Hybridan Small Cap Wrap - Transense makes sense, Beacon Hill shines a light and William Sinclair plants the seeds for growth

AquaSource Algae Group (AAGP 1.25p/£0.73m)

AquaSource Algae Group, which sells natural food supplements and body products, announced its preliminary results for the year ended 31 December 2009. The group was able to achieve revenue of EUR3.73m (EUR 3.5m) with PBT of EUR0.351m (EUR 0.237m) and EPS of EUR0.47 (EUR 0.17). Whilst cash from operating activities fell to £0.10m (£0.19m), a capital expenditure adjustment resulted in an increase in cash of EUR 0.28m (EUR 0.054m) for the year. With, a positive year of results, together with the wider implementation of a sales and marketing initiative that has already delivered increased sales in Bulgaria and Greece, we feel that the AquaSource Algae has a rosy future ahead.

Angel Biotechnology Hldgs (ABH 0.18p / £3.85m)

Further to our comment last week on Angel, the Company has announced another contract with Materia Medical. And this one is for £1.3m. This is a significant value considering the small market capitalisation of Angel and further demonstrates the Company’s ability to sign deals and deliver on them, hence the ongoing relationship with Materia Medica, amongst others.

The work on the contract is due to commence imminently and complete in 2012. We reiterate last week’s opinion that we think the share price doesn’t reflect all of the new business Angel is signing and so now is definitely the time to buy.

Beacon Hill Resources (LON:BHR) (BHR 4.5p/£11.64m)

Beacon Hill, the mining group, has commenced excavation works to extend the existing opencast pit at the Minas Moatize coal mine, Tete Province, Mozambique. Work is intended to lift production by 120,000 tonnes over the next 12 months while the refurbishment of the underground mine is expected to yield an increase from 2.5kt per month to 8kt per month. These are small steps prior to establishing a large scale open cut operation targeting c.4Mtpa and revenues in excess of $200m within 18 months though this will require significant capital investment. Still a hill to climb but looking attractive at this price.

Equatorial Palm Oil (LON:PAL) (PAL 12.75p/£10.38m)

The Liberian palm oil developer that recently IPO’d onto Aim has announced an investment of £5m from a major Indian conglomerate. The 29.1 per cent stake (of the enlarged Company) taken by BioPalm Energy Ltd (part of The Siva Group, a $3bn company) was priced at 15p per share, a significant premium of over 40 per cent on the current share price.

This provides Equatorial with the funds to ramp up the programme of developing it’s land bank of 169,000 hectares in Liberia. It also demonstrates the growing interest in palm oil, with global demand continuing to strengthen and the importance of new regions, such as Liberia for producing crude palm oil. Liberia is a politically stable country and Equatorial’s plantations are close to infrastructure of deep water ports.

Further good news this week comes with the shipping of the processing mill from Malaysia and it is expected to arrive in Liberia by the end of July. This mill will process palms from the 3,000 hectares that are initially being reactivated and will generate cash flow by Q4 2010. This will demonstrate production ability and revenues can be reinvested into the development programme.

We think that this investment by a major player suggests now is a good time to buy some shares, especially considering that they are still offered in the market below the price the 29.1 per cent stake was purchased and the Company continues to make progress towards production.

Hydrodec Group (LON:HYR) (HYR 8.38p £30.32m)

Hydrodec, the oil recycling specialist, has issued an encouraging trading update with volumes recovering from the lows of Q1 and with the group recently receiving its first orders from a US based OEM. The raw material position is more in-balance, suggesting the group may see a recovery in margins with a similar improvement in Australia. The easing of raw material costs is leading the group to have confidence that it has sufficient resources for the remainder of the year and beyond. Not time to recycle this stock just yet then.

Lipoxen (LON:LPX) Plc (LPX 6.12p/ £10.53m)

Lipoxen, a biotech company that develops new and improved versions of existing drugs and vaccines, announced last week that it has obtained an extension to it’s DNA Vaccine Patent for the US market with its ImuXen liposomal technology. Imuxen technology manifests itself in being able to enhance an immune system’s responses, thereby allowing a potentially reduced dosage for immunity (single dose) and reduced side effects. The US clearly represents a significant market for any biotech company, and the granting of this patent has given Lipoxen a strong ImuXen patent portfolio that ensures its products continue to be distinctive in the market place. With an increasingly well protected product range, Lipoxen appears to offer good prospects for the budding biotech investor.

