Investor's Champion Blog
Provides refreshingly forthright, independent comment on predominantly small cap companies and specialist investment funds. Informed opinion, based on first-hand research, but pulls no punches in exposing management weaknesses.

GEONG (AIM:GNG) – another unexpected announcement gives the share price a boost but doubts remain

The China based provider of software solutions issued a somewhat confusing update on both trading and a proposed acquisition. Despite the evident growth prospects we have had our doubts about the long term viability of this business for sometime, with cash generation our biggest concern. Today’s update serves up more mixed messages.

Geong announced back in July that it had entered into an agreement to acquire Hong Kong based company Adbeyond for up to £9.6m, to be satisfied very specifically 50% in shares and 50% in cash. At the same time it also announced that it entered into a ‘non-binding term sheet’ with one of its major Chinese customers to raise a further US$8m by way of an issuance of a two-year 7.5% convertible secured loan stock. Despite all indications that its customers were reluctant payers in the normal course of business, the suggestion was that a large customer was happy to advance larger sums under a ‘formal’ convertible arrangement – unusual to say the least.

We now learn that after four months of negotiation and “in the light of the continuing instability in the financial markets” management concluded that it would not be in the best interests of “either party” to conclude the acquisition. The comment that Geong remains in discussion with the vendors of Adbeyond concerning the terms of the termination and that a further announcement will be made in respect of this suggests to us that there could be financial implications implying that both parties were not necessarily of the same mind.

The US$8 million convertible loan stock is therefore not now required.

They remain committed to seeking acquisitions in Greater China although it’s hard to see how these will be financed as management has also conceded.

On a more positive note they have reported that trading in the half year just completed (period to end September 2011?) has been better than in the same period last year. For the first half of 2010 turnover was £4.7m and pre-tax profit £0.7m but more worryingly there was also a £2m operating cash outflow, so if the last of these is better it will indeed be good news. They also reported that net investment in working capital is expected to reduce in the current financial year, reflecting the increasing proportion of shorter term contracts.

It’s the usual story with a strong order book although surely that’s irrelevant if your customers don’t pay you!

Full year results are expected to in line with expectations which currently suggest pre-tax profit of £3m and earnings per share of 6.3p. On this basis, with the shares trading at less than 4x estimates they do look dirt cheap, however long term growth (even survival) surely remains all about effective cash management.

PUBLISHING TECHNOLOGY (AIM:PTO) - Nice money if you can get it

Publishing Technology, whose activities are hard to fathom (have a look at the web site if you don’t believe me!) has announced that it has accepted unsecured loans in aggregate of £500,000 from its Directors and from certain senior managers

This was apparently similar to last year to assist the Company meet its potential peak funding requirement during the last quarter of 2011.

The Directors’ loans are expected to be repaid on 31 January 2012 or sooner if cash flow allows and carry a coupon of very attarctive 12% per annum.

What a great arrangement for all concerned, as long as one has absolute confidence in the business and its cash flow, which I assume the Directors do indeed have.

It’s cheaper than any available alternative funding, which is fairly ironic when base rates are virtually zero, and the Directors’ spare cash earns interest at levels not seen for many a year.

The AIM Admission Document looks increasingly worthless to us!

A key document in the AIM Admission process is the Admission Document (‘AD’) which remains a source of reference for investors for many years to come post flotation. Time and time again we discover how companies quickly forget what they originally committed to!

Hidden towards the back of the AD one can generally come across information on Directors’ service agreements and terms of office.

Having dug into the AD for Zenergy Power from Aug 2006 we learned that former Chief Exec Jens Muller had entered into a service agreement with a business called Trithor that was the precursor to ZEN and one of the providers of HTS Technologies. This agreement provided for an annual salary of €94,999.92 and participation in the Trithor bonus scheme (up to €25,000 per annum). We also learn that Dr Müller entered into an appointment letter ZEN dealing with his position as an executive director of ZEN. No further information appears to be provided in connection with this appointment, however, for us there is a clear implication that his remuneration would be on similar terms to that at Trithor. It’s hard to justify how €120,000 of Trithor remuneration could become €215,000 from ZEN during a period when shares tumbled over 90%, the business consumed millions and very little appears to have been achieved at the operating level.

