… its just possible you haven’t grasped the situation.
… the FTSE 100 drifted up 0.3% to 5545, the FTSE 250 was unchanged as was virtually the AIM All Share at 728. A Euro cataclysm is difficult to discount rather like preparing for an overhead nuclear explosion. There was some political relief with changes of leadership, but Italian austerity and Greek recession will keep investors nervous. UK Producer Prices fell faster than expected from 5.9% to 5.7%, a promising early indicator of falling inflation while Interest Rates remained unchanged at 0.5%.
… there are UK Economic statistics that are likely to have an impact. Unemployment on Wednesday is set to increase, while Retail Price Index on Tuesday could show a declining growth rate so taking the head-butt out of stagflation. The BOE’s new GDP growth forecast is to be announced on Wednesday which is likely to be 1% in 2012 rather than the original 2.5%. The announcement of a £50 billion stimulant from the Chancellor is good economics. After a relief rally markets are likely to be flat.
Eckoh (ECK) – £20m at 10p
Speech recognition services provider Eckoh is continuing to win new contracts and build its underlying profitability. In the six months to September 2011, revenues grew 19% to £5m, while underlying profit improved from £253,000 to £443,000. Increased investment in staff and offices held back the profit growth. Eckoh has recognised a deferred tax asset of £2.1m and it has a further £4m of losses that can be offset against future profit that have not been recognised as yet.
The strength of Eckoh’s business is shown by the fact that 90% of revenues are recurring.
EckohPay, which enables card payments to be made over the phone, has received Payment Card Industry Data Security Standards level 1 accreditation. This is the highest level achievable.
Payment processing provider Servebase is the latest reseller that Eckoh has signed up. Servebase will sell EckohPAY along with its own services. Servebase has a customer base of banks. The core reseller relationship with BT has been renewed for three years. There is no significant overlap among the existing resellers.
Demand for speech recognition services is growing. Edison forecasts a full year profit of £1.2m, rising to £1.9m in 2012-13 as this year’s investment in building up the operational base of the business starts to pay off which gives a prospective P/E of10x.
Eckoh is generating enough cash from its operations to more than cover its capex and its dividend payment. Edison expects Eckoh to have net cash of £6m by the end of March 2011. Last year Eckoh paid a maiden dividend of 0.1p a share and the dividend is forecast to increase to 0.13p a share. Eckoh is paying one dividend a year.
Lok’nStore (LOK) – £25.1m at 98.5p
Self storage operator Lok’nStore’s revenues rose 4% to £10.8m in the year to July 2011 as price rises offset any weakness in trading. Pre-tax profit jumped from £431,000 to £938,000. Lower epreciation and share-based payments charges were part of the reason for this but there was underlying growth in profit. That is well below the adjusted NAV, including property revaluations, of 179p a share – after deferred tax provision.
Management took a decision not to invest in new capacity back in 2007 and this has proved to be a good policy. This could change following a deal with supermarket operator Lidl involving the company’s site in Maidenhead. The supermarket still requires planning permission but if this is gained then construction is likely to commence.
In June, Lok’nStore acquired document storage services provider Saracen Datastore, which has four sites in the South East. Lok’nStore paid £3.7m for 90.6% of the business with managing director Leo Kane owning the rest. Lok’nStore already generated 10% of its revenues from document storage. In 2010, Leatherhead-based Saracen generated EBITDA of £400,000 on revenues of £1.6m.
Another way of expanding could be managing storage centres for third parties. Storage centres can provide an attractive return to private and institutional investors, as well as inheritance tax relief on the investment, but they need professional management. Lok’nStore could provide this and already runs one site on a management contract. Profits for the July 2012 year-end of £1.2m give a prospective P/E of20x.
Cash inflow from operations improved from £3.47m to £3.6m. There are still plenty of tax losses available to the company. Lok’nStore has secured a £40m five year facility from Lloyds TSB. This will mean that interest charges will increase but it provides enough room for further expansion. Net debt was £24.4m at the end of July 2011. The final dividend has been increased from 0.67p a share to 2.67p a share, taking the total dividend to 3p a share (1p a share). Next year, the interim will be one-third of the total. The dividend is covered around four times by cash generated and should be increased in line with EBITDA growth.
Egdon Resources (EDR) – £17.7m at 13p
Onshore oil and gas company Egdon Resources reported a jump in profit to £4.08m last year but that was due to the profit on disposal of a subsidiary Egdon sold a package of French oil licences to eCorp for £4.5m – a profit of £4.34m. This was just before France banned hydraulic fracking. Egdon still has interests in conventional gas targets. The main focus is Audignon, where Egdon has a 33.4% interest.
Revenues increased from £1.25m to £2.38m in the year to July 2011 and the underlying loss rose from £153,000 to £261,000.Production averaged 130 barrels/day but hit 420 barrels/day in July. Reduced production levels at Kirkleatham mean that the average for this year is going to be lower than previously expected at around 400 barrels/day. Last year, Egdon bought assets from EnCore Oil, which took a near-30% stake in return. Premier Oil is taking over EnCore and it is uncertain whether Premier will want to keep this stake.
Although Egdon is loss-making it is cash generative. Cash flow from operations improved from £161,000 to £202,000. Egdon spent £3.2m on exploration and development last year and it could spend twice as much this year as it tries to build up its resources. There is £3.69m in the bank and the business will generate more cash this year.
China New Energy (CNEL) – £18.3m at 6p
Biofuels processing technology supplier China New Energy Ltd’s trading subsidiary Guangdong Zhongke Tianyuan New Energy Science and Technology Co (ZKTY) has reported a 20% increase in revenues to RMB101.7m in the nine months to September2011. Profit was flat at RMB 15.5m, although this excludes the overheads of the holding company which are around RMB10m. Arden believes that China New Energy can make a profit of £2.66m on revenues of £15.4m in the full year even though work on some contracts has been delayed.
China New Energy is the market leader in China and it is branching out into other markets in Europe and south east Asia. There is still plenty of growth in the Chinese market. At the moment, 2m tons of cellulosic ethanol are produced in China and the government wants to increase this to 10m tons by the end of the decade. Mckinsey believes that the figure could be as high as 31m tons by 2020. China New Energy is well-placed to provide a large percentage of the capacity that will be required to achieve this growth.
China New Energy is trying to build up its recurring revenues so it is not so dependent on the timing of large contracts. One of the ways it will do this is by providing yeast management services. It will build plants supplying wet yeast next door to the main biofuel processing plant. There are also ways of modifying equipment to produce production savings that can be shared with the customer.
China New Energy is collaborating with companies and universities developing new technologies for the production of bio-butanol from agricultural waste. This enables the company to be involved in these new technologies without using up its own cash.
China New Energy has shown that it can generate cash from its operations and the cash generated should increase over the next couple of years. Net cash was RMB8.2m at the end of June 2011, although that excludes RMB46.9m of convertible bonds. China New Energy raised just over £600,000 at 7p a share when it joined Aim in May but there was only £60,000 left after the expenses of the flotation. Management wants to start paying dividends in 2013.