Printing.com (LON:PDC) (PDC 36.5p/£16.19m)

Printing.com, the chain of franchised printing shops, has released it finals to March 2010 which saw total retail sales of £26.56m (09: £26.29m) which generated revenues of £14.46m (09: £14.47m) with a lower EBITDA of £3.11m (09: £3.27m), operating profit of £1.74m (09: £1.93m), PBT of £1.70m (09: £2.06m), EPS of 2.87p (09: 3.28p) and an unchanged full year uncovered dividend of 3.15p. The results were in-line with expectations. The group ended the period with net funds of £1.29m (09: £1.81m) which was after a £0.20m increase in plant and equipment spend, a £0.25m increase in development expenditure and a £0.89m special dividend announced the year before – so underlying cash generation was healthy. Performance was down on a like-for-like basis with the group ending the period with 288 sites open, an increase of 5 stores. The UK managed to increase revenues by 1.6 per cent to £13.58m (09: £13.37m) helping to reduce the impact of recession hit Ireland which fell to £0.29m (£0.42m). The group is reporting a healthy pipeline of bolt-on franchise stores and success with its ‘Templates’ format that utilises the existing infrastructure. Although the group appears to be on a very healthy P/E ratio of 19x for the current year we do see considerable yield attractions, not least the 2.01p final which will be paid to those on the register on the 11th June, a yield on the final alone of 5.8 per cent making this one ticket worth printing.

Sarantel Group (LON:SLG) (SLG 2.5p/£7.27m)

Sarantel, the GPS antennae group, has provided a trading update for the first half to March 2010. Revenues were £1.4m (£1.7m); net cash £1.6m (£2.2m) with a further £0.26m tax credit to be received. Importantly GPS sales were up 8 per cent. The group has signed a Letter of Intent with Elcoteq SE, a manufacturer with sales of €1.5bn listed on the Nasdaq OMX Helsink, to outsource assembly which is expected to bring savings of c. £0.5m pa but which will cause a modest exceptional cost on restructuring of £50k this year. Full year revenues are expected to be £3.1m to £3.3m. The outlook remains buoyant with near term growth from military application and fundamentals supporting growth in wider GPS markets so we remain tuned into SLG.

Spiritel (LON:STP) (STP 47.5p/£8.40m)

Spritel, the phone company, has acquired Housing Communications Limited (HCL) for an initial consideration of £1.6m plus another £0.5m to settle director’s loans. HCL is a mobile and data reseller based in Shrewsbury, established in 1998 and has a contract with the largest procurement agency targeting Housing Associations. In the year ending September 2009 HCL had revenues of £2.9m, PBT of £0.46m with no net assets. HCL has some 100 clients with over 17,000 mobile connections which to date has been its sole target – so represents an excellent cross selling opportunity for Spiritel’s wider product offering. Acquired on a sensible rating and with clear upside potential this appears a reasonable acquisition. However with only modest profits forecast for next year before this acquisition this remains one, to quote D Harry, to keep hanging on the telephone.

Stanelco (LON:SEO) (SEO 0.13p/£4m)*

The bioplastics company announced a successful fundraise of over £3m (£2.5m placed firm with institutions with a further £540,000 placed but subject to claw back should the open offer of £1m be taken up in full). Stanelco produces bioplastics made from sustainable/renewable resources, eg. corn or potato starch and that are biodegradable. The Company then sells the plastic granules to customers who then form into the chosen end product – flexible films, solid articles and coatings.  Brands want bioplastic, even though it is more expensive because it fulfills brand goals for marketing and image and consumers place a value on the eco-friendliness.  It also increases efficiency due to the plastic biodegrading and not needing additional labour to remove after the end of intended use, products can be recycled or composted, e.g. half of all bags distributed by local councils in UK, used for recycling kitchen waste use Stanelco’s plastic, as the bag will degrade with the waste inside.

The new management team came on board in 2007, and have been focused on cutting costs and commercialising the IP.   And as well as participating in this funding round, 5 per cent of placing total they have taken a 30 per cent salary pay cut as part of cost reduction programme. Litigation for patent infringement has been hanging over Stanelco with court cases in France and Italy launched by the main competitor in Europe, Novamont. On 19th April 2010 the   French court ruled in Stanelco’s favour, finding non-infringement on all three patents, one was deemed invalid, one expired and one was not infringed. This must bode well for the Italian case and validates Stanelco’s decision to defend the infringement claims.

