Hybridan Small Cap Wrap featuring Int. Environment, Sinclair and Landkom

This week: A smart strategy from Intelligent Environment, a strong pipeline for Sinclair, and Landkom does what it does best

Anglesey Mining (AYM 4.9 p/£7.4m)

There might have been nothing fantastically newsworthy in Anglesey’s final result statement, but the Chairman did point out the anomaly of the company’s valuation. Anglesey basically consists of its 50 per cent shareholding in Labrador Iron Mines Holdings Limited, a listed Canadian company with a market capitalisation in excess of C$62 m or more than £34m. Anglesey also owns the Parys Mountain mine in Wales. Hybridan had the pleasure of visiting this asset a few years ago. Were it ever to reopen, it would make headlines in the UK. These mines have been worked since the Bronze Age, 3500 years ago. During the 18 and 19th Centuries, they were the largest copper mine in the world. Although the company was unsuccessful in selling this property last autumn and it is now on care and maintenance, the value is a positive one. At some point Anglesey’s share price discount of 80% to its net asset value will disappear. That’s something worth exploring.

Cashbox (CBOX 3.6p/£5.2m)

The ATM operator announced this week an extension of its contract with Mitchells & Butlers, the pub operator, to manage a further 260 ATMs on the M&B estate. This brings the total number operated by the company within M&B to more than 500. Cashbox is clearly gaining market share and while this has been reflected in the recent rise in the company’s share price, the ATM sector has been notoriously difficult for small operators to generate value. Not one to cash in on just yet, then.

Deltex Medical Group (DEMG 10.2 p / £10m)

This week, the leader in oesophageal monitoring gave a trading statement on H1 2009. Deltex aims to establish the use of its CardioQ-ODM system as a standard of care in the monitoring and management of patients undergoing surgery and in critical care. Its CardioQ-ODM monitor, which uses disposable ultra-sound probes inserted into the oesophagus, determines the amount of blood being pumped around the body. Reduced circulating blood volume leads to insufficient oxygen being delivered to the organs. This causes medical complications including peripheral and major organ failure which can lead to death.

Sales were broadly in line with expectations, at 5 per cent higher than H1 2008. Good progress was made in the UK and in the US. There are more than 1,500 CardioQ-ODMs currently in use in hospitals worldwide; this is a razor blade model, the more systems that are placed, and the more probes that are bought. That said, the shares did not react very well to the pre-close announcement, however we believe that this is just the start of Deltex’s journey and we are pleased to see that the Company is on track to achieve its objective of having passed the cash break-even point as it goes into 2010. We like this medtech share and, when we met management ,were enthused by their conviction that CardioQ-ODM would become the standard of care globally and that no one else had a product nearly as precise or comprehensive in its monitoring function. As always with medical technology, it is a question of convincing the opinion leaders and changing habits. We’re sold!

Dori Media Group (DMG 60p/£15.3m)

The Israeli specialist in telenovelas – soap operas, but with an actual ending – has extended its agreement with Israeli satellite TV provider YES. It will now have carriage on YES for its specialist telenovela television channels, VIVA and VIVA Platina, until the end of 2013, extending the previous agreement by three years. The Israeli group, which operates internationally, was hit by a decline in programme commissions at the end of the 2008 calendar year, due to the economic downturn. But telenovela, a very cost-effective form of programme making, remains resolutely popular in regions such as South America, and this deal (which follows an earlier extended agreement with Israeli cable broadcaster HOT) increases Dori’s visibility. As such, Dori still looks hot to trot.

