Hybridan's Small Cap Wrap - 03-11-09

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: Lifting the lid on LiDCO, why Rockhopper could be rolling out the barrels, and a roofing company that's going through the ceiling.


Anglesey Mining (AYM) [13.00p / £19.87 million]

Anglesey Mining has reported that a licence exchange deal has been agreed between its TSX-listed and 50%-owned Labrador Iron Mines (LIM) operation and New Millennium Capital Corp (NML). The two sides have agreed to swap some of their respective mineral licences in Labrador province, Canada, in order to eliminate the fragmentation of the ownership of some of the mining rights in the Schefferville area. It will enable both parties to separately mine and optimise their respective direct shipping ore (DSO) deposits as efficiently as possible.

The agreement represents the exchange by each party of equal quantities of approximately 13 million tons of iron ore. Both sides have agreed to work collaboratively to facilitate their respective extraction, processing and transportation activities by enabling each other to apply for all required surface rights.

In relation to the transport both sides separately agreed a Rail Co-operation Agreement to reconstruct a rail spur line which will run from the main rail line near Schefferville approximately 2.5 miles to LIM's planned processing centre on a further approximately 13 miles to NML's planned processing centre.

Anglesey has done well in recent months to eliminate the discount its shares were trading at to the value of its stake in LIM (its 50% is worth approximately £20 million) but in addition Anglesey owns the Parys Mountain copper, lead and zinc property in North Wales, which is currently in care and maintenance.

Your intrepid reporter visited this site some years ago and believes that if the recent recovery in base metal prices is sustained the group would be able to unlock the value of the Parys Mountain project. Now that would be an interesting angle.

Boomerang (BOOM) [92p / £8.20 million]

The Welsh television production company has announced its results for the year to 31 May. Revenue fell by 5.6%, due largely to a delay in decision-making by broadcasters. But, at the analysts' briefing, finance director Mark Fenwick said that, of the £2 million - £2.5 million shortfall from management's earlier expectations only £0.4 million has been completely cancelled, with the remainder to be recouped in the current financial year and thereafter. Boomerang has traditionally focused on providing production and television services, including television studio and post-production facilities.

But it continues to focus on developing intellectual property in terms of a programme library and programme formats, with scope to sell these abroad - and this is typically a higher margin activity. The group is supported by some favourable headwinds.

First off, in the wake of the 2003 Communications Act, independent television producers own the programmes they make for public sector broadcasters. Furthermore, the public sector broadcasters have a quota system in which television production must increasingly come from outside the M25 and outside England, of obvious benefit to a business based in Cardiff.

Following the results, Boomerang also announced winning a four-year contract with Welsh channel S4C, worth £3.2 million, in addition to the £42.9 million pipeline referred to in the full-year results. There's lovely.


Cluff Gold (CLF) [70.50p / £82.58 million]

The West African focused gold mining group announced that the operations at the Angovia Gold Mine have reached the required standard for commissioning. Algy Cluff, Chairman and CEO of Cluff Gold said: "With Angovia successfully commissioned, our aggregate target of annualised gold production of 100,000 ounces for Angovia and Kalsaka, appears achievable in the last quarter of this year." Gold has been and will likely continue to have a good run and we are fans of Mr Cluff's vehicle.

GETECH Group (GTC) [20p / £5.84 million]

On Tuesday GETECH Group published its final results for the year ending 31 July 2009 and announced a pre-tax loss of £627,901. This oil exploratory company specialising in an integrated approach to oil prospecting - combining its peerless global gravity and magnetic proprietary database with in-house expert geophysical analysis -had a particularly tough second half of the year due to the huge drop in oil prices to less than $50 a barrel.

However in a presentation to analysts, Raymond Wolfson, the CEO of GETECH, said that he remained upbeat that the company would have a good end to the first half of the current year due to the stabilisation of the price of oil at more than $70 a barrel (the minimum price the CEO thought needed for significant oil company investment in exploration).