Many will be surprised to learn that the Board costs for this loss making venture totalled €718,000 in 2010 and €532,000 in 2009. It’s hard to gauge why they thought the Board should have benefited from an uplift in remuneration from 2009 to 2010, perhaps it was based on cash spent!

A more detailed commentary on Zenergy Power can be downlaoded from

Pressure Technologies (AIM:PRES) – Wake up market and look at the cycle!

The trading update was disappointing but one look at the market and recent updates from some of the key players (some of which are surely customers of PRES) suggests this business is in great shape for 2012 and beyond.

In the Group’s new Engineered Products Division management confirmed that Al-Met had record annual sales in 2011. When it bought Al-Met in Feb 2010 it announced that turnover for the 12 months ending 31 December 2009 was £4.2m, adjusted adjusted EBITDA £0.5m and gross assets of £2.0m. The initial cash consideration, represents a multiple of 3.5 times unaudited historical adjusted EBITDA. That sounds alright to us!

Management has confirmed that they expect the current record level of sales in Al-Met to be maintained into 2012 with further growth in this business expected in 2013. Industry forecasts and customer feedback indicate significant growth for wear parts into the subsea market from 2013 with double digit growth forecast for both 2013 and 2014.

Hydratron acquired on 18th Oct 2010 had sales of £4m in the UK in the year ended 30 April 2010.

With 1H11 sales in the Engineered Products Division of £5.1m the house broker is now forecasting full year sales in 2011 of £11.1m. That doesn’t look too bad either if one considers that 2010/2011 wasn’t an easy period for the industry – remember Macondo!

It’s worth noting that Cameron International, the industry leader in the provision of flow equipment products, systems and services to the oil and gas market yesterday reported total orders of US$2.0bn for the quarter and a backlog of US$5.8bn, the second highest quarter-end level in its history. PRES is bound to be dealing with CAM in some form

Management confirmed that the Group’s stated focus remains to double the size of the Engineered Products Division organically – the market looks highly supportive to us!

GTE (LSE:GTE) - placing demonstrates there is life on the secondary AIM market

Gas Turbine Efficiency, the AIM quoted provider of proprietary cleantech systems for enhancing the performance of industrial and aviation turbines, announced the raising of £7m at 24 pence per share (current price 28p). In the current small cap climate this represents quite a vote of confidence in this small AIM industrial group, although it also results in quite a large dilution with the raising representing c28% of the enlarged share capital.

The net proceeds of the Placing will be applied to accelerating the Group’s growth in four principal areas:-

(a) Supporting physical European and Middle Eastern expansionThe Group is expanding its Swedish facility by three-fold to meet increased demand from Pratt & Whitney as well as handling new combustion and industrial product lines.

(b) Adaptation of the Group’s products for new turbine customers

(c) Accelerating selected development programmes for specific customersThe Group’s strategy had anticipated the development of certain combustion, power augmentation and controls products in 2010 and 2011. However, given the recent successes of advanced solutions in the US utility market, the Board believes that it would be in the best interests of the Group and Shareholders to bring forward these developments into 2009 and 2010.

(d) Funding potential small acquisitions and market entry mechanismsThe Company has identified several small teams and businesses whose activities would complement the Group’s business and the Board would like sufficient financial resources to potentially align with or acquire these teams if and when the opportunities arise.

With cash of US$5.4 million at 31st December 2008 I must admit to being somewhat surprised by the timing of the move. However, clearly if the money is there it’s a good idea to take it as who when markets might dry up again.

The shares are now well off their lows of c16p but still 50% off the float price.
The earnings benefit from the new funds will take a while to come through but this leaves GTE well placed to realize the dream - GE look out!.

Revised broker estimates are for earnings of 3 cents / share for the financial year ending December 2009 and for 6 cents / share for 2010 which leaves the shares trading at c15x 2009 estimates and c7x 2010.

M.P. EVANS (LON:MPE) – good numbers but how on earth do you value this one?

M.P. Evans, the AIM quoted Indonesian palm oil and Australian beef cattle business (great mix!) announced seemingly outstanding results for the year ended 31st December 2008. However, this is a tough business to value in its changing state.

