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.

Smart Implant Holdings –it doesn’t look like a very smart investment to me

Another one of these pre-IPO offerings came through the post recently.

Smart Implant Holdings has apparently developed a new generation of breast implants that is believed to be safer than those presently available whilst also maintaining a natural feel.

This pre-IPO offering is being promoted by Arc Fund Management.

Why market this to the UK investor

I know nothing about this market and the product may have merit, but there really doesn’t appear much to commend this investment to the UK investor. The business itself is based in South Africa and the so I’m not quite sure why they are looking to raise funds over here anyway.

For investments of this nature it is normal to expect some kind of tax relief to mitigate the risk, however, being an overseas operation there is obviously none in this case.

Ambitious plans

In the face of stiff competition from the giants of the medical world the company has ambitious plans to capture a 9% share of the world market in 3 years. Without having even applied for FDA approval at present this really is ambitious, especially as USA or FDA countries have a c41% of the total market!

Great language

There is some cracking terminology in the introductory note prepared by Company Eye, ‘the small company specialist’.

How about this:

‘The Company plans to implement above line marketing activities based on an overall blue print strategy’-what on earth does this mean!


‘Smartplant will be represented either directly or through an outsourced medical representative’-so which is it?

Work is only in process on the application for CE Mark. I question how one can assign a value to a business of c£12m when it hasn’t yet received any regulatory approval. At this stage it is simply an idea!

Apparently Smart Implants are already available in South Africa and are distributed through the company’s subsidiary over there. With a growing reputation in South Africa I can’t understand why they don’t raise funds in that country; surely it would be a lot easier.

‘Company Eye’ also states that the Company has received a number of endorsements from leading cosmetic surgeons and industry commentators, however, none of these are given.


The suggested market capitalisation of £12.5m appears to have been plucked from thin air!

The valuation is apparently based on 8 times 2008 pre tax projected forecasts and 3.2 times 2009;why?

Projected turnover for 2007 is £2.7m and for 2008 £6.8m, however, there is no explanation how these numbers have been arrived at.

No new money being raised

Like me, you might be forgiven for thinking that this business is raising more money to develop and commercialise its unique offering. Unfortunately this is not the case and one single shareholder is simply seeking to raise c£1.6m through selling its 12.98% stake.

Why on earth are they selling if the potential is so great?

Discount Offer

The opportunity comes with potential investors benefiting from a 20% to the price investors invested in August 2006 with seemingly an additional 10% bonus from Arc as an ‘expression of appreciation’ to their clients.

Intellectual property (‘IP’) concerns

I am a bit confused about the strength of the IP. The company’s IP is protected through a series of International Patent Cooperation Treaty (PCT) patents, South African provisional patens (Provisional doesn’t sound very final to me!) and South African registered design applications.

It looks a quick premium for Arc

A browse through the accounts section reveals that on 1st March 2007 Arc Growth VCT were allotted 10,257,481 shares in consideration for £150,000 i.e. they paid only 1.46p share only at the beginning of March 2007. A few days later the shares are now being offered at 2.5p and even after all the wonderful bonuses it’s still at 1.80 or a 30% premium to what Arc paid.

On 5th March the Company also allotted a load of shares in consideration for writing off existing debts in Smart Implant. These debts aren’t quantified.

Just to complicate things further there is the usual Isle of Man company in the loop as well.

Exorbitant pay for the Chief Exec

For a company of its small size that is not yet profitable, the Chief Exec’s pay is, in my opinion, ridiculous.

Not only does he collect £120,000 per annum from the Company but he also appears to be receiving a further £48,000 from the Company’s South African subsidiary.

Shareholders should take a stand against pay of this level for a small business like this.

The product may have potential but the investment proposition really doesn’t look very attractive to me.

China Shoto comes in with another positive announcement-but how is the cash management going?

China Shoto, the Chinese producer of industrial batteries and power supply systems, announced that due to increased demand for its power type VRLA batteries, which are used for powering electric bicycles, it has decided to expand its manufacturing facility at its wholly owned subsidiary Jiangsu Best Power Supply Co.

