Hybridan's Small Cap Wrap - 24-11-09

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: FFastFill gets OTC, a brainstorming performance from Imaginatik, and how Huntsworth is going global
 
AdEPT Telecom (ADT) [23.5p/£4.95 million]
 
Interims to September 2009 of the independent provider of telecom services saw revenues fall to £13.01 million (£14.76 million) with underlying pre-tax profits of £1.83 million (£1.75 million) and EPS 4.9p (5.4p). The company blamed lower economic activity for reduced call volumes together with a more aggressive stance on non-paying customers who have been disconnected as part of a drive to reduce bad debts (which have been more than halved). It is hard to escape the feeling that this company, which came to the market at 140p trumpeting an aggressive and efficient buy and build model, has stalled.

Additional funding from either the banks or the equity markets for new acquisitions isn't there and whilst it's trying to extract as much as possible from its existing business this is a long hard slog without much to show. For the full year to March 2010 analysts are expecting £0.55 million profit with 6.5p earnings per share putting the company on a rating of 3.6 times. Seems cheap? Yes, but the group is weighed down by net debt of £10.23 million (about three times annualised EBITDA) which could easily see the group in the hands of the bank if it proves less than adept.

Anglesey Mining plc (AYM) [15p/£22.93 million]

Anglesey's TSX-listed and 50% owned Labrador Iron Mines has filed its second quarter financial statements. The debt free company had C$28 million (£16 million) in cash as at 30th September and reports that it has made steady progress in advancing the Schefferville iron ore project towards mining production in 2010.

FFastFill (FFA) [7.75p/£30.25 million]

The software group specialising in providing trading technologies to the derivatives market has now made the crucial step to profitability. In the six months to September 2009, gross profit grew by 17%, to £5.86 million, which helped the group turn from an operating loss of £0.42 million in the first half of the 2009 to an operating profit of £0.5 in these results.

Key to this success was a 27% rise in higher-margin software-as-a-service (SAAS) revenue. And this bears out the fact that the SAAS model offers some key benefits: all clients can be managed from a single shared infrastructure; this system is more cost effective both for FFastFill and its customers; and clients don't have to make capital spending investments to set the system up.

Growth prospects are also underpinned by a tightening regulatory regime for securities traded over the counter (OTC). Chairman Keith Todd said that, as these trades look to be required to be centrally cleared through one of the international clearing houses, so FFastFill's addressable market will grow significantly, driving demand for its middle and back office solutions.

Freshwater UK (FWUK) [29p/£4.48 million]

Regional public relations specialist Freshwater has not had an easy year. But it is not alone! Driven by a harsh recessionary climate, revenue for the year to August 2009 fell by 10.8%, to £6.7 million, while EPS dropped from 6.26p to 1.53p. And business in the consumer, property, conference and technology sectors was hit particularly hard.

There is, however, real light at the end of the Severn Tunnel for the Cardiff-headquartered outfit. The group reported an improvement in the second half of the year and, at the analysts' briefing, chief executive Steve Howell said the fourth quarter saw Freshwater "getting back to expected profitability".

Furthermore, this improvement in trading has continued into the current financial year and Mr Howell said he views "the immediate and long term future of the Company with confidence". The group has secured significant cost reductions, issued earn-out payments on all acquisitions made prior to July 2009, successfully diversified into a wide range of sectors and has net debt of just £0.86 million.

Significantly, 30-35% of revenues relate to 'statutory' notices typically concerning healthcare and planning issues - a key defensive attribute. And we view positively the group's continued expansion into digital activities, as the public relations industry is in our view a beneficiary of the anything-goes culture of the blogosphere.

Fusion IP (FIP) [34p/£14.33 million]

We covered struggling Fusion last week after announcing its £3 million emergency rescue by IP Group (IPO). Now, to try and inject a bit of momentum the university commercialisation company has announced it has recently completed a licensing deal with a leading global orthopaedic company for orthopaedic planning software. The software was originated by the Medical Physics team at the University of Sheffield. The deal, which was worth just over £0.8 million in total, resulted in a one-off licence fee income for Fusion of just over £0.4 million.