There was a record profit for the year US$53m (2007 US$46.6m), with earnings per share for both continuing and discontinued operations (note the unusual inclusion of both, that’s significant!) of US cents 96.26 (2007 US cents 82.32 cents). At the current share price of 306p and market capitalisation of US$160m, this all looks very rosy! However, the year on year comparison is hard assess given the changing nature of this business with Malaysian estates being sold (profits from discontinued operations amounted to US$24.5m), Indonesian estates being planted (gain on biological assets of US$11.1m) and Beef cattle investments being added. Add to this the influence on the results of palm oil and beef cattle prices and it really is a tough business to get to grips with!

The group has now received a total of some US$100m for the sale of its former Malaysian estates leaving assets with an estimated value of some US$50m still to be sold. The sale proceeds have been used to fund the Group’s expansion within the oil-palm sector of Indonesia and the beef-cattle sector of Australia.

Of the 36,000 hectares of new land that has been secured to date in Indonesia 8,500 hectares in total is now planted with a further 3,500 hectares anticipated to have been planted by the end of the year, thereby bringing the total to 12,000.

With all this changing activity it’s probably best to fall back on simple asset values, however, even that isn’t easy.

At the year end the net asset value was US$261m (approx £176m) compared with the current market cap of £160m. There is no need to worry about the impact of intangibles with Goodwill at a lowly US$1.1m and pension obligations also apparently immaterial.

Assets largely consist of Biological assets (cUS$79m), Property, plant & equipment (cUS$47m), Investments (cUS$101m) and net Cash (cUS$35m). That little lot adds up US$262m, in line with the net asset value. The cash is reassuring but that is being ploughed back into new plantations so don’t count on any exceptional shareholder distributions and there was a net operating cash outflow of US$21.7m.

The non-current biological assets also comprise plantation bearer-assets which come with some unusual accounting treatment. The Group values these plantation assets using a discounted cash flow (we all know how reliable DCF is!) over the expected 25-year economic life of the asset. It’s worth reading the notes if you want to know more about this!

In support of asset values the groups 34.37% holding in the Australian beef cattle business NAPCo appears to be worth substantially more than the balance sheet value. However, this business seems to alternate between profit and loss each year so the current value to the bsuiness again is hard to assess.

To add to its quirkiness the group even has joint Chief Execs!

The recovery in the group’s share price from a low of approx 165p at the end of November 2008 to the current price of 306p has followed that of palm-oil which has recovered from a low of US$435 at the beginning of 2009 to the current level of around US$725 per tonne.

MPE remains an interesting one to follow!

LUPUS CAPITAL (LON:LUP) – a relic from another age?

The ‘highlights from Lupus Capital’s results for the year ending 31st December 2008 smoothed over the true picture. Given the group’s seemingly precarious position the postive nature of the highlights came as a big surprise!

- EBITDA* up to £42.870 million (2007: £36.559 million)
- Pre-tax profits* up to £27.685 million (2007: £25.021 million)
- EPS* up to 14.83p (2007: 14.82p)- Strong cash generation- Substantial cost reduction achieved
- Debt negotiations continuing

Note all the items preceded by ‘*’.

The note supporting this reveals that items preceded by ‘*’ were ‘before amortisation of acquired intangible assets, deferred tax on amortisation of intangible assets, exceptional items, unwinding of discount on provisions, amortisation of borrowing costs and the associated tax effect.’ That’s a fairly long list of items that management consider doesn’t warrant inclusion in the earnings per share.

The diluted earnings per share were actually only 4.92p compared with the highlighted 14.83p!
They are unable to pay a final dividend and it’s hard to see when they will be able to resume dividend payments.

Finance costs were a massive £11.7m against operating profit of £20.8m.

Operating cash flow was good (£30.8m against operating profit of £20.8m), however, it’s got to be to support the mountain of debt and the high finance costs which are no doubt set to climb when debt is renegotiated.

Perhaps of greatest concern for this business is the last of the above highlights, being the continuing debt negotiations. New banking facilities and an easing of covenants will probably come at a high price.

They also highlight the impact of a weakening pound against the US Dollar on the group’s US$224m borrowings. Apparently if the exchange rate on 31st December 2008 had been the same as at 31st December 2007 their equivalent net debt in Sterling would have resulted in a £9.46m reduction in group borrowings – so, given the materiality why didn’t they hedge their currency exposure? Net debt at the year end was £145m, compared with £99m at the end of 2007.

The outlook statement doesn’t instil much confidence either with the group’s businesses both in the US and Europe facing unprecedented market conditions which may continue to deteriorate for a while longer.

