Hybridan Small Cap Wrap featuring Cashbox, Encore and H&T

This week: Cashbox makes a cashpoint, EnCore continues to perform and there’s gold in H&T’s profits

Cashbox (CBOX, 3.5 p / £5.4m)

Cashbox has just got a little bigger. It has been awarded a contract to manage 220 ATMs installed in the Orchard Pubs and Dining estate of leisure retailers. This brings the number of new ATMs in the Cashbox estate to more than 800 in the past three months, taking the total estate to more than 3,000 ATMs (although the focus should be on the transaction numbers rather than the absolute number of machines). With this level of growth and the increasing use of cash by consumers we expect current trading to be strong.

Claimar Care Group (CCGP, 37.75p / £18.9m)

We wrote a few weeks ago on the UK's leading provider of domiciliary and complex care to individuals living in their own homes. The shares have risen 18 per cent since then. Claimar has reached agreement on the terms of a unanimously recommended cash offer to be made by Housing 21 to acquire the entire issued ordinary share capital of Claimar Care for 39p per share, payable in cash. This is three times the share price before the initial announcement. At 39p, Housing 21, the national provider of older people’s services, is paying £39m including net debt, amounting to 0.7x sales or 8.8x EBIT. It would appear that Claimar has found the right home and this doesn’t look to be a bad deal for Claimar shareholders.

EnCore Oil (EO., 14.75p / £45m)

EnCore has now completed the sale of its 15 per cent interest in the Breagh gas discovery in the North Sea. As a result, the company’s core asset is a £47m net cash holding. With a market cap of £45m, you would think that there is nothing else going on. Not so! There is plenty of upside: first gas is now expected from the Ceres field in Q4 2009. Q1 2010 could well also see the drilling for oil at the onshore Markwells Wood property, as well as the drilling of an appraisal well at the Cladhan light oil discovery. In 2010 we can expect to see drilling of a test well at Catcher and at the Bennett gas prospect, another appraisal well at the Cobra discovery and at the Biscathorpe structure. Furthermore, the board will seek approval at the upcoming AGM for a share buyback programme, in order to leverage the impact of the expected success from its current projects. We think the market is undervaluing the company’s remaining assets and, even more so, management’s proven record and ability in creating value with a consistent asset management strategy.

H&T Group (HAT, 270.5p / £95.59m)

The country’s leading pawnbroker, H&T, which specialises in everything from secondhand jewellery sales to payday advances, saw profits rise 48 per cent in the first half. Pre-tax profit increased to £7.7m in the six months ended 30 June, compared with £5.2m previously; and turnover was £30.8m, as against £24.1m last time around. Small wonder, then, that the company increased its interim dividend from 2p to 2.5p. With the strong increase in profits having been primarily driven by the strong price of gold, its enlarged estate and an increased public demand for capital, H&T said it expects full-year results to be towards the top end of current market expectations. Further good news came in the form of the successful agreement of an enlarged four-year debt facility, taking its original £35m facility up to a sizeable £50m. The company plans to use the increased funding to continue with its expansion plan – further store openings are planned across the UK – and thus help drive profits going forwards. Chief executive John Nichols said: ‘Given the current credit environment, this demonstrates confidence in H&T’s abilities to generate returns and secure the necessary funding to continue growing the business.’ Perhaps not everyone has felt the credit crunch strain.

Hutchison MediPharma (HCM, 120.5p / £61.7m)

This low-risk, high-reward specialty pharma is up 43 per cent since we first covered it a few weeks ago. And last week it announced that 14 of its main drugs have been included in the list of 307 essential drugs on the New National Essential Medicines List, issued by the Ministry of Health in China. Priority has to be given to these Essential Drugs by healthcare institutions, which represent more than 80 per cent of the HCM division’s sales of prescription and over-the- counter drugs. The She Xiang Bao Xin pill, a prescription drug for cardiovascular disease, is protected by a certificate issued by the Ministry of Science and Technology and State Secrecy Bureau until August 2010. Management believes this exclusivity protection will be extended in 2010 and that it will continue to be the sole supplier of this highly successful pill in the Chinese market.

The China healthcare market maintains its rapid growth and its China healthcare division did well, according to the company’s recent results. Christian Hogg, chief executive of Chi-Med, said: ‘Since our 2006 flotation, our China Healthcare Division has recorded compound annual organic growth of 28 per cent, as well as improving operating profit margins from 0 per cent in 2005 to 18 per cent in the first half of 2009.” This is no high-risk biotech and in itself offers a diverse mix of activities to give exposure to drug development and specialty pharma, with a consumer division to boot. We also like the geographic mix, with some, but not exclusive, exposure to China.

Landkom (LKI, 12.5p / £30m)

As if bringing in the harvest for our favourite Ukrainian crop grower wasn’t enough, the company has announced its chief executive has stepped down and Landkom has announced it is in preliminary discussions regarding a potential merger. These goings-on down at the farm seem a bit of a shame, as they’ve distracted the market from a decent harvest this year of 39,000 tonnes of oilseed rape. Still, probably only a stock for those well versed in Ukrainian oil seed rape farming.

Oilex (OEX, 12.75p / £22.45m)

This oil and gas producer rose more than 80 per cent since it successfully completed the farm out for JPDA (Joint Petroleum Development Area) off shore East Timor with Japan Energy E&P JPDA, a subsidiary of Japan Energy Corporation. The stock has paused for breath in the past few weeks. Last week, Oilex announced that all conditions precedent for the farm out have now been satisfied. Oilex is farming 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. Planning for the initial, two-well drilling program is well advanced and Oilex is currently in negotiation with a preferred contractor to secure a rig to drill the two prospects. These prospects have estimated mean prospective resources of 285m barrels of oil. Oilex is likely to commence drilling in the fourth quarter of 2009. We believe this oil and gas stock is still one to keep an eye on, despite pausing for breath over the past few weeks.

Pilat Media (PGB, 25.25p / £14.95m)

Pilat, which supplies business management software to the broadcast industry, is seeing its own business move back in the right direction. Following a loss-making year in 2008, the company, whose clients include BSkyB, Fox and the BBC, made a small adjusted profit of £36,000 in the six months to 30 June. And there was also an uptick in revenues, which rose 1.8 per cent in the period and 7.9 per cent in the second quarter. Management was unsurprisingly upbeat, particularly given that Pilat typically makes almost all of its profits in the fourth quarter of the financial year. And, significantly, recurring revenues from existing contracts remain at a high level and management said the rise in demand from existing clients alone should help it match, and perhaps exceed, 2008 revenues. And with an improved sales pipeline, a reduction in costs and no debt, Pilat could be set to fly high once more.

Quarto (QRT, 98p / £18.2m)

Book publishing is a relatively defensive part of the media sector, as it doesn’t rely on revenues from advertising. Even so, it is not immune to the economic downturn. And this is reflected in the results of Quarto for the six months to 30 June, in which revenue declined by 5 per cent, to £41.8m. This was, erm, driven by a poor performance in automotive and home improvement titles, unsurprising given the tough car and property markets, and a difficult climate in the US. The group also has a heady net debt figure of £59.9m. But Quarto has plenty of asset backing to offset this, in terms of its ownership of book titles and licensing rights. In addition, it has carved out an attractive niche for itself as a producer of illustrated books, many of which are created for other book publishers. This allows it to leverage its illustrated publishing skills, such as using designers, design software, and knowing how to seamlessly link images with text, which traditional book publishers typically lack. As such, Quarto has plenty of skills to draw on.