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.

City of London PR - Public Relations Company or Investment Company?

Someone recently asked me to take a quick look at City of London PR (not to confused with the other City of London Investment Group-which is an emerging market investment manager). The name suggests that this is a Public Relations business but names can be deceiving.

I quickly discovered that City of London PR is in fact an investment company rather than an operating one with the Public Relations subsidiary a relatively immaterial element of the current business.

Browsing through the results for the year ended 31st March 2007 reveals that the PR subsidiary made a pre-tax profit of £106,132 on sales of £326,193 and is only anticipating ‘some’ improvement in the year ahead.

It appears that management would like to turn City of London PR into a specialist fund management business, having already been in discussions with a team of fund managers.

Realised profits for the year on disposal of a portfolio of investments were £673,000.

At the year end the group balance sheet shows financial assets of £5.1m, cash of £2.5m and a net asset value of £7.5m (net current liabilities were £100,000). The investments comprise a number of higher yielding securities but more importantly a large number of small mining stocks some of which appear to be unquoted.

With the share price currently standing at 80p (it was 96p went I started writing this) the current market capitalisation of £7.658m is a small premium to the net asset value at 31st March. As the group is currently structured as an investment company I would have assumed that the share price should in theory be moving in line with that of the investment portfolio. If anything, given the mix of the investments indicated in the annual report (smaller less liquid shares with a few higher yielding issues) I would have expected the shares to be trading at a discount (rather than premium) to the net asset value.

A quick (very) review of the largest investment holdings listed at 31st March 2007 reveals that the share prices of many of these have fallen post March 2007. For example the largest holding at 31st March 2007 was in shares of Prime People (value £528,000) and the share price of this appears to have fallen c6% since the year end. Other large holdings included shares in Tertiary Minerals which have fallen 17%, HBOS Irr Prefs which have fallen c6% and BAESystems Con Prefs which are down 21%. Shares in Tullow Oil, a £255,000 position at 31st March, are up 43% which helps. However, it’s obviously impossible to tell which holdings they have sold so this little review may not mean very much.

If £2.5m remained in cash this will clearly be further drag on investment performance in the short term.

They are due to receive a final royalty payment of from Iron Mountain in respect of the purchase of one of their investments which will help, however, I assume this will only be c$500,000, in line with previous payments.

The group’s operating costs for managing the currently portfolio of £7.5m in size are obviously very high. In simple terms they could sub-contract the management of the investment portfolio to another specialist fund management firm and it would only cost them (at worst) £150,000 per annum (c2% of assets under management).

They clearly need to do something about things hence the search for an investment management business, although I am a little mystified why they aren’t trying to grow the public relations bit as they have experience in this area and it's not a bad old sector to be in at the moment. I think they’ll have a tough job establishing a hedge fund management business as any decent hedge fund managers surely won't be interested in this type of structure.

Mobile Doctors – could this be the start of an IVA like trend (Remember the IVA providers were big winners in the early days)

I see that Mobile Doctors, a provider of medical reports to support personal injury insurance claims, intends to float on AIM via a reverse into an unlisted cash shell Petsome; no money is being raised on flotation.

Apparently this is yet another industry that is ripe for consolidation (find me one that isn’t) and Mobile Doctors intends to be the consolidator.

Mobile doctors suffered from exposure to the demise of certain “no win, no fee” claims managers between 2002-2004, however, 'industry dynamics' (I love that term) are apparently now stable.

Until recently, the liability for the payment of medico-legal reports was disputed by the insurance industry. However, a 2006 judgement in a case supported by Mobile Doctors (Woollard v Fowler) was favourable for the company and for the medico-legal reporting industry. This judgement determined that the liability for bearing the cost of medical reports required for personal injury claims rests with the insurance companies (poor old insurance companies forking out again!). This judgement underwrites the future of the medico-legal reporting industry but could there be challenges in the future?

Further discussions between the major players in the insurance and medico-legal reporting industries respectively were concluded in May 2007 with an agreed fee structure-agreed fee structures, ring a bell!

There isn’t anything like Mobile Doctors on the market at the moment so peer group comparison is tough. The broker points to a a valuation range of £8.1-12.2m with a mid point valuation of around £10.2m for 10.0x 2008 estimates. Sounds quite a high opening gambit to me but this sector is a mystery to me so what do I know.

Given the early excitement generated by the IVA providers this might be one to watch. I also sense a few fund raisings in the offing if Mobile Doctors gets stuck into the consolidation bit.

Good luck to Mobile Doctors.

Jetion- Investor's Champion note

We have written one of our usual Investor's Champion notes on the Jetion issue. If anyone would like to receive this please let me know by posting a comment with your email address.

