Immupharma (IMM)


Hybridan's Small Cap Wrap

Share this In this week's pick of the small caps, Hybridan looks at Cluff Gold, Herencia Resources, more.This article is an edited extract from a non-independent research note issued by Hybridan; please click here for an explanation.

This article is focused on firms with a smaller market capitalisation, please click here for a description of the risks of investing in "small cap" stocks.

This week: First Derivative is boosted by the Lepton factor, Gulfsands gets a positive appraisal, and Rotala receives a ticket to ride

Cashbox (CBOX) [3.25p / £4.88 million]

Cashbox, the UK's largest independent operator of ATMs, has announced a two year agreement to advertise China Unionpay, the Chinese Card Scheme with over 1.8 billion card holders, on its ATM machines. The contract follows China Unionpay's connection to the LINK network in the UK, enabling its customers to access cash from LINK machines.

With over 140,000 Chinese tourists estimated to have visited the UK in 2007, and with this number expected to grow leading up to the Olympics, this deal provides an additional non-transaction revenue stream for Cashbox. If not a night at La Gavroche then certainly a nice little take-away.

Cluff Gold (CLF) [77.25p / £90.50]

The West African focused gold mining group last week announced an update on its mineral resource estimate at its Baomahun gold project in Sierra Leone. This followed the recent completion of a 7,000 metre core drilling programme undertaken to test the underground potential.

Inferred mineral resources have increased by over 500,000 ounces to 957,000 ounces of gold and in addition, total measured and indicated mineral resources are now 1,103,000 ounces of gold. A scoping study has been initiated into the combined open pit/underground scenario with completion expected in the first quarter of 2010 which will be independently reviewed.

This continued growth of the mineral resource at Baomahun is great news. Algy Cluff has done it many times before, and we fully expect him to work his magic with Cluff Gold. The stock has gone up 12 pence since we last wrote on it and we recommend keeping a watchful eye on the news flow of this gold play.

Epistem (EHP) [357.5p / £25.79 million]

Biotech company Epistem last week announced its intention to open a US office based in Boston, MA to increase its presence in the US. This is well timed to support the commercialisation of the recently launched proprietary GenetRx biomarker platform in oncology. GenetRx is the company's cDNA gene expression profiling technology which has the ability to analyse individual plucked hairs, blood and other tissue samples which are traditionally difficult or too small to analyse by other methods.

This proprietary technology is used by clinicians and research scientists to study the effects of a drug and to establish dose scheduling and patient response. Epistem is a well managed biotech that develops drugs and biomarkers and provides contract research services to drug development companies. We like its model of fee for service and drug development and believe that the combination of a strong cash position and impressive management team will power this stock forward.

First Derivative (FDP) [290p / £39.92 million]

The banking and hedge funds-focused software and consulting group announced impressive results for the half year to 31 August 2009. Sales rose 66%, to £11.4 million, PBT was up 36%, at £3.1 million, and EPS grew 47%, to 15.4p. This was driven by the acquisition of Market Research Partners (MRP), increased penetration in the US, a rise in software revenues and the trend to outsource IT. And, while most of First Derivative's business comes from London and New York, the acquisition of Lepton Solutions in March has opened the door for expansion into Asia.

The group has traditionally offered consulting services to banks by applying its knowledge of products from specialist technology suppliers. But it has now moved into developing its own software, which offers higher group margins. First Derivative has a strong customer base that includes Goldman Sachs and Morgan Stanley, and it has good recurring revenues. The group has displayed consistent organic growth and has a strong financial position, with net debt of £12.3 million but £18.3 million of property, plant and equipment on its balance sheet. Above all, however, it continues to perform at both the top and bottom line.

Gulfsands Petroleum PLC (GPX) [232.75p / £279.82 million]

This oil and gas production, exploration and development company with activities in Syria, Iraq, and the US, last week announced an update on the company's operations at Block 26, Syria where Gulfsands holds a 50% interest and acts as operator. Preliminary interpretation of drilling data has identified a gross oil column within the well-bore of 60 metres. The well will now be completed as a potential for future production. The successful outcome of the Yousefieh 3 appraisal well will now enable the company to proceed shortly with an application for commercial development of the Yousefieh field.

The rig will move to the Khurbet East field to drill Khurbet East 13, a vertical production well to be located approximately 600 metres southwest of the Khurbet East 9 development well. Extended flow testing operations have recently been completed on KHE-12. Oil was confirmed to be present within a six metre section of core recovered from the top of the reservoir interval, but the well did not flow oil to the surface.

Cumulative gross oil production from the Khurbet East field has reached five million barrels with minimal water production and little pressure depletion being observed to date. Khurbet East Field is performing very well. Average daily gross oil production during the month of October is in excess of 17,000 barrels per day. Gulfsands looks to be one that will continue to generate news flow this year.