Intangibles of £369m will surely be subject to big impairment charges

One broker observed that the results were better than feared – the mind boggles what they were actually expecting!

Plastics Capital (LON:PLA) – not as bad as feared; debt marginally higher but cash flow solid

The AIM quoted niche plastics products group issued a ‘mixed’ trading update for the year ending 31st March 2009.

Full year turnover is now anticipated to be not less than £28 million (that’s ahead of initial broker estimates) with underlying profit before tax for the year to 31 March 2009 to be ‘not less than’ £2 million, after a £1m charge for hedging costs in the year due to sterling depreciation against the dollar. The last sponsored research not from 7th April estimated pre-tax of £2.68m and eps of 10p – I assume they forgot to allow for those hedging costs!

Net bank debt is expected to be £19 million which appears to be £1m higher than at the interim stage. Since the last trading update, group margins have remained firm but volumes have been weak in all businesses. Even the Rotating Parts which had previously weathered storm has recently been impacted by the collapse in international trade for manufactured products. Ironically it’s the UK focused business involved in packaging film that has performed well and only suffered a relatively modest volume decline over the last 12 months, although this trend did worsen somewhat in the final quarter of the financial year.

Cost reduction measures continue to be implemented across the Group and management reported that operating cash flow has remained solid.

As expected management remains as up-beat as ever commenting that customer loyalty remains high and that are winning new business in all areas – clearly these new business wins are not sufficient to maske up for all the other losses!

The share price has suffered badly over the last few months (down 42% in 2009), clearly in anticipation of dreadful news, and actually got a small boost following the announcement, albeit on very small volume.

Of greatest concern to many will be the debt burden and it is disappointing to note that debt has increased, despite the ‘solid’ operating cash flow!

CHINA SHOTO (LON:CHNS) – amazing turnaround in ‘cash’ fortunes!

The China based producer of industrial batteries and power supply systems, today announced its preliminary results for the year ended 31st December 2008 which came with a quite unexpected surprise.

The big increase in revenue of 70% to £183m was much as anticipated as was the increase in net profit of 79% to £10.07m. Diluted earnings per share were up 76% to 43.14p.

However, the big surprise for me from this China based business was the quite unexpected turnaround in cash generation. China based small caps have earned a reputation for poor cash management and credit control and China Shoto’s previous results implied that it too was going the same way as many of its China based peers. I acknowledge that a business whose turnover has risen over 800% over the past 4 years is bound to experience growing pains, however, there is no excuse for poor cash management in the current climate! The results from 2007 showed an operating profit of £8.5m yet an operating cash outflow of £2.1m.

Today’s 2008 results present a very different picture with operating profit of £14m converted into a net operating cash inflow of £40m – no I haven’t slipped a ‘0’ in there by mistake! This resulted in the group finishing the year with net cash of c£18m compared with the previous year end where there was net debt of c£12m.

Congratulations to management for clearly having made a concerted effort to improve credit control with debtor days having fallen from 57 to 69. Stock management also appears to have improved.

Unfortunately the cash turnaround is just so unexpected that I am having trouble believing it – that’s the cynic in me!

The final dividend for 2008 of 3.5p per share combined with the interim payout of 1.5p leaves the shares yielding just under 3% at the current share.

Bateman Litwin - settlement of Delta-T Litigation gets a massive 5 lines

Bateman Litwin has announced that the litigation between it and the former owners of Delta-T Corporation ("Delta-T"), Bibb and Robert Swain, has been settled. The litigation related to the Swains’ sale to Bateman Litwin of the stock of Delta-T.

The announcement simply confirmed that the terms of the settlement are confidential and that the Bateman Litwin shares held by the Swains will be returned to the Company – that’s it!
Having paid a massive US$45m in cash and 11.8m in shares for Delta-T back in August 2007 and subsequently had to take an operating charge of US$8.5m and Goodwill impairment of U$8.3m all we get is a few lines and a return of 11.8m shares with a current value of £2.2m.

At the time of the deal back in August 2007 the Bateman Litwin share price was over 300p! It all sounds a bit too cushy to me.

Anyway let’s hope the new management can now draw a line in the sand and move on.

London Capital Group Holdings - AGM Statement has a mixed message

The online spread betting company’s AGM statement opened with the encouraging news that key performance indicators for the first quarter were ahead of management expectations – clearly the key performance indicators in question were less important to investors than news of a fall in pre-tax profit which resulted in a 18% fall in share price!