Ebiquity (EBQ 43.5p/£14.0m)

Measuring the effectiveness of advertising campaigns for most of the UK’s top advertisers has proved to be a very solid niche, as Ebiquity turned in a forecast-beating performance for the 12 months to 30 April. Revenues rose by 7 per cent, to £18.4m, underlying operating profit was up by 20 per cent, to £2.4m, and underlying diluted EPS was also up 20 per cent, at 5.3p. This reflects, on the one hand, the benefits of Ebiquity’s earlier restructuring efforts, and, on the other, the resilience of a business that focuses on providing advertisers with the comfort of knowing the return on investment from their ad campaigns – and whether their money has been well spent. Looking to the future, Ebiquity could well benefit from a smart move into media monitoring, via its Newslive 2.0 platform, launched in May 2009. At a time when the internet, the blogosphere and channel proliferation are disrupting so much of the media industry, this PR-type news monitoring activity is actually benefiting from that proliferation. Quite simply, these new channels have opened up companies, organisations and individuals to increased reputational threats, and Ebiquity’s editorial monitoring platform enables clients to keep up with comments across all news media as they happen. This enables potentially damaging claims to be dealt with as quickly as possible. There are no flies on Newslive, then.

EnCore Oil (EO. 16.5 p/£49.2m)

We mentioned a few weeks ago that an announcement regarding the sale of the Breagh gas discovery was imminent. Well, here it is and EnCore will now collect $68.8m from RWE Dea for its 15 per cent interest. The sale is in line with EnCore’s strategy of realising the optimal value of its assets just prior to the time when they require significant capital injections. The company will consider several options for the use of the substantial amount of cash, such as share buybacks, capital restructuring or new investments. EnCore now has a lot of flexibility, an enviable
position not due to luck but to careful planning. Encore!

Faroe Petroleum (FPM, 69 p / £72.3m)

The oil and gas company focusing on exploration and appraisal in the North Sea and Norway jumped up a few per cent yesterday on news that, as with EnCore, it had sold its interest (10 per cent Faroe’s case) in the gas field Breagh for $41.6m in cash. It is good to see the return for shareholders coming back into the company, to be reinvested in further value-creating opportunities. And we trust Faroe to invest it wisely. Faroe has seven well exploration programmes to be drilled over the next 24 months. Its JV partners include household names such as BP, Chevron, ConocoPhillips, E.ON Ruhrgas, Shell and Statoil. Faroe seeks to reduce its exploration cost exposure whilst retaining material interests, surely a creditable approach in the oily world of exploration.

Intelligent Environment Group (IEN 10.3 p/£16.9m)

You’d think a company that provides software to the financial services industry would be struggling in this cost cutting environment. Not so for Intelligent Environment, who in their trading update announced that they expect first-half revenues to be up by 8 per cent.

The company’s software enables banks and savings institutions in particular, to offer their products online. This is an increasingly attractive solution not just for the banks, which cut customer acquisition, transaction and maintenance costs, but for the customers, who benefit from more flexible and customised offerings and a much more convenient way of accessing their accounts. The credit crisis caused financial institutions to turn to retail deposits for funding and the best place to find new customers is on the internet. As more and more banks sign up to Intelligent Environment’s NetFinance platform, whether it is for savings products, loans or credit cards, the company’s revenue and earnings are enjoying good momentum resulting from a clever business model of transactional income and recurring revenues.

Judges Scientific (JDG 92p/£3.7m)

Judges Scientific remains one of the market’s hidden gems and once again has proved the quality of its business. The company designs and manufactures scientific instruments and has announced that trading in the six months to June 2009 was strong and that it expected earnings per share for the first half to grow, even after taking account of the 10 per cent dilution caused by a recent acquisition. However, management are keen to avoid market expectations rising too quickly and did point out that the current order book is well below the level at the start of the year albeit well above the level at the same time last year. We suspect this stock may have a profits upgrade sometime soon and would expect the company’s ambitious and capable management team to look to continue to grow by picking up attractively priced acquisitions that enhance earnings per share.

Landkom International (LKI 15.25p/£36.6m)

Landkom, the Ukranian crop farmer, has announced it is to start harvesting. Good move guys.

