Small Cap Report (11 Mar) - HYDG, PUR, BRY, ESCH

Monday, Mar 11 2013 by

Pre 8 a.m. comments

I'm having a quick scan of the 31 Dec 2012 final results for Hydrogen (LON:HYDG) first this morning, as it's a company which has come up on my radar as looking reasonably-priced before. Hydrogen is a mainly UK recruitment group They have some overseas operations too, but 81% is UK, so clearly 2012 will have seen challenging conditions.

It looks as if a lacklustre year was expected, as Stockopedia shows normalised EPS of 10.3p in 2011, forecast to fall to 8.6p in 2012. The actual number is 9.56p for diluted EPS (which seems the right comparative number, as prior year was 10.24p), so that looks like about a penny above expectations for the 2012 results.

At 95p this puts the shares on a PER of 10, which looks about right for a business that is in a competitive sector, and is not showing any profit growth. The question is how much should we be anticipating earnings growth from a recovering economy? That's really up to each investor to decide, but personally I'm not prepared to pay a significant premium, given that there are so many uncertainties about an economic recovery that is at best tentative.

The main attraction with Hydrogen is the dividend, and with the final dividend being raised slightly to 3p, plus the 1.5p interim dividend, that gives a yield of 4.7%, which is pretty good.

Their balance sheet looks sound, with net debt having risen from £1.4m to £2.8m, mainly due to higher working capital. Overall the balance sheet is fine, with £31m in current assets, less £20.9m in current liabilities, giving a healthy surplus of net current assets of £10.1m, and only £127k in long term liabilities.

In the context of a £22m market cap, making £3.4m operating profit in 2012, those balance sheet numbers look pretty solid to me. So it's a fairly safe investment, which looks OK value to me, although I'm not exactly jumping around with excitement at a PER of 10. There's probably fairly limited upside on that in the short term, but it looks a sound company which I will keep on my watch list, and buy if it dips to 80p or less in a market downturn.


The PER drops to 9.26 on current year forecast EPS, and the dividend yield…

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Hydrogen Group plc is a United Kingdom-based company, along with its subsidiaries, is engaged in the provision of recruitment services for mid to senior level professional staff. The Company operates through two segments offering both permanent and contract specialist recruitment consultancy for the organizations. The Company's segments are Professional Support Services and Technical and Scientific. The Company recruits for roles in Professional Support Services, including legal, finance, technology and business transformation placements, and in Technical and Scientific market sectors, such as power, mining, oil and gas and life sciences. The Company's subsidiaries include Hydrogen UK Limited and Hydrogen International Limited in the United Kingdom; Hydrogen Group Pty Ltd in Australia; Hydrogen Group Pte Ltd in Singapore; Hydrogen Group Ltd in Hong Kong; Hydrogen Norge AS in Norway, and Hydrogen Group LLC in the United States, among others. more »

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Escher Group Holdings plc, through its subsidiaries, is a provider of distributed messaging, and data management solutions and services. The Company develops, markets, sells and supports enterprise-wide software applications for post office counter automation and distributed network communication. The Company's segments include Software development and consulting services, Software licenses, Maintenance and Support. The Company provides on-premise or cloud-provided digital communications and transaction management solutions for organizations working within various transaction management environments. The Company offers Riposte, which is a messaging software. The Company's solutions include digital point of service, including postal automation, banking automation and retail automation; e-government, including document management and digital growth hubs; consumer engagement, including eMoney and Identity, and logistics, including Track & Trace, and Click & Collect. more »

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  Is LON:HYDG fundamentally strong or weak? Find out More »

5 Comments on this Article show/hide all

marben100 11th Mar '13 1 of 5

Hi Paul,

No doubt you'll have a few questions for Escher's directors at next week's tech. event. : 0)

Look forward to seeing you there. Good opportunity to see some interesting companies.


Brady does trouble me, and I exited about a year ago, having been invested for some time. They do seem to have a nasty habit of spending all the cash they earn each year - and then some - on further (expensive) acquisitions. OK a for a few years but it's been going on too long for my liking now. As you say, they need to show organic growth.



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Cisk 11th Mar '13 2 of 5

Paul, not familiar with Hydrogen but do hold shares in Harvey Nash (HVN). Seems to be perennially undervalued but a nice juicy yield doesn't leave me complaining and the stock seems a good bet for rosier economic times.

I work in an industry where I often encounter Brady software. I'm naturally averse to software companies (too many dodgy policies on income recognition and goodwill valuation for my liking) - but Brady's name has cropped up a bit more recently - however their core commodity trading markets are taking a hammering of late.



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Paul Scott 11th Mar '13 3 of 5

In reply to post #71503

Hi Mark,

Escher's name sounded familiar, and I wondered if I'd met them at a Mello Central event, but couldn't remember. However, you've solved the mystery, of course the reason they sounded familiar is because they are presenting at your ShareSoc tech companies evening next Weds (20 Mar) which I shall be attending. Looking forward to it, and I shall certainly be very interested in finding out more about Escher. Sustainability of earnings will be the key issue for me.

Regards, Paul.

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Paul Scott 11th Mar '13 4 of 5

In reply to post #71525

Hi Cisk,

Indeed, Harvey Nash (LON:HVN) is on my watchlist, although they have quite a bit more debt than Hydrogen (LON:HYDG), so when you adjust for that, HYDG actually looks slightly cheaper on a PER basis. Similar dividend yield.

I did well on Staffline (LON:STAF) last autumn, but (as is usually the case) I sold far too early at 300p, as they have since risen to 360p.

It's striking how smaller recruiters are still much cheaper than larger recruiters, although I'm nervous about opening any new positions after markets generally have been so buoyant. Can't help feeling it's better to play it safe and wait for sell-off to pick up some bargains, rather than getting caught up in a momentum rally which is probably in its last stages now? (at least in the short term)

Regards, Paul.

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Cisk 11th Mar '13 5 of 5

Hi Paul

They did have more debt at the interim stage but this has since been reduced in the pre-close update 13th February (not sure if this is reflected in Stockopedia data):

"The Board is pleased to announce that the Group returned to a positive net cash position at 31 January 2013 of circa GBP4.0 million following the net borrowing position reported at 31 July 2012 of GBP14.1 million".

They had more contractors at that stage hence more working capital requirements. I'm sure it will bounce around depending on the permanent / contractor mix. Other pluses are that HVN are also a little more broadly spread - both geographically and in business mix (managed services and offshoring).

The shares have had a good run of late but I feel once economic conditions improve the shares should appreciate - especially given the useful yield.



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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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