Last week I expressed a view on Stephen Hester's bonus. This proved interesting because reactions fall into two camps, those who can't see what the fuss is about and those who think that a) banking has been taken in the wrong direction from the standpoint of depositors and b) banking executives are overpaid in relation to the function which depositors require banks to fulfil. An interesting article which takes the second view can be seen by clicking here.
Why is this important against the backdrop of the LCF Research investment template? There is a small but noticeable sea change amongst certain journalists that in order for the UK to get itself out of its economic pickle, it needs to rebalance the economy with more resource allocated to wealth creating (and potentially wealth creating) businesses and less resource to wealth redistribution businesses.
This could be great news for those of us that invest in early stage wealth creating microcaps. Two such AIM listed companies which reported last week were Scancell and Surface Transforms (both of which I have an investment in). I seek to construct an 80/20 portfolio, with at least 80% invested in established businesses and up to 20% invested in a portfolio of companies such as these two. I am due to meet Scancell next month and will report on that. Yesterday I met the new chairman of Surface Transforms, David Bundred. He was appointed in October 2011 having been consulting to the company during the preceding six months. Set out in the following paragraph are my impressions from the meeting.
Mr Bundred's CV can be seen by clicking here, from which it can be seen that much of his career has been spent in senior positions within the motor industry with a particular focus on brake systems. For example, he was involved with the first anti-locking braking systems, based on which he observed the need for new technology for the automotive industry to be taken up first in the aftermarket as a prerequisite to being adopted by OEMs.
Key matters gleaned from the meeting included:
1. In order for Surface Transforms' technology to be acceptable to automotive OEMs it is necessary to:
- achieve significant cost savings.
- demonstrate access to increased capacity.
- demonstrate control over the supply chain in order to ensure that there are no areas requiring unacceptable lead times.
Like many early stage technology companies, the Surface Transforms manufacturing process has developed incrementally over the years without standing back to judge whether a more efficient overall process could be deployed. One of the keys to addressing this and to make progress across the above fronts is introducing a lean manufacturing culture - an executive bringing this experience will be recruited.
2. The company now has four distributors, providing access to:
- the UK, continental European, North American and Asian aftermarkets.
- the racing car market.
- appropriate OEMs.
These distributors in combination are expected to generate sufficient sales (c.£2.2 million) to enable the company to breakeven in 2012/13.
Mr Bundred brings to Surface Transforms significant experience of the rules which need to be observed for engaging with automotive OEMs. This in turn is giving the company the confidence to tell its customers what it expects of them eg no more free development. In my opinion, Surface Transforms investors' patience will be rewarded with some significant commercial and financial progress over the next 18 months. These game changing businesses take a long time to develop which is why they need to be tucked away in the 20% section of an 80/20 portfolio, but when they work they have the ability to turbocharge portfolio performance.
News on LCF Research Covered Stocks
Dillistone Group Plc, the supplier of recruitment software, reported in an update regarding the final results to December 2011 that adjusted pre-tax profit is anticipated to be in line with market expectations. Year end net cash was c.£1.6 million.
Despite a softening in the market seen towards the end of 2011, the group has entered 2012 with a record order book.
The DSG share price has increased by 21% over the last year.
Dillistone Group Plc is currently graded b by LCF Research. To learn more, follow the link.
Scancell Holdings Plc, the Nottingham based cancer vaccine developer, announced that interim results to October 2011 showed a pre-tax loss of £965,000 (2010: £835,000 loss). The company reported that in relation to SCIB1 the Phase I trial is expected to be completed during Q1 2012 and Phase 2 is expected to start in H2 2012. Period end net cash was £1.9 million.
The SCLP share price has decreased by 35% over the last year.
Scancell Holdings Plc is currently graded c by LCF Research. To learn more, follow the link.
Surface Transforms Plc, the Cheshire based supplier of carbon fibre reinforced ceramic brakes and components, reported its interim results to November 2011 show sales of £340,000 (2010: £289,000) and pre-tax loss of £433,000 (2010: £558,000 loss).
The company reported that whilst the automotive and aerospace programmes have made tangible progress, little progress has been made on the military and rocket programmes due to government cutbacks. The board expects minimal contribution from these latter programmes in the near future. Regarding aerospace, the major US customer has broadened the scope of the development to assess the product in other types of aircraft. Progress has been made on the programme to reduce manufacturing cost and improve gross margins. This is necessary in the context of the three year programme to achieve sales to OEMs at the required pricing.
R&D costs fell by c.£60,000 due to increased customer contribution and the end of programmes with high third party costs. There has been no reduction in core R&D capacity. As part of the cost reduction programme, Koenigsegg Cars has been partnered with to win a Eureka Eurostar grant to support the development of lower cost, precision machining of carbon ceramic products.
A new furnace has been ordered for delivery in summer 2012 which will more than treble capacity in what was previously a bottleneck area. The period end order book totalled £374,000, all for delivery in H2. Period end net cash was £654,000. The sales target for cash breakeven and operating profit breakeven are c.£1.7 million and £2.2 million respectively. Sales in H2 are expected to continue the pattern of being significantly higher than H1.
The SCE share price has decreased by 21% over the last year.
Surface Transforms Plc is currently graded C by LCF Research. To learn more, follow the link.
EKF Diagnostics Holdings Plc, the point of care diagnostics company, announced that it has been awarded a contract to supply the State of New Mexico's Women, Infants, and Children (WIC) clinics with its point-of-care haemoglobin testing instrument, the HemoPoint H2, and related cuvettes.
The initial order is for 220 instruments which will be supplied to over 100 WIC clinics throughout the US State and will be used to carry out tests for anemia. Anemia is one of the most common blood conditions in the US, affecting about 3.5 million Americans.
An initial indication from the New Mexico WIC clinics suggests that they expect to perform more than 160,000 tests per year using the HemoPoint H2 instrument.
The EKF share price has decreased by 7% over the past year.
EKF Diagnostics Holdings Plc is currently graded C by LCF Research. To learn more, follow the link.
This note was prepared by LCF Research Limited using information provided by the subject company’s management or publically available news sources. No representations are made nor warranties given (express or implied) in relation to accuracy and completeness. This document is not an invitation to invest in the subject company and does not purport to contain all the necessary information that a prospective investor might require. LCF Research Limited recommends prospective investors to conduct their own thorough independent analysis of the subject company and the information contained in this note or referred to above.