Hybridan Small Cap Wrap featuring Gulfsands, Seeing Machines and Ceres

This week: Gulfsands Petroleum is looking well, Seeing Machines restructures for growth, and why Ceres is no fuel

Brainjuicer (BJU 149p / £19.3m)

Brainjuicer, the provider of innovative market research techniques, has seen its share rise by 14.6 per cent since we wrote on the group in July. And, given its results for the six months to 30 June, it‟s not hard to see why. Brainjuicer had top-line growth of 22 per cent in the period. While this was helped by favourable currency movements, this still represents a stunning result given the economic downturn and the fact that its client base consists of providers of consumer goods, which have been at the forefront of the recessionary onslaught. Sales fell by 5 per cent in the UK, however. But chief executive John Kearon said this was partly down to the fact that Brainjuicer has seen most of its growth come from its newer „juicy‟ products and the UK, as the country Brainjuicer has operated in for the longest, uses many of its older products. Growth in the US, meanwhile, was 43 per cent on a constant currency basis, staggering in the current environment. And with the group expanding in Germany and Switzerland, some might consider Brainjuicer‟s business a no-brainer.

Burst Media (BRST 11.5p / £8.1m)

We commented on Burst Media‟s trading update in July and, since then, the shares have risen by 74.2 per cent. The group‟s results for the six months to 30 June offer further reassurance. This provider of online advertising services for websites, largely in the US, saw robust growth in the second quarter, with revenues up by 23 per cent. But the first-half net loss widened from $0.2m to $0.6m. However, this was largely down to the loss of the Tacoda account, following its acquisition by AOL, and is hardly a bad result given the savage recessionary backdrop. Furthermore, the group‟s cost base is mainly fixed and, as such, any rise in revenues above this cost base flow largely down to the profit line. Crucially, the second-quarter performance suggests the group may be reaching that inflexion point. As a B2C advertising business, Burst clearly faces cyclical pressures. But its chief financial officer Steve Hill told Hybridan it has a well-established sales team with strong relationships, and so is well-positioned for growth. In addition, digital marketing is benefiting from favourable structural trends. Overall, then, the picture is positive, and Burst still has $9.4m in cash. Not to be sniffed at given the market cap of £8.1m.

Ceres Power (CWR 199.3 pence / £133.6m)

The listed alternative energy company announced its preliminary results for the year ended 30 June 2009. Important to note is that it finished its year with £23m of cash. Ceres is focused on the delivery of its core residential Combined Heat and Power (CHP) programmes. On the same day as Ceres announced its results, it announced that it had signed a long-term supply agreement with Daalderop BV for the volume boiler assembly of its residential CHP programme with British Gas. Ceres will mass manufacture in-house, at its facility in Horsham, fuel cells and assemble fuel cell stacks and fuel cell modules in volume. The boiler assembly will be manufactured in volume by Daalderop, a leading manufacturer of innovative, high-efficiency domestic heating appliances including condensing boilers. Ceres Power will now move into the next phase of development with British Gas. It also has relationships with Calor and EDF and would appear on target to be one of the fuel cell winners as it heads towards making this area of renewable energy a reality. There‟s plenty on the boil for Ceres, then.

Deltex Medical (DEMG 9.8p / £9.9m)

Last week, the leader in oesophageal monitoring announced the latest results from its CardioQ-ODM system within enhanced recovery surgery in Spain. Data on the first 234 patients from the 10 participating hospitals shows average length of stay in hospital reduced from 13 days to 7. We like this medtech share and understand that no one else had a product nearly as precise or comprehensive in its monitoring function as Deltex. As always with medical technology, it is a question of convincing the opinion leaders and changing habits, which the company seems to be doing nicely, both in Spain last week and a few weeks ago in Italy.