The current manufacturing facility will be expanded by some 15,768 square metres and when construction is completed in June 2007 it will then total 43,768 square metres-that’s a vast area.

Commercial production utilising the newly built facility is expected to commence in September 2007 (the usual quick efficient Chinese turnaround) and this extension will then increase the current production levels of 18,000 units per day to 24,000.

The cost of expanding the manufacturing facility will be c£1.14 million and this will be met from existing resources.

China Shoto expects the electric bicycle market in China to continue to grow.
According to the latest statistics from the Jiangsu Bicycle Association, the production volume of the electric bicycle manufacturers in 2006 increased by more than 78% compared to that of 2005. The Group believes that this growing demand is generated both by the need for cheap and efficient transportation and the desire to switch to greener alternatives. I’m not exactly sure how much greener batteries ultimately are!

I have been impressed with China Shoto’s efforts. However, as we have seen with other Chinese companies the risks have nothing to do with demand or output but quite a lot to do with working capital management. There is no point sending out loads of batteries if you never get paid for them!

A quick glance at China Shoto’s interim numbers illustrates things perfectly. There’s no problem with turnover growth (+141%) or profit (+25%), it’s just there isn’t much actual cash being generated at the moment, although, to a certain extent that would be expected from this sort of high growth business.

Accounts receivable at 30th June 2006 were £20m and turnover for the period of 6 months £28m, resulting in debtor days of over 4 months! Operating profit was£2.9m and operating cash was a negative £3m.

There was a lot activity in the period including the consolidation of a former ‘associate’ company which might skew things somewhat but it’s still quite a scary picture for a ‘normal’ business. You just have to remember that this is China!

Full year results are expected to be announced in the last week of April and according to the pre close statement made on 1st March will be in line with market expectations. They are sure to prove interesting reading which is precisely what investing in China is all about-I can't wait!

Tanfield- ordinary results but an extraordinary valuation

Preliminary results from Tanfield, the manufacturer of zero emission (i.e. 'electric' in old language) vehicles and aerial work platforms, showed significant growth in sales and profit.

Sales rose from £22.4 to £41m, just slightly below the broker’s estimates and after re-structuring costs of £1.9m, profit before tax rose from £2.1m to £3.6m. Earnings per share were slightly below even the broker’s expectations at an adjusted 1.6p (estimates. 2.6p).

I am aware that business is buoyant for Tanfield, however, the valuation relative to these numbers and the projections looks a bit excessive. It’s definitely the green premium that is pulling things up.

Even the normally bullish house broker has reduced their forecasts from BUY to HOLD against a target price which is now 21x expectations for the current year.

I like one of the comments in the results announcement in respect of the move to new premises:

'......the Chairman and founder of Tanfield, Roy Stanley, successfully negotiated a 15-month rent-free period at Vigo Centre. The Chairman also secured a £1.95m grant for Tanfield, from Regional Development Agency, One NorthEast.'

Clearly the Chairman needs plenty of praise heaped on him. I thought it was in his job description to act in the best interests of the company!

The first of the group’s Smith vehicles have entered service with business-to-business parcel delivery company TNT Express; and contract logistics company CEVA Logistics (formerly TNT Logistics), on behalf of Starbucks.

TNT Express has indicated that there is the potential for it to replace up to 10% of its UK fleet with zero-emission vehicles such as the Smith Newton.

At this stage it appears to be politically correct for big groups to show interest in green initiatives. I just wonder how long it will take for them to really commit to material orders and thereby help to justify Tanfield’s stratospheric share price.

CAPE -I would prefer my money put to good use immediately, rather than line the pockets of the brokers

Cape delivered another strong performance in 2006 and its position in healthy markets appears to be very attractive.

Positive momentum is apparently especially strong overseas and overseas earnings now represent 56.4% of total contribution.

Industrial Disease Claims dropped during the period (£3.4m in FY06 against £4.8m in FY05).