Gross revenue for the Group is also ahead of last year but group profit before tax is down on last year as a result of an increase in costs (accelerated investment in new trading software and increased white label expenses) and less less volatile conditions in their main markets - we like lower volatility! The lower level of interest income also doesn’t help a business like LCG that is awash with client’s cash on deposit!

Average daily trade volumes have risen to 28,000 in the first quarter of 2009 (1st quarter 2008: 17,700), new client acquisition is well ahead of last year and has accelerated to over 2000 per month in the first quarter of 2009 (1st quarter 2008: 1000) and spread betting client funds on deposit have risen in the first quarter by 26% to £30.5m – unfortunately with interest rates well down they haven’t gained much from these.

Unlike it’s larger peer IG Group, LCG’s risk averse model also ensures that bad debts remain negligible.

Assuming the cost increase was a one off and introduction of new trading software is a positive move, it appears that the group should reap the rewards of the higher client numbers and new white label arrangements over the coming months!

Hunting - thoughts on the first significant acquisition

Hunting has announced the acquisition of National Coupling Company Inc. ("NCC"), a leading developer and manufacturer of subsea hydraulic equipment, for an initial cash consideration of US$55m on completion and an additional US$5m to be paid after one year provided that certain financial performance targets are achieved.

NCC’s 2008 normalised profits before tax were US$4.6m with an EBITDA of US$6.5m. These are after adjusting for non-recurring items of US$3.1m. The net assets and gross assets of NCC at 31 December 2008 were US$15.6m and US$20.8m respectively. So seemingly not that cheap on a PER basis (just under 16x historic post tax earnings!) relative to current quoted valuations – cash rich, high margin Rotork trades at just under 14x 2008 numbers. NCC must have some good technology!

It is expected the acquisition will be earnings enhancing in 2009 – we estimate approx 1.6p of additional earnings per share in 2009, based on 8 month contribution from NCC.

Hunting had net cash of £372m at year end; allowing for the cash outflow following acquisition of NCC of US$55m (c£38m) and further Gibson sale proceeds received of £17.5m and allowing for a neutral cash position for the quarter results in net cash currently of approx £351m or c£2.68 per share. Stripping this out leaves the shares trading at approx 5.8x consensus estimates before the NCC acquisition or 5.4x assuming an enhancement of 1.6p to current year earnings.

There is a more comprehensive update note at

ZENERGY - a positive announcement but how about some idea of potential monetary value?

The AIM quoted superconductor energy company announced today that it has been contracted by ‘Con Edison’ to build and test a “Smart Grid” device for improving the stability and reliability of New York City’s electrical system. Pity they didn’t tell us more about it’s revenue generating potential or how much it will cost!

The so called Fault Current Limiter (`FCL’), instantly detects and absorbs spikes in power which may damage electrical equipment or cause partial or total power failures on an electrical network. Con Edison is a subsidiary of NYSE quoted Consolidated Edison, Inc. [NYSE: ED] so it’s a big vote of confidence from a big utility!

Zenergy expects to deliver the prototype by the end of August but frustratingly no details whatsoever were given with regard to revenue earning potential from this contract.

Con Edison has commented that Fault current limiters will be an essential element of the smart grid to maintain reliability and improve its resilience and flexibility, however, I assume there are other groups and not just Zenergy also involved in this field?

Power disruptions from faults and related issues are estimated by the U.S. Department of Energy (DOE) to cost the U.S. economy more that $100 billion per year – another big number, but what does this all mean in terms of revenue possibilities for Zenergy.

The recent announcement follows a previous announcement that Southern California Edison had installed Zenergy’s FCL in the grid in California, unfortunately there was no indication of revenue earning potential on this either.

I appreciate that this is all very early stage but I’m sure existing and prospective investors would like to gain a better understanding of the ultimate revenue generating potential from these contracts and in the absence of revenue how precisely they are being funded. There was an announcement in February stating how the U.S Department of Energy (`DOE’) is to provide additional funding from the initial US$800,000 to US$1,800,000 for Zenergy to extend its existing research and development agreement with Sandia National Laboratories. However, it’s not clear if this relates to today’s news.

Maybe I’m wrong but doesn’t ‘Zen’ refer to enlightenment?

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