Faroe Petroleum (FPM 119p / £124m)

The oil and gas company focusing on exploration and appraisal in the North Sea and Norway last week announced that the drilling of a side track appraisal well has commenced to assess the Glenlivet West of Shetland gas discovery (Faroe owns 10 per cent) announced last week. The results of the appraisal well are expected within a week, following which a further announcement will be made. Faroe also last week announced its unaudited interim results for the six months ended 30 June 2009. At the period end it had cash of £11.5m and, at 28 August 2009, cash of £37m. In the first half Faroe had turnover of £2.9m and a loss of £4.2m. We continue to maintain that Faroe has far to go in delivering value and share price appreciation: indeed more of a Shetland thoroughbred than a Shetland pony.

Group NBT (NBT 281p / £77.2m)

Group NBT reported strong progress over the year to 30 June 2009. Performance was especially strong in its two chief activities, which generate recurring revenues from corporate clients by managing their portfolios of internet domain names and by hosting their websites. Good growth was also recorded in the Ascio Partner business, which provides infrastructure to companies who retail domain names to consumers. Profit before tax was £5.0 million, up 19 per cent on the previous year, from revenues of £41.5m, up 18 per cent and up 10 per cent on a constant currency basis. This growth was all organic but has clearly benefited from currency movements as a significant part of the group‟s revenue is in other currencies. Cash generation was strong and at the end of the financial year the group had net cash of £5.2m up from £0.7m at the end of the previous year.

The company reported that the world economic slowdown has had some limited effects, specifically, slower new contract wins for corporate domain names, a higher churn rate in managed hosting, and a slower than anticipated take up of the innovative internet brand protection services of Envisional, which was acquired two years ago. Nevertheless, the company gave a confident message that it expected good growth in the current year and put its money where its mouth is by increasing the dividend for the full year to 3p (from 2.4p). The share price has had a good run recently, rising from 192p in mid-May to 281p currently, putting the company on a forward price earnings multiple of 12.4 times, which is full enough in our view. However, with £5m net cash in the bank and an ambitious management team looking for further value enhancing acquisitions this one is one where you may need to be quick and Not Be Tardy.

Gulfsands Petroleum (GPX 247.5p / £297.6m)

This oil and gas stock announced its interim results for the six months ended 30 June 2009 last week, with revenues up 47 per cent to $29.0m. Gulfsands achieved a net profit $3.7m (H1 08: loss of $10.3m) and had cash of $31.9m at the period end. Gulfsands‟ management team is happy with these results, following its decision to focus on a Middle Eastern strategy, particularly in Syria. We cover Gulfsands this week as we felt it significant that it had delivered the first profit for shareholders for five years. Gulfsands chairman Andrew West commented that he “looks forward to continuing this positive trajectory in the second half of the year” and the CEO Richard Malcolm says he “envisages 2010 being another active year of drilling, with a combination of exploration and development wells.”

Hightex Group (HTIG 8.75p/£13.0m)

Hightex, a group we‟ve covered in the past, is a leading designer and installer of membrane roofs. A landmark set of half year numbers just announced included the company‟s maiden profit of €147,000 (last time a loss of €1.4m) on revenues down to €7.3m (from €8.3m last time). The company reported that the market for large area polymer membrane roofs and façades continues to increase as a result of their cost, safety and design features. The company‟s high profile projects, such as the new roof over the Centre Court at Wimbledon, have ensured that Hightex remains at the forefront of new projects and tenders. So, the change of strategic direction and management now appears to be bearing fruit and we share management‟s optimism for the future: Hightex really could go through the roof.

Hydrodec (HYR 13.5p/£37.8m)

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Hydrodec aims to be a leading supplier of sustainable oil products and is forging ahead in its first market, that of transformer oil. Every electrical transformer used in the generation of electricity requires a flow of oil around it for cooling purposes but this oil only has a limited life due to contamination. Hydrodec‟s patented processes remove these contaminants and can produce a transformer oil of a high standard that be reused. Currently it has plants in the US and Australia with a planned plant in Japan. It has reported a 10 per cent increase in turnover for the half year to June, to $4.5m (H108: $4.1m), with an overall loss of $5.0m (H108: $3.7m). These figures are disappointing and caused in part by the steep decline in oil prices at the end of 2008 and the beginning of the year, a longer than anticipated ramp up of a new plant and slower sales in the Australian market. These short term factors will work their way through though and there‟s comfort in the fact that Hydrodec recently raised £5m of new equity. Oil drink to that!