Whilst this level is unusually low (resulting from a smaller number of meseothelioma claims) and some would say that it does provide further evidence that there are sufficient resources within the compensation scheme to finance all future cliams, I believe a risk still remains.

I am left distinctly unimpressed by the recent fund raising to support 'potential' acquisitions. I sense that management and the new broker simply chose a good moment to raise additional funds without any real certainty of the core acquisition ever happening.

What do they need all the cash for if nothing happens for several months or never at all-I would prefer my money put to good use rather than simply line the pockets of the broker.

I can't understand why institutional shareholders aren't more demanding.

If a deal doesn't materialse for several months it's hardly going to be good for the earnings.

Bodisen Biotech- is it quite literally a case of where there‘s muck there’s brass?

I see that shares in Bodisen Biotech the Chinese organic bio-fertiliser group fell c65% today. Dual listed (AIM & American Stock Exchange) Bodisen has had a torrid time over the last few months since being admitted to AIM in February 2006 at a price of 730p, at which point it was valued at £130 million resulting in it being the largest Chinese Company on AIM. The shares were priced at over 1000p at one point so the fall really is a big one!

Apparently Bodisen has been unable to provide the desired information to the American Stock Exchange within the applicable time period. Accordingly, it now expects to soon receive notice from the Amex indicating the latters intention to strike the Company's shares from listing on that exchnage.

The Company's failure to file its Annual Report on Form 10-K with the SEC by the due date could also serve as a basis for the Amex to commence delisting proceedings.

All a bit of a mess!

In the past, I see that many analysts have drawn attention to Bodisen’s awful cash generation-and it does appear to be truly awful! Cash generation and effective working capital management appear to be common problems for rapidly expanding Chinese listed businesses. From what I have seen, if you are looking to invest in small cap businesses with exemplary cash management forget about China, it’s the wild wild east out there.

Given the more onerous regulatory demands of listing in the US Bodisen’s decision to attract investment over there appears total madness. A Chinese venture of Bodisen’s size is simply at the mercy of the bulletin boards.

With regard to its AIM listing surely it’s another example of where the effective monitoring of the company’s AIM broker and nomad is of key importance to UK shareholders. How else can UK retail investors be expected to invest in a Chinese company if the UK broker isn’t keeping a close eye on things. This is where they should be earning their fees.

So what’s in store for Bodisen now and how does the underlying business look?
I look forward to having a look at the Annual Report, when it’s finally available, and to receiving further clarity on all the shareholder shenanigans.

Let’s just hope that where there’s muck there’s brass- quite literally!

Nichols - good timing (for once) from Investor's Champion

Having highlighted the attractions of Nichols (NICL), the VIMTO beverages business, only last week in my Investor’s Champion small cap summary I see that the Board of Nichols announced today that it is currently in preliminary discussions regarding the possibility of an offer for the company. They went on to say that discussions are at an early stage and accordingly, there is no certainty that any offer will be made.

Clearly others have noticed those elements that I referred to in my note, notably the valuable brand, strong balance sheet and lovely cash-or perhaps there is something else!

In a way it will be a shame to see it move from AIM as it represents a nice little AIM stock for IHT planning purposes with an attractive yield.

A winning second half from WIN

I see that WIN the wireless data services provider had a good second half and FY06 results are well ahead of its broker’s expectations, with the company generating normalised profit before tax of £2.3m and EPS of 18p, compared with forecasts of £1.9m PBT and EPS of 14p.

WIN is now debt free, with a healthy £3.8m net cash position. At the Interims the management said it hoped to announce a maiden dividend this year and intends to put a 2p dividend to the AGM this year. Not much of a yield but at least a token and no doubt they have better use for all the cash.

The new CEO has instigated a wide-ranging review which has seen headcount slashed by 20% and a sharp re-focusing of the operations.