Oilex Ltd (OEX, 9 p / £11.6m)

Oil and gas producer Oilex jumped 18 per cent yesterday as it gave an update on operations for Q2 2009. Oilex continued to restructure its assets and operations to reduce costs, is continuing to produce, and is seeking opportunities that may provide early production with positive cash flows. Work continues apace on a farm out for JPDA off shore East Timor, a highly attractive offshore oil exploration opportunity with potentially significant oil resources.

We like this company for its focus on near-term production assets and its search for projects close to infrastructure and markets. They started out in India, which is producing, have an asset in Indonesia, where they are trying to resolve an issue with the operator, are seeking to renegotiate terms in Oman and reducing the spend on activity there. We think that they are close to a deal for JPDA and suggest watching this one in the near term.

ReGen Therapeutics (RGT 3.3 p/£0.9m)

The maker of Colostrinin, a nutraceutical product that supports cognitive functions, has been signing a number of distribution deals over the last few years. Commercial development is now underway in several territories. At the AGM this week, the company reported recent progress by their partners in South Eastern Europe, Cyprus, Turkey and Poland. Numerous scientific studies suggest there could be therapeutic benefits from Colostrinin in several neurodegenerative diseases. Based on their own research, ReGen has initiated discussions with potential partners for the development of Colostrinin derived peptides for use as pharmaceutical products. Two candidates identified are for treating Alzheimer’s disease and obesity. As the nutraceutical product roll-out gathers momentum, the company expects profitability next year. Should they also be able to out-license one or two pharmaceutical compounds the current market cap of £1m would not make any cognitive sense.

Sinclair Pharma (SPH, 23.5 p / £24.3m)

The specialty pharma that focuses on dermatology, oral care & gynaecology issued a trading update for the year ending 30 June 2009 yesterday. Revenues of circa £29.7m from products for eczema and mouthwash were impacted by wholesaler destocking in the face of the economic downturn. But greater revenues from licensing fees and a tight control on costs meant EBITDA should be in line with expectations. The stock fell 7 per cent yesterday, but we hope would rise as the market starts to appreciate those trends in the market mean that orders may be smaller but more frequent following the destocking issue. Sinclair has a strong pipeline and growth will return for FY 2010 of at least double digit organically, with more to come on top from new products. We see no reason why Sinclair wouldn’t move into new areas and one day perhaps go beyond the safe route of device registration to go for the big time with pharmaceutical products. This company has done over 60 deals this year; expect the same amount next year. A conversation with management gave us the sense that there are twice as many companies talking to them as this time last year about deals. Expect to see further consolidation in this area, with Sinclair playing a role. Who will consolidate Sinclair one day? It currently has deals with Dr Reddy’s, Wockhardt, J&J to name but a few.

Zenergy Power (ZEN 128.5p/£67.1m)

Zenergy produces superconductors used in the energy industry. For those whose physics is a little rusty a superconductor is a material that possesses little electrical resistance to a current, thus ensuring high levels of energy efficiency. Superconductors have been around for years but have traditionally only been effective at    extremely    cold    temperatures    (-269°C)    thus    limiting    their    use. Zenergy’s superconductors however are able to operate at around -150°C, which makes feasible their use in high scale energy intense environments such as power generation.

Zenergy is focused on the commercialisation of a number of energy efficient power applications to be adopted in renewable energy generation, electrical energy distribution and large-scale energy use in industrial processes. Revenues are still modest recording only €2m of sales last year but the market valuation prices in significant growth. Evidence of this growth came this week with news of another high value sales order of a low energy/high productivity induction heater. These bits of kit are used in aluminium, copper and brass extrusion where processing speed and quality depend on the homogeneous distribution of heat within billets. The magnetic billet heaters produced by Zenergy Power are claimed to achieve better results than conventional induction and gas heating. Separately, the company announced that it has completed testing of a new high voltage fault current limiter. These protect power grids against damaging power surges caused by short circuits or lightning strikes while maintaining a disruption-free downstream power supply. All in all good news for Zenergy whose shares are up 13 per cent on the week.