Herencia Resources plc (HER) [0.7p / £6.0 million]

It does not come as a surprise to us that this junior exploration company has been able to raise £1.37 million to advance its Paguanta zinc-lead-silver project in northern Chile. Over the last few months we have written about the company's positive developments and we are pleased to see Herencia now being enabled to commence its fourth drill programme in early 2010. Herencia will target potential extensions to the known areas of high grade mineralisation at Paguanta.

Mineralisation is open along strike and down dip, so this could result in significant resource upgrades as previous drilling has shown higher grades at depth. Along with a larger resource, confirmation of higher grades would add to the project's potential and economics compared to the scoping study done last year. There is also additional upside from a possibly higher gold content and improved metal prices as well as lower capex resulting from easier access to second hand plant and equipment.

The company plans to initiate a pre-feasibility study after the drill programme ends. Part of the funds will be deployed to evaluate the gold-copper prospectivity of the adjacent La Rosa porphyry copper target which is on the same block of tenements. Whilst the outlook for Herencia was bleak at the beginning of the year, the company is now back on track with a good possibility it will deliver exciting news for investors next year.

H R Owen (HRO) [72.5p / £17.12 million]

It has been a tough few years for luxury car dealer H R Owen which has seen revenues drop by 75% since the beginning of 2005 with a share price down 65% in the same period. Its operating profits this year of £6.6 million only came courtesy of a £7.5 million sale of a property lease and its chief executive Nicolas Lancaster said that on average sales were down by around 40% on last year. We can find signs, however, that the company may have reached its nadir.

The company announced on Wednesday that its trading levels in the second half of the year 'looked no worse' than those experienced in the first half of the year with Mr Lancaster stating that business had started to pick up again in recent weeks due to large gains in the capital markets (which fuels this particular industry). The company is free of debt and the current share price looks particularly low at the moment when compared to its peers. There may indeed still be some mileage left in this distressed stock.

ImmuPharma PLC
(IMM) [107p / £82.91 million]

The specialist drug discovery and development company the week before last won the Best Technology Award at the AIM Awards 2009, organised by the London Stock Exchange. The Award is presented to the company which reflects the innovation and entrepreneurial skills that are considered the cornerstone of the AIM culture. ImmuPharma has been one of UK biotechs winners this year and has gone up more than 20 pence since we wrote on them a few weeks ago. Usually an award is the kiss of death, but the SCW team think that this one has a way to go yet.

Landkom International (LKI) [5.9p / £14.1 million]

Our favourite Ukrainian crop farmer has harvested City coffers by announcing a placing of shares at 5p to raise £9.75 million. We have to admit to being impressed by the size of the fundraise for a company with a market capitalisation of £14 million and an interim CEO. However, the size of placing discount, 30% to the share price the day before the placing was announced, gives a sense of pressure on the company to raise additional capital or face a working capital cash crunch. No shareholder likes this kind of gun to the head and they've clearly reflected this in the pricing.

The company has assured the market that it now has sufficient working capital to fund its planned cropping programmes through to harvest in 2011 and beyond. All well and good but readers may remember that the company recently announced it was in discussions with a number of international farming operations with a view to completing a substantial merger of farming activities and/or securing both farming expertise and additional funding. Clearly these discussions bore no fruit. Not much of a harvest festival then.

Next Fifteen
(NFC) [65p / £35.15 million]

The technology specialist public relations group issued a relatively resilient set of results for the year to the end of July. Adjusted PBT fell by 21%, to £5.2 million, and adjusted EPS declined by 25%, to 6.5p, but this is perhaps unsurprising, given the economic backdrop. Management has responded by cutting costs, with headcount reduced by 13%. Despite this, the adjusted operating profit margin fell from 10.4% in 2008 to 8% in 2009, but chief executive Tim Dyson says margins have 'normalised' now.

He also reassured that the loss of the Sun Microsystems account is set to be offset by the gain of Hewlett Packard. Furthermore, the group benefits from a blue chip client base that includes IBM and Microsoft, and it has a good business pipeline. We have been strong supporters of public relations, which is a beneficiary of the increased reputational threat posed to companies, brands and individuals by the internet.

And this Hybridan writer has long argued that the rise of digital PR offers a means to measure the effectiveness of expenditure on public relations services, something PR has lacked in the past. In this regard, we view positively Next Fifteen's decision to launch a digital agency and consultancy. Indeed, we'd call it good PR.

Pulse Group PLC (PGRP.PL) [3.5p / £3.21 million]

With its finger on the Pulse, this leading provider of research services within the Asia-Pacific region, last week announced that Omnicom Media Group has appointed Pulse as its strategic partner for its research projects throughout Asia-Pacific. OMG, part of the Omnicom Group, is one of the largest media agencies in the world.

Pulse will work with OMG's analytics team, providing the latter with its online and offline data collection expertise and other ancillary services such as project management, survey programming and data processing. Pulse is rather a small company, listed on PLUS, but has impressive expertise in its region and in its research service offering.