The house broker has lifting their FY07 forecasts to a normalised Profit before tax (excluding goodwill amortisation and share-based payments) of £2.75m and EPS of 20p. That leaves the company on a multiple of just under 10x for the year to December ’07.

The bad press surrounding premium rate phone lines obviously doesn’t help although most of WIN’s business in this area is with the BBC which has been implicated in fewer problems and has publicly said it does not intend to suspend its PRS operations as ITV and C5 have done.

Cash and improving outlook notwithstanding it still looks a bit risky for my IHT portfolio.

Network data Holdings - a nice little business, if only one could buy the shares

I see that Network Data Holdings (NDH) quietly announced their preliminary results today.

Turnover increased by 35% to £29.2m and profit before tax rose by 178% to £1.9m. A dividend of 0.35p per share is to be approved at the Annual General Meeting.

Business volumes have increased by 30%, 16 sales staff have been recruited for Hipstar (the Home Information Pack business) and 51 Home Inspector franchises have been sold-I can’t wait to see the official uniform for the Home Inspector! The Group continues to invest significantly in Hipstar ahead of 1st June when Home Information Packs become mandatory.

This looks a nice little business. With 572 Appointed Representative firms NDH has a 20% market share of AR firms and is the largest mortgage network in the UK.

If only one could buy the shares. Today’s positive news was greeted by the trading of a massive 12,200 shares equivalent in value to c£7,000.

I like the following comment from the results:

'We are delighted with the success of the listing on AIM and welcome all thosewho have become shareholders in the Group. We intend to keep shareholders informed of our progress and developments in particular in the HIPs market as HIPs come into force.'
With no new funds raised on float and no sellers from amongst senior management they must only have a handful of outside shareholders!

It's look like we will have to wait for them to make a significant acquisition requiring the raising of new funds thereby attracting new shareholders.

Clean Air Power - disappointing

Clean Air Power (‘CAP’) updated the market today with regard to the trial by Tesco of a Euro 3 Mercedes - Axor truck, which was converted to run on diesel and natural gas and delivered to Tesco in August 2006.

Clean Air Power converts heavy duty diesel engines to run on natural gas and/or diesel. This reduces a vehicle’s fuel costs, but retains all the flexibility and reliability of a diesel, at a lower cost than other alternative fuels. The primary reason for conversion is economic, although the technology also provides reduced emissions. The group also sells gas injection and emission reduction components that it sells to other automotive OEMs.

Apparently the trial of the Dual-Fuel truck has met with all of Tesco's objectives, which include driver acceptability and achieving certain operational performance bench marks. Additionally, the trial unit has achieved a CO2 emission reduction equivalent of around 10 tonnes of CO2 per annum whilst reducing their fuel cost by more than 15%.

The trial vehicle continues to run in the Tesco fleet, however (and this is the significant bit for me) to date, Tesco have not ordered any further Dual-Fuel vehicles and have simply expressed a willingness to support Clean Air Power with their discussions with manufacturers- These discussions relate to looking to secure the incorporation of Dual-Fuel technology on Euro 4 and Euro 5 emissions compliant trucks. Whilst Clean Air Power is in discussions with a number of manufacturers, such discussions are not yet at an advanced stage.

If it all worked so well why didn’t they order more of these vehicles.
I consider this a fairly disappointing announcement for both CAP and Tesco for that matter.

While the announcement played down the state of the OEM discussions, the house broker has confirmed that apparently these are progressing well, albeit not yet near the heads of terms stage needed to be considered ‘ advanced’. Wincanton, DHL, Christian Salvesen and Robert Wiseman Dairies are currently all trialing Genesis on one or more trucks, some of which were outright system purchases.

The house broker has maintained its BUY recommendation (it generally takes a lot for the house broker to downgrade!). Its valuation is based on a seven year discounted cash flow which in my view is probably relatively meaningless for such an early stage business as this. Although I suppose you have to start somewhere.

Screen Technology - how did Wilden get out of the deal

Following on from my previous comments on Screen Technology one wonders how Wilden managed to extricate themselves from an 'agreement' to provide finance, notwithstanding their acquisition.

