gross margins from 22.6% to 28.8% giving a PBT of £0.6m compared to a loss of £0.77m for an EPS of 1.78p.  Aerospace is 36% of sales and further room for improvement on 8.4% margins. Energy & Medical, 35% of sales reported a marginal loss but a profitable second half is expected. The star of the show is Industrial Products accounting for 29% of sales which turnaround with a leap from £0.3m losses to profits of £0.5m. Germany is particularly strong and the Chinese operation,which now employees 100 staff is achieving profits and is well positioned for accelerated  growth. House Broker, JM Finn forecast EPS to May 2011 of 4.1p growing to 6.1p for the year after, as profits improve from £1.5m to £2.2m. This would give a prospective P/E of 13.9x dropping to 9.3x.  The development strategy is to supplement organic growth with acquisitions and currently in-fill targets are being evaluated.


Net debt decreased by £0.3m to £7.5m giving gearing of 34%. The company is committed to resuming payment of a dividend which perhaps reduces the acquisition headroom but should help the share price.


Plant Impact (PIM) – £13.5m at 32p

Crop enhancement technology group, Plant Impact may be reaching the point where it should reap the benefits after much investment. The appointment last week of David Jones as Chairman is a further move in the forward. He has a life-times experience in the international agro-chemicals business and of corporate Mergers & Acquisitions.  Plant Impact has developed a group of technologies that enhance crop yields, improve product quality and extend product storage life.  The focus is moving away from smaller scale crops, such as strawberries, to crops with much greater potential for income generation, including potatoes. Plant Impact has already secured a six figure order from the Netherlands for the use of its InCa technology on potato crops. InCa helps plants to take more calcium from the ground, which enables the plant to better combat stress and drought. The other product that the company is now focusing on is PiNT, which enables a plant to take more nitrogen from the soil. There are other technologies but Plant Impact has decided to concentrate on the two key products.  Deals with Arysta should start to bear fruit in the next few years, while a trial in Brazil in partnership with Syngenta could open up opportunities in the soya crop. From invention to proof of concept to registration with the worlds environment agencies can take up to 15 years.  The new chairman David Jones with his background and experience can add industry credibility and negotiating skills as Plan Impact further develop distributions channels.


There was £1.7m in the bank at the end of September 2010, which is enough cash for the immediate  business needs.


Amino Technologies (AMO)£28.1m at 48.5p

A strong second half trading helped Amino, IPTV technology group,  to make a small profit in the year to November 2010 and it is on course to make amore significant profit this year.  Revenues grew 74% to £44m in the year to November 2010, while the underlying pre-tax profit was £300,000 according to house broker FinnCap. Gross margins fell because of lower margin, large contracts and foreign exchange movements. The first orders for Over The Top TV (OTT TV), which offers the ability to use iPlayer and similar services on the TV screen, are coming through. There was a £1.7m onerous contract provision for the first OTT TV contract because it took longer and was more costly to develop the technology and product. These are now sunk costs and the technology is ready to sell to other customers. Amino has had problems sourcing components in the past but the company believes these problems have been reduced by the appointment of Donald McGarva as chief operating officer. Julia Hornby has been appointed as finance director. Finn Cap forecasts an underlying profit of £1.7m for 2010-11, rising to £3m next year for a prospective P/E of 17.2 dropping to 9.8x.

Net cash was £3.59m at the end of November 2010. This is much lower than a year before because of a sharp increase in inventories to satisfy OTT TV orders for a large Western European contract early in the new financial year. Amino still has £36.3m of tax losses so it won’t be paying any significant tax for some time.


Atlantic Coal (ATC)£24.8m at 1.1p

Pennsylvania-focused coal miner Atlantic Coal wants to consolidate coal mining assets in the region of its Stockton mine, which has a ten year mine life. Stockton produces anthracite, which is high carbon coal used in steel making, glass production and domestic heating. Demand outstrips supply in Pennsylvania. The coal price is rising and the average selling price has been $137/ton in recent months. Assuming 200,000 tonnes of coal are sold and a target price per ton of $130, revenues would hit $26m in 2011.

Cash in the bank is minimal and more will have to be raised to make acquisitions.

Atlantic Coal will only prosper if it acquires other coal mining assets in Pennsylvania. A number of assets have already been identified. Some deals could be done on a royalty basis which will limit upfront costs. The existing plant and equipment could be used to process coal from the other mines.

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