December and January are also traditionally the months when the large oil companies review their budgets for the following year. With significant pre-commitments for geological studies (due for completion in 2009/10) and an extremely low interest £1 million debt facility to help the company remain cash-rich, we believe that if the price in oil does indeed hold up, this exploration company will once again be able to tap into the huge oil company reserves.

Hightex (HTIG) [7.88p / £11.78 million]

Hightex, the designer and installer of large membrane roofs, has been awarded its largest contract to date, to supply the membrane roof and cable system for the Olympic Stadium in Kiev, Ukraine. The contract, worth approximately EUR18.9 million, will involve fabrication and installation of the main roof radial cable system and the complete membrane roof system. The new roof is part of the ongoing redevelopment of the Kiev stadium for the UEFA 2012 Euro football championships.

This contract win, together with the recent contract for the national stadium in Warsaw, has substantially increased the visibility of 2010 revenues above EUR10 million. This is a significant turnaround for the group that in recent years has struggled to gain revenue traction and so we now see it as one of the leading companies in the world for the design and installation of large area membrane structures.

The market reaction was positive with the share price up 22% on the day the deal was announced. The shares have had a good run recently so definitely one to buy on any share price weakness.

Hutchison China MediTech Ltd (HCM) [167.5p / £85.80 million]

This low risk, high reward specialty pharma, otherwise known as Chi-Med, last week announced that it intends to increase in its ownership of Hutchison Healthcare Limited, one of the three joint ventures which comprise Chi-Med's China Healthcare Division, from approximately 85% to 100%. Chi-Med's China Healthcare Division manufactures, distributes and markets pharmaceuticals and health supplements in the fast growing China healthcare market.

Since flotation in 2006, it has recorded compound annual organic growth of 28%. HHL's performance has improved significantly in this year due primarily to the strong growth in one of its product ranges and gaining control in this brand is important to Chi-Med. Last week, Chi-Med also announced that its first-in-human Phase I clinical trial of its proprietary anti-inflammatory drug candidate, HMPL-011, has started in Australia.

In pre-clinical studies, the drug candidate has shown efficacy in vivo models of rheumatoid arthritis, multiple sclerosis, and other auto-immune diseases. This phase I study is expected to report results in the first half of 2010. Chi-Med is a Company which often has good news and although its share price has reacted well, we believe that there is more to come.

Intelek (ITK 15p / £13.10 million)

Intelek, which makes electronic systems for microwave and satellite communications, has had £0.8 million-worth of orders from a North American telecoms group for high-frequency radio link printed circuit boards. This brings the orders from this customer to £1.5 million for the current financial year and, significantly, these orders are scheduled for actual delivery in this financial year.

The orders lend further support to Intelek's September trading update, when management said that, following on from a slow start to the year, it had 'more confidence in a stronger trading performance in the second half'.

LiDCO Group (LID) [24.25p / £42.18 million)

LiDCO supplies minimally invasive hemodynamic monitoring equipment to hospitals. Despite hospitals having cut back their capex budgets, LiDCO announced in its interim results that sales were up 23% for the six months ended 31st July.

This was primarily due to the successful launch and acceptance of the LiDCOrapid in 2008, a new cardiac output monitor for use in the operating theatre, as well as accelerating sales in the US market where the company has replaced its direct sales force with distribution through Aspect Medical, itself to be acquired by Covidian.

Similar agreements have been made with Becton Dickinson and Absolute medical for the Japanese and German markets respectively.

LiDCO is benefiting from the urgent needs of the bloated health care systems in the western world to reduce costs. As all kinds of surgical complications add substantial costs to hospitals, patients and insurers, technology and systems that reduce the chances of problems are in great demand. LiDCO offers hospitals a reduced risk of infections and improved outcomes for high-risk surgery patients, thereby reducing complications, hospital stay per patient and costs.

