Pause for thought

Smaller companies average share price has fallen 6% since the beginning of the year against a 10% fall for the larger companies. 



Last week …

… saw declines  with the FTSE 100 -1.5% and FTSE 250 declining -2.2% while the Aim All Share at 774 improved 0.5%.  As expected Interest Rates are being left unchanged at 0.5% and there is no new QE2 initiative. The Eurozone debt fears are being exacerbated by the resignation of another euro Central Banker who is anti-bailouts.  The world and US growth concerns were not eased by the US President’s $450 billion Jobs plan.


This week …

… on Tuesday UK’s August inflation  will be reported with Europe’s  on Wednesday followed by the US on Thursday. It seems that only in China that inflation is a cause for genuine concern.  UK Investors are more likely to react to the Employment report on Wednesday and Retail Sales Figures which are to be reported on Thursday. UK consumers account for 65% of GDP and consumers may at best be cautious at worse gloomy.  Further falls seem likely this week.


Company Reports

IS Solutions  (ISL) – £10.1m  at  40.25p

Online technology services provider IS Solutions is trading strongly even though software sales declined in the first half and the outlook remains positive thanks to good demand for web-based analytics.  ISL has carved out a niche as a specialist systems integrator, offering software products, projects and managed services to support organisations’ internet infrastructures. Key areas are portals, content/document management and analytics. It has established recurring revenues through building relationships with ‘customers’ (software sales), with a goal to convert them into ‘clients’ (recurring project work) and ultimately into ‘trusted partners’ (embedded relationships). Recently reported interim results were buoyant, suggesting that the strategy to drive its high-margin managed services business which has strong recurring revenue is gaining traction. Recurring managed services revenues jumped 16% to £2.4m, driven by the significant contract with SAS Institute, announced in August 2010, and now represent 73% of gross profits. The higher-quality business mix was reflected in the operating margin, which nearly doubled to 8.3%. Management says that despite the weak economic outlook, the group has a strong order book and are confident of achieving forecasts. Forecast for the year end December 2011 are for £0.9m for an EPS of 3.3p so a prospective12.2x with a yield of 3.2%


Gearing is 38% with net debt of £1.48m and  the NAV is 16p a share.  The business remains cash generative. The interim dividend has been increased by 11% to 0.4p a share.


Polo Resources (POL) – £124.8m at 5.34p

Polo Resources is an active investor in companies with mining projects that are at a stage when they are moving towards production. Polo tends to take significant minority stakes and retain them for one-to-three years. Polo has sold its uranium assets and its stake in coal miner Caledon Resources. Polo still has some coal investments, as well as stakes in iron ore and gold companies. It is also looking at oil and gas and copper investments. The net asset value at the end of August 2011 was 6.56p a share.


Polo paid 3p a share to shareholders from the uranium disposal cash and it bought back $7.8m of shares . A 2p a share dividend will be paid out of the proceeds of the Caledon disposal. That will cost £46m out of the £90m raised. There was $37.5m in the bank at the end of August and this means there is plenty of cash for new investments.


Polo owns 29.8% of Aim-quoted GCM Resources and this is valued at $25.9m. Polo is effectively looking to exit this investment.


Hydro International  (HYD) – £19.8m at 137.5p

Wastewater and stormwater equipment supplier Hydro International performed strongly in the first half despite weak construction markets and a lack of capital investment in the UK water sector.

The UK and US operations have both increased their revenues. Most of that growth came in the wastewater operations as weak construction demand held back the growth of the stormwater businesses. Water company capital spending is not increasing as expected in the UK, following the AMP5 regulatory review. This is in its second year and spending is normally ramping up by now but projects are being rescoped to reduce costs. The AMP5 review is for a five year period and it may mean that spending will be skewed more to the second half of the period.

Over the past year Hydro has won orders totalling £24.9m for Zickert Scraper projects with Thames Water and these will continue to contribute until 2013.  Revenues rose 24% to £13.7m in the six months to June 2011, while pre-tax profit jumped 54% to £951,000. The profit improvement came from the wastewater operations, which also benefited from the write back of a previous provision.

Middle East sales have been hit by the conflicts in the region but management is confident that they will recover. A contract in Qatar has been secured. Brazil and additional European markets are being targeted. New products will also help to grow revenues. Hydro’s order book is worth £25.2m, which is a record.

House broker Arden remains cautious and still forecasts a flat profit of £2.52m for 2011. Arden wants a clearer picture of the pace and timing of the recovery before making any change. This puts the shares on a prospective P/E of 12.1x Even so, there appears scope for an upgrade  from EPS of 11.4p a shares given the first half performance and the ongoing work for Thames Water.


Net cash was £3.4m at the end of June 2011.


Vindon Healthcare (VDN) – £8.5m at 9.6p

Storage equipment manufacturer and storage services provider Vindon Healthcare says that the UK is still flat at best but the Irish and US storage operations are winning new customers.

Pharma company consolidation and unwillingness to invest means that demand for temperature controlled storage cabinets is weak although there are signs of improvement and chairman Liam Ferguson says that he is much more confident about prospects than he was one year ago.

Stability storage capacity is being trebled in Ireland and the new US storage facility has won five clients. Recurring income from storage is at a high of £4.2m. Interim revenues rose from £2.64m to £3.13m but additional costs in Ireland and the US, plus investment in new products, meant that profit was flat at £416,000. Profit forecast for the full year to 31 December  have been  increased from £900,000 to £1.1m which gives EPS of 1.1p and a prospective P/E of 8.8x with a 1.7% yield


Net debt was £1.69m at the end of June 2011. The former factory is in the books at £313,000 and this should yield at least this much when the deal to sell it is finalised following the gaining of planning permission. The final dividend should remain at 0.165p a share.


Rotala (ROL) – £14m at 38.5p

Rotala are an acquisitive bus operator and seems to be  benefiting from operational pressure on the larger companies and the changes in local bus companies. Interim’s show revenues had increased by 18% to £26.6m (2010: £22.5m), gross profit increased by 6% to £4.1m (2010: £3.9m), with gross margins further squeezed to 15% as a result of increased fuel costs. The growth strategy is working with an improved revenue  balanced   as commercial charter services and local authority contracts provide  overall growth despite a challenging environment. The January 2011 acquisition of PBL, opened up a new hub for the group around Preston and is being integrated and expanded the commercial services which are the non-contracted routes.   Profits of £2.1m are forecast for the November 2011 year end which gives an EPS 6.1p so a prospective P/E 6.1x, while yielding 2.9%.


The NAV is 58p a share with net debt of £22m. The holders of Convertible Unsecured Loan Stock issued in 2008 have agreed to  extend to December 2014, holders of £2.3m of the outstanding loan stock have committed to the extension (coupon 8%, conversion 45p/share). The remaining holders of £1.7m, which is repayable on 31 December 2011, is likely to be financed through cash generated and existing bank facilities.

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