Clearly there was never a binding commercial agreement to provide finance and the announcement on 27th Sept 2006 only refers to 'letters of intent.'

Wilden apparently started dragging their feet in November when they were already in discussions with Gerresheimer and were not in a position to sign up to anything at this time.

Pixel Interactive Media - bulking up

Pixel Interactive Media a business I commented on back at the beginning of February announced that it had agreed to acquire Chinese online affiliate marketing business Easy Growth (I suppose growth is easy if you are a Chinese business)

The acquisition will apparently give Pixel exposure to the fast growing Chinese online advertising and marketing industry and access to Easy Growth's strong customer base and will be immediately earnings enhancing.

The total consideration will be calculated at up to five times Easy Growth's profit after tax for the year to 31 December 2007. If the numbers re reliable, even for a Chinese business this appears to be reasonable. Furthermore, the initial cash consideration of approximately US$1.9 million is payable in stages during 2007 subject to quarterly performance milestones- I’m not sure what these are.

Anyway, following on from my previous note they are at least starting to bulk up the business a bit.

Southern Bear, ‘Record Trading Since AIM Admission’ – the Bear has turned into a 'Bull'

Southern Bear, a company focused on the UK industrial and engineering sector, yesterday announced that its wholly owned subsidiary, Tarvail Limited, had achieved record sales and profit figures in the two months following its acquisition and the Company's admission to AIM.

We participated in the EIS qualifying issue back in November at 3p per share and the shares are curremtly trading at 4.25p .

Sales in the two month period to 31 January 2007 were over £1 million which is apparently c65% above budget. Profits are also correspondingly higher. The record sales in this period are due to an increased level of business with the Company's key clients. The Company has also successfully implemented a cost reduction programme in order to control overheads and further boost profits.

More acquisitions are likely over the next few months.

Shouldn’t we expect more announcements on these lines following IPO. It just seems that many companies fail to deliver.

Screen Technology - another disappointment

A negative announcement today from Screen Technology regarding its manufacturing partner sent the shares down nearly 25%.

Screen Technology is the designer and manufacturer of high-resolution, large-screen displays designed for high ambient light environments.

Whilst the news was bad surely it doesn’t appear to be 25% bad! On closer inspection the meteoric fall arose as a result of a massive 2,200 shares sold during trading hours, equivalent to £900 in value!

It’s business as usual from Screen who always seem to disappoint just when they are starting to attract believers.

Unfortunately the current problems appear to be nothing to do with Screen but are relevant to its manufacturing partner Wilden who were acquired by Gerresheimer Group in January. Although one could point out that it was Screen’s fault in the fist place for choosing them.

While confirming that it remains committed to and excited by the potential of Screen’s ITrans product, Gerresheimer has withdrawn Wilden’s earlier decision to fund the £1.1m cost of the first high speed production machine. Apparently the Wilden deal was heavily debt financed and Gerresheimer are probably a little stretched at the moment.

In addition the acquisition process (at least they are blaming it on this) has led to a two month delay in the production of mould tools required to fully commission this machine.

The house broker has moved their expectation of production volumes from April to June, with a knock on effect on revenue and profits. It has not changed its expectations for 2008 which given Screen’s history of delays appears somewhat strange and highly optimistic. Still they are the house broker.

Screen is in discussions with a number of lenders to replace the funding previously promised by Wilden and Management report these discussions are progressing well. The house broker’s forecasts are based on the expectation that a deal is signed in April, although it will be on more commercial terms than those offered by Wilden. I just wonder how much more commercial given the newness of the technology and the limited resale potential of the bespoke machines if things don’t work for Screen.

The house broker views the upside potential as ‘enormous and could arrive very quickly after volume production begins in the form of large orders and an early move into profitability’.
However, there appear to be lots of obstacles to overcome and the longer it all takes the greater the risk of others stealing their market. I'm really beginning to wonder if volume production will ever begin.

