Pause for thought: Investing in commodities as a hedge for inflation and growth makes sense but the fact that prices keep going up reflects speculative flows, which might choke off. FT

Last week
Investors are climbing the wall of caution, for despite UK & China inflation, unemployment and bullets in the Middle East most markets marginally improved. The FTSE 100 improved 0.3% with a similar rise in the FTSE 250 while the Aim All Share at 955.0 was unchanged.

This week
Revised UK GDP with be announced on Friday but before then corporate (banks, builders) and other economic announcements will shine a light on the health of the UK economy. The BOE Minutes on Inflation are reported on Wednesday, which should remind the market that the interest rate increase could be soon. The FTSE 100 has marginally improved for three weeks, we sadly remain cautious.


Electric Word (ELE) – £12.7m at 4.25p
Up until now education and sport have been the core customer sectors. The proposed changes in the NHS provide new opportunities for the Radcliffe business bought last November. This part of the business will be the main focus of investment. Revenues fell 11% to £14.6m in the year to November 2010 with most of the decline coming in the educational sector. Underlying profit was flat at £1.94m thanks to timely cost cutting. The professional division, which is mainly the educational publishing business, reported a 14% decline in organic revenues, although it made a greater profit contribution last year. The educational demand should recover slowly but the main growth in this division will come from Radcliffe. The business information division, which includes sport business and online gaming information, continues to grow revenues and profit. This was a quiet year for sport because it was a low point in the bidding cycle for major events, such as the Olympics. The MyChild business focused on consumers has been rebranded as The School Run and it is building up its database of names. The sports performance business and its sports health professional operations could provide opportunities for some of Radcliffe’s publications. House broker Panmure Gordon does not expect to make significant changes to its 2010-11 profit forecast of £2.13m on turnover of £16.6m. so the shares are trading on just over 8x prospective earnings with an EPS of 0.5p.

Net cash was £646,000 at the end of November 2010, although since then just over £1m has been spent on buying out the minority interest in the iGaming business. There is potential deferred consideration of up to £1m for Radcliffe. There is still scope to make further acquisitions.

Trifast (TRI) – £36m at 42.4p
A cautious sounding trading statement left the shares lower at this leading global manufacturer and distributor of industrial fasteners. Gross margins have been built to 25% as value is added with logistics efficiencies, purchasing, stock and vendor Management. The focus is on a sales led strategy in Asia and Europe which are performing above or within expectations while inroads are being made into the US. The market’s reaction to the statement suggests fear of a downgrade. The finals for the year end 31St March are expected in June and although margins are being put under some pressure by currency movements and increased freight costs, but with management looking to lift gross margins, the overall performance remains positive. Trading conditions remain challenging, but the statement refers to deliveries commencing on several new contracts. Management has identified a number of further initiatives which should deliver over the medium term to supplement the progress currently being achieved. Profits are forecast a £3.4m with turnover or £104m giving and EPS of 2.93p so a prospective 2011 P/E of 14.7p while 2012 EPS of 3.4p drops the P/E to 12.5x. There is busy shareholder activity which intriguingly may have prompted the trading statement.

Net borrowings are £5.6m which makes gearing of 14% backed by an NAV of 48.7x, there is no dividend forecast.

Regenersis (RGS) – £32.1m at 72.5p
RGS is an electronic outsourcing business with three divisions – Mobile Communications, Media & Entertainment and Information Technology and recently appointed a new non-executive chairman, Matthew Peacock. He describes Regenersis as a “forgotten gem” and his turnaround business, Hanover Investors Management took a 14.16% stake at the end of January. Peacock and Hanover have been involved in the turnaround of a number of quoted companies, including STV and chain maker Renold. When Hanover bought most of its shares, Impax, Torch Capital (BVI) and Gordon Shields, the founder of Fonebak, were sellers but they remain large shareholders in RGS. The previous non-executives stepped down and the new team bring logistics expertise which is seen as an important factor in improving the returns. The mobile phone recycling sector became highly competitive and this part of the business is being wound down. Peacock says that European rivals have better margins and much higher ratings for example Germany-based rival Teleplan is being taken private by the Netherlands-based Gilde Buy-Out Fund, which is paying €155m for the Frankfurt-listed repairer and after-market services provider. Peacock’s initial focus at Regenersis will be asking strategic questions and then action so news may flow. The present forecast for the Y/E June 2011 is for PBT of £5.4m for an EPS of 9.7p and a prospective P/E of 7.4x. Interims are due in March.

Peacock is keen that Regenersis should become involved in the consolidation of the European outsourced repairs market. He argues that the multinational companies in the electronics sector want a consistent service across Europe and the rest of the world but it is still a geographically fragmented market.
Net debt at the June 2010 year end was £4m with an operating cash inflow of £2.1m. The NAV is £30.7m or 76p a share.

Animalcare (ANCR ) – £31.4m at 155p
Veterinary medicines and products supplier Animalcare is reaping the benefits of focusing on its core operations. The sale of its non-core livestock products business and this has removed the seasonality of the group’s revenues. The pets market continues to grow and Animalcare is launching new treatments. Animalcare reported a 12% increase in revenues to £5.99m in the six months to December 2010. Underlying pre-tax profit jumped from £1.03m to £1.44m. The driver of growth is the veterinary medicines business even though export sales have been flat due to problems in Europe. There are a pipeline of new drugs that will be launched by Animalcare over the coming years but none of this is built into the market forecasts. Animalcare is likely to launch two third party anaesthesia products in the first quarter of 2011 and may even start selling two other products before the end of June. Initial orders from wholesalers at launch mean that a new drug makes a gross profit contribution immediately. Forecast for the year end June 2011 are for a PBT of £3.13m which gives an EPS of 11,18p for a prospective P/E of 13.9x which drops to 12x for 2012.

The disposal helped Animalcare to move to a net cash position of £425,000 at the end of 2010. House broker Brewin Dolphin forecasts net cash of £1.9m by the end of June 2011. To reflect the lack of seasonality Animalcare is paying a maiden interim dividend of 1p a share. In the past there was only a final dividend.

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