Imaginatik (IMTK, 8.75p / £13.9m)

Collaborative software provider Imaginatik has announced the launch of ChemBioConnect, a software tool for research professionals in the chemistry, biotech and pharmaceutical sectors. The product, developed in conjunction with chemical and biological software specialist CambridgeSoft, lets scientists draw, edit, file and search chemical and biological structures and allows them to work together on ideas generation. This launch follows on from a series of contract wins for Imaginatik, whose growth story is continuing apace. The group, listed in 2006, has yet to make a net profit, but is undoubtedly moving in the right direction, as shown by the contract win announced on 28 September to supply software and services to a US insurance group. And the shares themselves have been on the up, rising from 1.83p in December 2008 to 8.75p on 25 September 2009.

Lighthouse Group (LGT, 10.2p/£13.1m)

Lighthouse Group appears an unfortunate victim of fashion. Nobody loves financial businesses currently, however strong their underlying fundamentals, and Lighthouse‟s fundamentals are strong indeed. The UK‟s largest independent IFA group, Lighthouse has reported a 15% increase in revenues in the half year to June, of £29.3m (up from £25.5m), and increased EBITDA (earnings before interest, tax, depreciation and amortisation) to £526,000 (up from £513,000) although profits fell to £56,000 (from £442,000). Admittedly, this apparently strong revenue performance was largely due to the well timed acquisition of Sumas, another quoted IFA group, and if the contribution from Sumas is stripped out revenue would have fallen 21 per cent and EBITDA 45 per cent. And, it is the depreciation and amortisation arising from the Sumas deal that accounts for much of the decline in profit. Nevertheless, David Hickey, chairman, must be given credit for the Sumas deal and also for being ahead of the curve in aligning costs with the tougher trading environment.

As with all IFAs, a significant proportion of revenues historically had been linked to the mortgage market and, for Lighthouse, these revenues collapsed by two thirds and now make up only 4 per cent of group revenues. To counter this though, revenues from investment and retirement products remained broadly flat. The group is well placed to benefit from further consolidation within the IFA sector driven by increasing regulation and the FSA‟s “Distribution of retail investments: Delivering the RDR”. We see a group that‟s well managed, profitable and poised for significant growth. Furthermore, with £12m of cash on the balance sheet, no debt and a market cap of only £13m this is one lighthouse to steer towards.

Lombard Risk Management (LRM 6.25p/£8.5m)
Lombard Risk Management, the global number two supplier of collateral management software and bank regulatory reporting software to the financial sector, has reported revenues for the year to March of £8.69m, up 2.8 per cent on same period last year (2008: £8.46m), a loss after tax of £1.10m (2008: loss £0.67m) and a placing to raise £1.8m at 4 pence per share. The group supplies financial institutions with software to manage trading and risk (through its Colline and Oberon products) and compliance and regulatory reporting software (through its STB-Reporter and STB-Detector products). The trading and risk division accounted for £3.85m of the group‟s revenues, with Oberon being the group‟s most profitable product but with Colline securing strong client wins and now trading ahead of budget for this year with a large and growing pipeline of opportunities.

The compliance and risk division offers appreciable opportunities with the move away from light touch regulation, although this division suffered this year through underestimating the costs of product upgrades. Overall, the results are creditable from a period in which many doubted its customer base would survive at all and we see the group as well poised to take advantage of a more settled trading environment in which greater emphasis is placed on managing risk and compliance. Factors in the group‟s favour include a realigned cost base, the weakness of sterling and a solid base of £4.4m of recurring revenues. Additionally, the strengthened balance sheet should permit the group to pursue opportunities more aggressively. The current valuation does price in some of this upside but only a small number of additional
contract wins could significantly boost the bottom line. One to buy if you could manage the risk.