The group isn’t expected to generate any actual earnings until the financial year ended December 2008 when the house broker estimates now point to top line turnover of £22.8m, pretax profit of £3.1m and earnings per share of 8.2p, resulting in a rating of c5x 2008 estimates. . With net cash of currently c£2m some would argue that based on these 2008 estimates the rating now looks unbelievably cheap; to my mind the current price implies that no one gives them a hope of hitting these estimates. The top line of £22.8m also looks highly optimistic to me at the moment.

More delays will stretch things out and be a drain on the cash. Even if things work out and production is ramped up I can now see them coming back to the market in 2008 so the broker’s forecast 2008 EPS is already looking in jeopardy.

You can probably tell that I’m not at all convinced at the moment, a typical predicament with a speculative AIM micro cap you might say!

Given all the uncertainty I'm beginning to think that even after today's fall in price the current valuation looks stretched.

A classic AIM announcement from Chieftain Group

Chieftain Group the AIM quoted diversified engineering business came out with a classic announcement on Monday.

The Tyneside-based industrial services group was ‘pleased to announce’ that it had acquired Kevin Lloyd Ltd and that the acquisition offers significant synergies with Chieftain's existing operations in the North East of England and further bolsters the Group's commitment to its industrial services customer base on Teesside.

It went on to say that Kevin Lloyd Ltd currently employs five full-time managers and 65 operatives, has two main streams of activity, Steel Fabrication and Engineering Services. The business serves the process industries on Teesside with customers including Corus and Seal Sands Chemicals.

However, no mention was made of to the cost of the deal or for that matter any financial information in respect of Kevin Lloyd Ltd. Somewhat important in my view! As the latter is a Limited company whose accounts are open to everyone to have a look at, I can’t understand why Chieftain didn’t provide a little more information.

With a market cap of c£14m Chieftain has a hard enough job attracting interest and the recent woolly announcement is hardly good for investor relations.

Are we left to assume that they have acquired a basket case for an inflated price?

Pile it high and sell it cheap joins the market

I see that Sports Direct, the pile it high and sell it cheap empire of Mr Ashley floated this week with a market cap of c£2billion.

Having visited Lillywhites for the first time in a several years only last week, I can’t say I’m impressed with things at this jewel in the crown.

In addition to the usual offering of football shirts, sports shoes etc you could have picked up a graphite shafted Dunlop driver (I’m assuming there are some golfers out there!) for £6-that’s less than the cost of two pints of beer from a nearby pub! On this basis I could have picked upa whole set of clubs for under £90 which is pretty amazing. Never mind the quality, this would certainly get a beginner going.

Sports Direct was founded by Mike Ashley in 1982 and has grown to be the UK’s largest sports retailer, both in terms of sales and profitability. In addition to sports shops it owns a number of brands, which it distributes through its own stores and third parties, both in the UK and Internationally.

It now has a total of 465 stores of which 408 are in the UK including Sportsworld, the Original Shoe Company, Giles Sports, Hargreaves, Streetwise, McGurks, Exsports and Lillywhites.

The group owns, either outright or through majority stakes brands such as Antigua, Carlton, Donnay, Dunlop, Kangol, Karrimor, Lillywhites, LA Gear (by licence), Lonsdale, No Fear, Slazenger, Title and Voodoo Dolls. It also licenses its brands to third parties; and, in the last financial year, Dunlop, Lonsdale and Slazenger together contributed over £10m of licensing income. Overall, the wholesale business in the last financial year had sales of £166m, generating operating profits of £18.7m.

Mr Ashley and his team have clearly done a great job growing the business over the last 25 years. I just can’t believe that Lillywhites in the heart of the West End has a long term future as a glorified warehouse. Clearly it isn’t viable to return this once mighty sports emporium to its former glories but surely they can do better than the current offering!

It might be great for the beginner to pick up a set for under £90 but will he or she be inclined to return.

Still what do I know about retailing sports goods!
Good luck to Mike and his team. I hope the market treats them well.

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