With the additional funding from the placing, on top of the existing cash position of £2.4m the Company had in the bank as at the end of March 2010, the Company is well funded to continue to grow, by new product launches (such as heat resistant plastics and paper coatings and casings for electrical consumer goods) and collaborations with brand partners.

The Company plans to change its name to Biome Technologies, in order to distance itself from the old Stanelco and better reflect its focus. We think that at the current price, depressed due to the fundraise and open offer, these shares offer a fantastic opportunity for growth in this exciting sector.

Surgical Innovations Group (LON:SUN) (SUN 4.12p/£15.42m)

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A key part of Surgical Innovation’s (SI) strategy of growing sales in its minimally invasive surgery business, is to further develop a role as original equipment manufacturer in partnerships with major medical device companies. These companies have global sales reach and very efficient distribution power but lack the development resources and the innovative sparkle that characterises smaller and more nimble operators. There has been a clear win-win situation for SI by working closely with several of these companies and many of the company’s recent innovations and new product developments have taken form through these partnerships. One of these is with Teleflex, a global medical technology company with $2 billion in sales primarily from critical and surgical care products. SI has been working with Teleflex for 10 years and the relationship has recently focused on the development of a new handle technology that improves on the ergonomics and ease of use of laparoscopic instruments used in keyhole surgery. Last week, SI announced a five year contract to supply Teleflex with reusable articulating handles. This is a longer period than we had expected and demonstrates the attractiveness of SI’s leading edge technology.

Tower Resources (LON:TRP) (TRP 1.32p/ £13.34m)

Tower Resources the oil and gas exploration company with interests in sub-Saharan Africa, principally in Uganda and Namibia, has provided the final results for the year ended December 2009, which saw operating losses of £1.09m (£1.29m), losses before tax of £1.05m (£1.24m), and losses per share of £0.15 (£0.23). Unusually, the balance sheet showed cash and cash equivalents of £8.6m (£0.73m), representing 31 per cent (4.4 per cent) of total assets-much of this has been and will continue to be used to meet the cost of drilling and exploration across 2010. Whilst Tower has demonstrated sound reasoning behind holding such high cash reserves, utilisation has proved to be fruitless so far. Nevertheless, the Government of Uganda has renewed Tower’s EA-5 licence (which covers an area that includes the unproductive Avivi-1 well) and it is anticipated that, Tower will continue to explore the area for further signs of oil and gas. Whilst Tower continues to be optimistic about the EA-5 licence, there is the distinct possibility that the Company may not be successful. One for those with a strong stomach, we think.

Trading Emissions (LON:TRE) PLC (TRE 103p/£265.15m)

This is the first time we have commented on Trading Emissions. Although the market cap is larger than our usual universe of stocks, the recent announcement on the future strategy of the Company highlighted to us a very interesting and undervalued opportunity.

TRE is a closed end investment company that specialises in emissions instruments and renewable energy companies and projects (an area of special interest for us). The unaudited NAV as at 31 December 2009 of approximately 143p/share (versus the current share price of 104p) indicates significant upside potential for the shares.

In a nutshell, the Company acquires tradable emission instruments (predominantly carbon credits) through forward purchases from clean energy or emission reduction projects. Such contracts are often signed at an early phase of project development and may be an important part of the project finance process. TEP also usually contracts before the emissions permits are approved and registered by the Clean Development Mechanism Executive Board and so has been able to enter into these contracts at substantial discounts to the price at which secondary credits trade on exchange. The resultant portfolio of emission assets is traded, hedged and ultimately realised to provide revenue and profits.

The Company also makes structured debt and equity investments in alternative energy and other greenhouse gas reduction projects, and in strategically positioned companies. These investments generate a cash revenue stream, for example from energy sales or cost savings and also produce an additional harvest of emission reduction credits.

The announced future strategy included a renegotiation of the advisory and fund management agreements with EEA Fund Management Limited, the retained investment adviser on emissions trading and manager of the quoted and unquoted funds. In addition, and more importantly, the Company announced its intention to optimise and realise the cash value of all of its assets in the period up to 31 December 2012.

Taking into account the significant discount to the spot price of the holding value in the accounts of the emission instruments and the renegotiated agreements with EEA, there is the prospect of a material improvement in the share price in the foreseeable future.