Oilex (OEX 16.75 p / £21.7m)

Oil and gas producer Oilex has signed a contract with Songa Offshore Drilling to secure the services of its semi-submersible drilling rig. The rig will drill two wells (with the option of one additional well) in the Joint Petroleum Development Area (JPDA) of the Timor Sea. Drilling locations have been selected for the first two wells on prospects with recoverable mean prospective resources (on 100 per cent basis) of 385 million barrels of oil. On August 3rd, Oilex entered into an agreement with a subsidiary of Japan Energy Corporation to farm down 15 per cent of its 25 per cent interest in the offshore production sharing contract in JPDA. Oilex retains a 10 per cent interest in this highly prospective offshore block, but now has been refunded for its past costs and has the funding for its first two wells. Oilex, then, is looking well drilled for action.

Seeing Machines (SEE 2p / £6.24m)

The leading developer of advanced computer based imaging software systems last week announced final results for the year ended 30 June 2009. Revenue increased to A$5.2m (2008: A$4.4m) and there was a net loss of A$5.6m (2008: profit A$326,744) principally due to a one-off write down of intangible assets. Seeing Machines has recently restructured the business to focus on cash generative operations and to conserve cash reserves, which was well timed as the second half of the year saw the business adversely affected by the global economic crisis, particularly its products that rely on the automotive industry. That said, Seeing Machines has cut back on R&D and has ramped up the sales effort, so we do expect the news flow to relate to client wins over the next six months. Its Driver State Solution (DSS) product will change focus from the in-the-doldrums automotive OEM space to sales opportunities in private fleets and mining operations. Seeing Machines‟ strategy with faceAPI is to derive revenues through two streams: developer licence sales and production licence sales; and the potential here is enormous. Seeing Machines has progressed the development work required to bring the TrueField Analyzer to market and is still aiming to launch the product this year, hopefully at the next major industry meeting in October 2009 if a few tweaks can be successfully applied to it. This could provide some positive news for the company in the next few weeks. Seeing Machines results don‟t look too great, but behind them, the company has restructured and we believe it could potentially have a number of good announcements to come in terms of client wins. We understand management is keen to address the lumpiness of its revenue line and so expect to see some attempt at smoothing out the revenues in future deals it signs, and we understand that Seeing Machines is in talks with a number of client wins. We like this stock and suggest a watchful eye on Seeing Machines, as it would appear to have no shortage of shots at goal.

Titan Europe (TSW 33.5p / £27.6m)

Titan International, Inc., a major shareholder in Titan Europe plc, which designs, develops, manufactures and distributes products and services for the global mining, construction and agricultural machinery markets, has announced that it has signed a letter of intent with The Goodyear Tire & Rubber Company to purchase certain farm tyre assets, including the Goodyear Dunlop Tires France (GDTF) Amiens North factory. Titan Europe‟s share price has done well over the past three months and this looks to be potentially an interesting deal with a big name.

Tower Resources (TRP 2.75p / £18.1m)

Tower Resources last week announced it has concluded its detailed evaluation of information from the Iti-1 well after its significant disappointment in June. The overall findings of the re- evaluation is that the Iti-1 well found 15-20 metres of clean reservoir sands, with significant potential to contain oil just above basement between 540 and 575 meters. Tower now wants to drill a second exploration well, and the company is still considering the best location for this second well in light of the information that the Iti-1 well has provided. The company hopes, subject to government approval, to drill this second well in early 2010, with a target of February. A further update will be provided to shareholders once a firm forward programme has been agreed with the government of Uganda, hopefully in the second half of October. Peter Kingston of Tower commented: “We are naturally pleased that a much more comprehensive evaluation has indicated significant potential for hydrocarbons in the Iti structure.” We expect further news from this stock over the next few weeks and, of course, all‟s well that ends well.

Xtract Energy (XTR 3.75p, £28.2m)

Xtract, which identifies and invests in a diversified portfolio of early stage energy sector technologies and businesses, last week announced that it has exchanged its remaining holdings in Wasabi Energy for a total of £65,000 in cash plus 1,775,000 shares in Elko Energy Inc. Xtract no longer holds any interest in Wasabi and has increased its holding in Elko to 36.8 per cent. This would appear to be a good piece of news in the process of simplifying Xtract's portfolio to increase its focus on its core oil and gas interests.

*A corporate client of Hybridan LLP