This is the first major licence fee generated since the expanded agreement with University of Sheffield IP which gives Fusion the right to license out any University originated IP for half of net income. Fusion is targeting breakeven in 2011/12 and is now well underpinned by cash from IP Group. However, as a one-off deaf this is relatively small and there will be no recurring income, which this sort of company needs. Nothing to blow the fuses just yet then.

Hasgrove (HGV) [54p/£12.87 million]

The public affairs and digital communications group has, since October, seen a 'significant improvement' in client activity, securing business (with groups such as Coca Cola and GSK) worth £1 million on an annualised basis. But there has also been a deferral on some significant projects, which are now expected to be delayed until 2010.

Furthermore, the group's focus on the faster growing areas of association management and digital marketing has required additional costs in terms of recruitment, pre-sales and proposals activity. But Hasgrove's digital credentials have been further cemented with the acquisition of education-focused digital technology outfit MCL Digital and digital marketing group Underwired.

The upshot of all this is that the group expects full-year headline pre-tax profits of £2.6 million, with an exceptional restructuring charge of £0.8 million. The shares fell by 8.5% on the day of the announcement, but Hasgrove is not the only marketing group to face the wrath of the downturn, and recent positive trading activity does suggest upside potential.

Huntsworth (HNT) [64.75p/£135.41 million]

In a trading update for the four months to the end of October 2009 Huntsworth said its earnings are in line with expectations for the full year. Some 96% of annual forecast revenues are now committed and management expects 70% of revenues for 2010 to be committed by January 2010. The rationalisation of the business continues apace, with the group's 26 brands now organised into four key brands, at a cost of between £8 million and £10 million.

Crucially, this new branding is set to increase the potential for multi-office and global opportunities. It's reassuring, then, that Huntsworth is being invited to pitch for more global clients in its Grayling brand. And a few juicy global client wins could well see the group achieving its aim of significantly improved organic growth in 2011.

Hydrodec (HYR) [13p/£34.76 million]

Hydrodec, the green tech company that produces new speciality oils using spent oil as the primary feedstock, appears back on track after a difficult first half of 2009 which was seriously impacted by a combination of the global financial crisis, the oil price collapse and initial operational challenges at its Canton plant.

Production and sales volumes in the third quarter of 2009 (5.2 million litres and 3.7 million litres respectively) exceeded those of the entire first half of the year and the ramp-up of production is continuing into the fourth quarter with record production in October.

The company reported that transformer oil prices remained soft well into the fourth quarter largely but that recently announced price increases of around 10% by the major refiners indicate the market is improving. In addition, feedstock costs, over which the company has greater control, are being progressively reduced through a wider portfolio of feedstock suppliers.

Interestingly, the company also reported that it is in advanced stages of negotiation for an off-take arrangement with one of its largest existing customers for more than 11 million litres of 2010 Canton SUPERfine production and expects to secure additional commitments for another 7.5 million litres before the year end. Hydrodec is trading at less than half its value at the beginning of the year but with its prospects improving rapidly we expect this one to power ahead soon.
 
Imaginatik (IMTK) [8.25P/£13.14 million]

Imaginatik provides software and services for "Collective Intelligence" or "Idea Management", tracking the thought processes and tapping into the brain power of employees within a business, using the employees as an additional resource. Whilst this is still niche at the moment, Imaginatik expect it to be mainstream within two years.

In fact, as validation of the whole area, more than $40 million has been raised by mainly US businesses in the sector recently. In its interim results Imaginatik increased revenue by 26% to £2.3 million despite the troubled global economy, and signed multi-year deals giving visibility on future revenue.

The business traditionally has a better second half, and this is expected again this year, especially as it has increased spending on Sales and Marketing to drive the business forward. There has been a restructuring of the sales team too, giving each division specific focus, be it for new business or for upselling to existing customers.

The result of this should be seen in the year end results, as management expects it to take four to six months for new sales staff to become fully productive. Additionally there is a new version of the software about to be rolled out in January 2010, giving an improved, sleeker, better user experience. The shares have risen 78% since January (when they were just over 4.5p) but we still imagine it could be a great second half for Imaginatik!