Rotala (ROL) [51.5p / £13.93 million]

Rotala, the bus and coach operator, has announced a placing to raise £2.15 million to fund organic growth and strategic development. Rotala, from hubs in Birmingham and Bristol, operates bus services that are contracted or subsidised by local authorities and so not in competition with the larger bus groups. At present, Rotala provides private bus, coach and car services to corporate customers and scheduled bus services under contract to local authorities, typically for terms of up to three years. Major customers include British Airways (BAY) and the West Midlands Passenger Transport Executive (Centro).

Public sector bus operations are generally conducted under the "Connect" name. Rotala is well positioned as a consolidator in an industry which, outside of the big players, is highly fragmented. Many existing operators are small and are only marginally profitable at best so the opportunity for Rotala is to put businesses together, reduce overheads overall and secure more favourable margins.

At the same time the industry is a product of the de-regulation of some 20 years ago. The owners of these business set up then are now approaching retirement and are looking to sell out and so Rotala is well placed to take advantage of this factor. For the time being however, the business is showing strong organic growth with good contract wins.

The new funds will allow the company to establish and expand a new bus network in Worcestershire, acquire a new depot in the Bath and Bristol, acquire 15 new buses for British Airways' ground transportation and fund the continuing organic growth. The cash flows from an efficient bus operation start to become substantial after the depots are established, the new routes take hold and debt is paid down, so this is one bus to catch.

St Ives (SIV) [71.25p / £73.78 million]

The supplier of printing services saw revenue decline by 1.1%, to £387 million, but underlying EPS fall by 75%, to 4.9p, due to operational gearing and a sales mix weighted towards lower-margin work. The group has been hit by both structural and cyclical issues, with, for example, B2B magazine publication in long-term structural decline, but exhibitions and events-related work facing largely cyclical pressures. Management has responded by cutting costs.

It has closed one magazine plant and a CD/DVD plant, and reduced its workforce by 12%. St Ives is also developing a strategic plan to offer new products and services, such as book warehousing. There was a significant improvement in net debt, which fell from £33 million to £19 million. And, with a mouth-watering £122 million of property, plant and equipment on its balance sheet, this is not a group with debt problems. More crucially, such asset backing positions the group well to make it though the recession and experience the positive effects of operational gearing as and when the economy improves.

Synchronica (SYNC) [3.625p / £20.93 million]

Synchronica has done it again. Following on from the southeast Asian contract we reported on two weeks ago, the group has announced a $101,400 purchase order from a mobile operator in North Africa for its Mobile Gateway mobile email product. The deal also includes an initial 10,000 user licence and a contract for ongoing professional services. To make things even more interesting, Synchronica is in discussions with several other subsidiaries from the same African group and says it 'expects to make further announcements in due course'.

Xploite (XPT) [45p / £18.36 million]

In these straightened times it's unusual to find a company fessing up to having too much cash on its balance sheet. But, that's what Xploite has done following the sale of one of its major divisions, VBHG Limited, for £31.5 million earlier this year. The operator and aggregator of strategic high growth IT services businesses had been looking for further acquisitions in the Information Communication Technology market but after assessing a number of big potential deals it concluded that none were attractive enough. It is now focusing on smaller acquisitions which require less cash and is therefore returning £9.5 million to shareholders by way of a tender offer at 50p per share.

This will leave approximately £3.1 million on the balance sheet together with rights to deferred payments of £4.1 million from other disposals and liabilities of £1.25 million. Management has a strong track record in delivering value for shareholders but a buy and build strategy focused on smaller deals, and hence smaller returns, and a remaining business that's loss making make this one a difficult call. If in doubt…

The Hybridan Small Cap Wrap is a weekly review of some of the most interesting small cap stories of the past week. Our review will usually be of those companies whose market capitalisations are less than £50 million although we may occasionally cover larger companies. Our review is not intended to constitute research and is not to be taken as investment advice.

A non-independent research note:

(a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research; and
(b) is not subject to any prohibition on dealing ahead of the dissemination of investment research (although Hybridan does impose restrictions on personal account dealing in the run up to publishing research as set out in their Conflicts of Interest Policy).

The individuals who prepared this document may be involved in providing other financial services to the company or companies referenced in this document or to other companies who might be said to be competitors of the company or companies referenced in this document. As a result, both Hybridan LLP and the individual partners and/or employees who prepared this document may have responsibilities that conflict with the interests of the persons who receive this document.

It was not originally intended to be distributed to Retail Customers, and is included here for information and discussion purposes only. It does not form a recommendation to invest or otherwise. It is intended as a weekly review of some of the most interesting small cap stories of the past week. The content will usually review companies whose market capitalisations are less than £50 million although we may occasionally cover larger companies.

Our review is not intended to constitute research and is not to be taken as investment advice.