The company has a strong cash position and distribution partners who have the financial capabilities to successfully deal with the increasing trend of placing systems for free where the initial cost of the machines are made up (and often more than made up) over time through higher pricing of disposables. It could be well worth having a finger on the pulse of LiDCO.

LXB Retail Properties (LXB) [101.75p / £111.93 million]

Shares in retail property investor LXB Retail Properties ended its first week of trading at a small premium to the IPO price of 100p. Jersey-registered LXB is a newly formed company that raised £110 million to invest in 'out of town' retail assets in the UK.

The focus will be on food-led retailers which it expects will be the winners from the current turmoil in the retail sector. LXB expects to have a portfolio of 10-15 property assets when it is fully invested. The directors of LXB include Tesco's (TSCO) investor relations director Steve Webb and New Look boss Phil Wrigley, who will be LXB's chairman.

Motive TV (MTV) [0.575p / £1.97 million]

Motive TV has secured a commission to produce a documentary for the BBC on caring for disabled children. The programme features Rosa Monckton, a friend of Princess Diana, who has a child with Down's Syndrome. This is the latest in a line of commissions Motive TV has secured with the BBC and management adds that another significant BBC commission will be announced shortly.

Following a strategic review, Motive TV's focus today is largely on the distribution of digital set-top boxes. But these commissions can, on the one hand, bring in cash to support the group's new direction, and, on the other, increase the potential value of the TV production subsidiaries, should they ever be sold. And that would be of interest to anyone with a profit motive.


Renewable Power & Light (RPL) [8.5p / £7.55 million]

Power production company Renewable Power & Light has completed the sale of its power station at Massena in New York, following the disposal in September of its Elmwood Park power plant in New Jersey.

The $8.5 million sale of the two plants was announced at the end of July but required US regulatory approvals. It is understood that the hold up over the sale of Massena was because of a delay in obtaining the go-ahead from New York State authorities. With the sales now completed, the company said it was planning to return cash to shareholders by the end of the year.

Renewable Power & Light came to AIM in December 2006 after paying £13.2 million for the two assets with the hope of turning them into profitable biodiesel-powered energy producers. After a string of operational setbacks and soaring losses, the company decided to cut its losses in 2008 and look to sell off the two sites.

All in all a disappointing outcome for shareholders but the return of capital is doubtless welcome. The shares, and our reaction, were flat on the news.

Rockhopper Exploration (RKH) [58.25 p / £46.9 million]
 
The North Falkland Basin oil and gas explorer last week announced that it has placed shares at 54p per share to raise £50 million. The Placing Shares equal 115% of the ordinary shares currently in issue and the 54p placing price represents a discount of 16%.

Sea Lion and Ernest are Rockhopper's primary oil prospects. Both have direct hydrocarbon indicators and both are clearly defined on seismic surveys. A further six targets were considered in the CPR which, together with Sea Lion and Ernest, have a potential to contain 3.3 billion barrels of oil in place under the best estimate provided by RPS Energy.

The Placing will provide the Company with the necessary funds to finance the drilling in 2010 of two wells on its North Falkland basin prospects and to meet its financial commitments under its 7.5% interest farm-in agreement with Desire in respect of three wells that are to be drilled by Desire in 2010.

Rockhopper's excellent progress has enabled it to raise the funds to move to the next stage of proving whether it has a significant oil discovery on its Falklands Islands licences.

Having spent four years since its AIM flotation improving the quality of information about these prospects, the indications are now promising enough for it to be planning to start drilling in early 2010.

In its four year stock market history, Rockhopper's shares have performed well for an early stage explorer, reflecting steadily improving news about the quality of its oil prospects. Now that drilling is very close, we expect the shares to continue to be healthy, and not to drift while awaiting results.

Sareum Holdings Plc (SAR) [0.385p / £4.53 million]*

Specialist cancer drug discovery company Sareum last week announced its preliminary results for the year to June 2009 from which we have estimated the current (much reduced) cash burn, which along with monies from recent placings, should put Sareum in a strong position when negotiating licensing deals.