Transense Technologies Plc (LON:TRT) (TRT 5p/£3.79m)*

Transense has released its preliminary results for the year to 31 December 2010, highlighting a more than tripling of revenues, along with an announcement of a share placing and open offer to existing shareholders. The encouraging statements from the Board reflect the significant advances achieved by the Company since June 2009 and the expectation of the Company achieving profitability in 2011.

The proposed fund raise of up to £2.54m in new shares at 4.5p (plus a 1-for-1 warrant with a 4 year life) , includes a placing amounting to £2.038m with new institutions, existing large private shareholders and significantly, material commitment from the Directors. Private investors have not been excluded from the opportunity to participate in this attractive opportunity – for which management should be commended – with any shareholder on the register as at 28 May 2010 able to apply for up to the whole of the remaining £500,000. If this Open Offer is oversubscribed, then preference will be given to smaller shareholders.

The 4.5p placement price, equal to the closing bid price the day before the announcement, reflects the excellent prospects of the Company going forward and the keen appetite from Institutions, large supporting shareholders and the Directors.

We continue to recommend purchases of shares in the open market at the current level and that existing shareholders apply for new shares in the open offer.

Webb Capital (WCAP 24.5p/£1.81m)

Webb Capital, the advisory house which is focused on providing investment advice to meet the needs of entrepreneurs, managers and investors in SME companies, have announced the preliminary results for the year ended 31 December 2009. Whilst losses before tax on ordinary activities were £233,647 (£47,624), a series of changes in the fair value of discontinued activities for the year, through the sale of its loss making Swiss subsidiary, have resulted in a retained loss for the year of just £29,115 (£665,251). Although dividends were not declared for the year, the appeal of Webb is based on the reputation of Peter Webb, a fund manager with an enviable record in small caps. One to look out for.

William Sinclair (SNCL 105p/ £17.38m)

This is our first time of writing on William Sinclair, and not before time. The Company is one of UK’s leading producers of commercial horticultural and branded garden products. It owns the leading brand in the fast growing peat-free garden and organic plant foods sector.

The trading update in April promised the positive and upbeat results for the half year to 31 March 2010, that were announced today. The accompanying statement is very encouraging, boding well the future prospects for the business. The 50% increase in the interim dividend is a welcomed rarity in the small cap arena.

With the receipt from DEFRA of £9m as an advance payment for the eventual cessation by the Company of peat harvesting and the reinstatement/regeneration of the peat bog at Bolton Moss Fell, Cumbria, the balance sheet has been strengthened materially. Shareholders can now look forward to the prospect of acquisitions to enhance the Company’s market position as well as additional sums in final settlement of Bolton Fell with Natural England.

With the above prospects and a near certain increase in the final dividend, investors should dig deep to fund purchases of this horticulturally focused group.

Zytronic (LON:ZYT) (ZYT, 196p/£28.83m)

Zytronic the touch screen group, has released its interims to March 2010 which saw revenues increase to £8.2m (09: £8m) with PBT up 1 per cent to £1.06m (09: £1.05m) and EPS to 5.4p (09: 5.2p) with an interim DPS of 2p (09: 1.2p). Net debt fell to £2.78m (09: £3.13m at the September year end). Given the general concerns on the outlook for the UK it is encouraging to see growth in overseas sales which now account for 89 per cent (09: 86 per cent) of the group total. The growth in sales to the self service and kiosk markets more than offset declines in the gaming market. New orders grew to £9.7m (09: £8.4m) without help from two major opportunities that will benefit the future, specifically the Coca Cola Freestyle drinks fountain and sales to the white goods sector which are expected to start in September. These new products are likely to drive healthy growth in 2011 accompanied by upgrades to the current forecasts which are looking too conservative to us. The current forecasts for 2010 are of £2.6m PBT with 12.6p EPS and 5.5p DPS, followed in 2011 by £2.8m PBT with 13.6p EPS and 6p DPS putting the group on a 16x P/E falling to 14.8x with a 2.7 per cent prospective yield. We agree with the approach of keeping market expectations under control although if these forecasts are not exceeded the group is looking on the expensive side. Still, after meeting management we were impressed by their grip of the business and have confidence they’ll be able to deliver the goods. 

*A corporate client of Hybridan LLP

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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 £50m although we may occasionally cover larger companies. Our review is not intended to constitute research and is not to be taken as investment advice.