Lipoxen PLC (LPX) [13.5p/£21.23 million]

Lipoxen, a biotech company that develops new and improved versions of existing drugs and vaccines, has signed a collaboration agreement that allows the Russian pharmaceutical company Pharmsynthez to apply Lipoxen's ImuXen technology to create three vaccine candidates for secondary progressive multiple sclerosis, HIV and non-Hodgkins lymphoma.

Also, Lipoxen's PolyXen technology will be applied to active compounds to create three pharmaceutical candidates for treatment of cystic fibrosis, acute myeloid leukaemia and type 2 diabetes. With no monetary resources required from Lipoxen to achieve human clinical proof of principle, the company also benefits from having the rights to use all relevant clinical trial data to conduct further trials and seek marketing authorisation in all other territories than the Russian Federation (where Lipoxen will receive 10% royalties of all net sales).

Four of the product candidates target rare diseases that may benefit from shortened clinical pathways and market exclusivity periods in the EU and the US. Pharmsynthez expects to complete testing by the end of next year.

This agreement is another deal that underscores Lipoxen's cost effective business model. Should their partner achieve human clinical proof of concept at no cost to Lipoxen, the company will not only be gaining royalties and worldwide marketing rights (except Russia), but the new compounds will further validate Lipoxen's exciting technologies and further enhance its portfolio.

Minster Pharmaceuticals plc (MPM) [5.25p/£3.09 million]

In its results for the six months to 30th September Minster announces that it has decided to find a partner for the further development of Tonabersat, which has potential in several neurological indications. We reported a few months ago how this compound, which failed a Phase IIb study in migraine prevention, has shown a significant preventive effect in migraine with aura.

This has been further supported in academic papers describing the mechanism of action and potential utility in epilepsy and neuropathic pain. For a company with the appropriate resources Tonabersat could become an exciting development programme. Minster also announced that it is preparing its other compound Sabcomeline for a Phase II proof of concept study in the treatment of cognitive decline in schizophrenia. This is currently an unmet clinical need with sufferers unable to work.

There are 1.5 million schizophrenia sufferers in the US alone. With £4.8 million in the bank, the market values Minster at a lot less. If the company is successful in finding a partner for Tonabersat and gets started on the Phase II study for Sabcomeline, then Minster's share price is unlikely to stay at this depressed level.

Serabi Mining Plc (SRB) [2.075p/£6.14 million]

Shareholders of Serabi, the northern Brazilian gold mining company, now have the opportunity to participate on equal terms to the placing announced last week. For every 14 shares existing shareholders can subscribe to one new share at 1.5p per share under this open offer. If fully taken up the offer will raise £317,000 on top of the £2.4 million raised last week.

Serabi has identified a number of targets and will use the funds to prioritise and drill four to six of them next year. The company hopes to be able to identify two or three Palito "look-a-likes" (the existing mine) that can be developed concurrently so that they would be feeding into a central processing plant. Loyal shareholders should consider staying involved in a company that appears to have become much more focused and determined to realise the potential value of its extensive exploration portfolio.

UBC Media (UBC) [5p/£9.76 million]

In the half-year to 30 September 2009, UBC Media had a welcome rise in revenues (up 9%, to £1.94 million) and an equally welcome reduction in reported operating loss (from £0.61 million in the first half of 2009 to £0.33 million in this first half) as the group benefited from cost cutting.

Since the sale of the commercial division (which produced news and travel bulletins for radio stations in return for advertising space) the group has been repositioning itself as a content and software business, and we note with interest the acquisition of Radio Lynx, which produces ad funded content for blue chip clients such as Nokia and Tesco (TSCO).
 
And revenues in the radio division were flat, at £1.4 million, a creditable performance in a downturn. Reassuringly, 60% of this year's BBC radio revenues have been confirmed for the next 12 months. Turnover in the software division, however, fell from £0.31 million to £0.28 million, but a new deal has been secured with Bauer Radio group and a software agreement has been renewed with the BBC. But what really matters here is what UBC is going to do with its £9.7 million cash pile. Watch this space.

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.