Renewed investor awareness of Sareum's drug discovery programmes has recently enabled it to raise £815,000 for an expansion of 43.7% of the shares in issue. As a result, it now (at the end of October) has sufficient cash to until at least May 2011.

This will enable Sareum to continue licensing talks on CHK1 and on other programmes and to progress outsourced research on its FLT4 and Aurora kinase programmes. Talks have continued with parties interested in Sareum's CHK1 programme, but as far as we know there is no substance to suggestions that particular companies or agreed deals are yet involved.

Strong recent interest in the shares is more likely to have reflected the Autumn biotech conferences at which presentations are being made of progress on the CHK1 joint programme with ICR and CRT.

Presentations on the Aurora Kinase, on which Sareum is also working, are similarly being made. Yesterday, Sareum also announced that Dr Tim Mitchell, CEO, will present Sareum's cancer drug discovery pipeline at BIO-Europe 2009 this week in Vienna. BioEurope is Europe's largest biotechnology partnering event. We continue to believe that Sareum is likely to get a deal done in the short to medium term.

Sea Energy Plc (SEA) [45p / £30.64 million]

Off shore wind play Sea Energy PLC and Taiwan Generations Corporation last week announced that they have concluded a Heads of Terms Agreement under which they will undertake the joint development of TGC's pipeline of offshore wind farm projects.

The companies will work on a variety of projects, commencing with the Changhua Offshore Wind farm, which it is planned will have an installed capacity of up to 600MW. Combining Sea Energy Renewables' offshore development expertise with TGC's pipeline of projects, local knowledge and experience, the partners will jointly plan, construct and operate offshore wind farms in Taiwan.

The Agreement provides Sea Energy with the right to retain a 25% working interest in the wind farm developments. The Project is expected to require modest initial investment, by both companies, to complete studies, already commenced, which are required to gain a franchise - which equates to regulatory consent - from the Taiwanese Government.

The Taiwan Government has set a target of 15% of Taiwan's electricity to be generated from renewable resources by 2025. The Taiwan Government passed the Renewable Energy Act in July 2009.

It is anticipated that the associated feed-in tariff system will be announced by January 2010. Currently Sea Energy has successfully tendered two sites offshore Scotland and is awaiting a decision from the UK's Crown Estate regarding Round three; however there is nothing to stop this company going global given the calibre of its team and their management, which is very much international in its experience.

Sea Energy recently changed its name from Ramco Energy PLC and intends to focus now on being an offshore wind Company. We expect to see further announcements on the UK's round three by the first quarter 2010 latest and wouldn't be surprised to see news of a more international flavour also.

Seeing Machines Ltd (SEE) [1.625p / £5.07 million]

Leading developer of advanced computer based imaging software systems last week announced fantastic news, as we hoped and alluded to before, that it has launched its TrueField Analyzer (TFA). This is the Company's revolutionary new device for ophthalmic vision testing initially focused on the glaucoma market, and it is now available initially on limited release in the US. Following initial sales and independent clinical trials the Company intends to pursue licensing the device to a medical devices OEM.

The TFA is the first test in the world that offers objective non-contact visual field testing which, Seeing Machines believes, has the potential to transform the diagnosis and management of a range of vision disorders. The TFA was launched on 24 October 2009 at the American Academy of Ophthalmology (AAO) Annual Meeting in San Francisco. We do expect the news flow to relate to client wins over the next six months for Seeing Machines and we continue to like this stock as it would appear to have no shortage of shots on goal.

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

The mobile technology group is hardly out of the news these days. This week it announced a licensing agreement, worth an initial €175,000, with a mobile software provider. Admittedly, the agreement is for the use of some of Synchronica's older software products. Even so, Synchronica had revenues of £3.7 million in 2008, and this will be a welcome addition to the top line. In fact, we'd call it a nice little earner.

*A corporate client Hybridan LLP

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
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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.