Carter and Carter - I thought there might be a short term trade in there

Having only mentioned on Friday that shares in Carter & Carter could look a bit of a steal (group’s market capitalisation had slumped to £21m at the time) I see that some adventurous souls (I'm not one of them I hasten to add) have indeed jumped in pushing the shares up nearly 50% over the lsast couple of days.

I can't wait for the next batch of news on this one-it's anyone's game at the moment!

Plant Offshore Group - an amazing start to life on AIM, which is a bit of a mystery to me!

The meteoric rise in the share price of Plant Offshore Group (POGL) this week is a bit of a mystery to me. You could say it’s sour grapes as I had an opportunity to participate in the IPO but didn’t take it up-it was a valuation thing!

The group floated at 12p at the beginning the week and at the close today they were trading at c19p-quite a return! Volumes weren’t great but it’s the perception.

POGL originally wanted to raise £2.6m at a prospective Price Earnings ratio of approximately 12 times (2007 estimates), giving them an initial post-IPO market capitalisation of about £21.5m. It now stands at £32m so assuming the estimates remain as they were it stands on nearly 18x 2007 estimates and c15x 2008 estimates.

Perhaps I am missing something and further contracts have been nailed in the interim, however, they still have to deliver on these. The contract award is surely only a small part of the jigsaw, just ask Global Marine!

Despite this (and my sour grapes!) I’m still not sure why a Malaysian company, with Malay clients needs to come to AIM to raise a paltry £2.6m. But we do seem to see this time and time again.

The numbers look compelling but the suggested valuation just doesn’t stack up for me as it is based on a huge step change in the business from 2005 to 2006. There are obviously some massive operational risks with regard to this and one should allow for the potential of a hiccup or two, especially with a small group who has never undertaken work of this magnitude.

The balance sheet at 31st December 2006 indicated shareholders funds of £2.77m, net current assets of £2.38m (including cash of £1.78m) and Long Term Liabilities of £580,000-well we aren’t investing for balance sheet strength but it could be worse.

Net cash generated from operations in 2006 was £1.59m (vs Operating profit of c£0.8m) which appears a little too good to be true.

The peer group comparison for this £21m company (at least it was back then) was made against (amongst others) Abbot Group (Mkt cap c£670m), Expro International (Mkt cap c£1bn), Petrofac £1.6bn), John Wood Group (£1.6bn) and arrives at an average 2008 PER of 15.8x.

A more appropriate comparison would surely have been with AIM quoted (and UK based) Sovereign Oilfield Group (AIM:SOGP) Mkt cap c£25m and trading c13x 2008 estimates and UK based Chieftain Group (AIM:CFT) Mkt cap c£17m c13x 2008 estimates.

It’s an exciting opportunity to get in at the start in a business that would appear to have a potentially thrilling future across 2 booming sectors. It has proved that it can deliver on minor projects and has successfully won big contracts on foreign soil in Quatar and Indonesia which is good going.


It’s a Malaysian business that’s a total unknown in the UK-RISK = Discount
Management are not known in the UK – RISK = Discount
There is a projected huge uplift in turnover in 2007-RISK = Discount
The major contract for 2007 is the largest of its kind for the group-RISK = Discount.
One major contract and one client dominates in 2007-RISK = Discount.
There is foreign exchange risk for the UK investor-RISK = Discount.
Peer group valuation comparison isn’t comparable-RISK = Discount
Illiquid-RISK = Discount

Taking a prudent view on 2007 estimates one can cut back the profit c£1m. Given the huge step change I think one also has to look at what they have achieved to date.

So I was wrong-BIG time.

Good luck to Plant Offshore!

GEONG INTERNATIONAL - A nice announcement to finish the week

One of my recent favourites, Geong International, the Beijing based provider of enterprise content management software, announced that it has signed a contract with Shanghai General Motors worth US$880,000.

The contract, which was won in partnership with Oracle China (nice partner!), is to deliver the fourth phase of SGM’s Dealer Management System (DMS) which is based upon GEONG PortalAgeTM infrastructure that GEONG originally designed and installed in 2005.

At first glance this sounds quite good to me. Geong’s full year turnover to March 2007 was US$8,112m and the broker’s estimate for 2008 was US$11.4m. So, unless I am mistaken US$880,000 appears to represent quite positive news!

I hope they can keep things going

Carter and Carter - many clearly think there are some major financing problems on the horizon

Carter and Carter hit the headlines again today after issuing a profit warning
Since the tragic death of the group’s founder Phillip Carter and his son in May the affairs of the company have gone from bad to worse.

Today it announced that it had been unsuccessful in its tenders for Phase 1 of Pathways To Work with the result that the group's adjusted profit before tax for the year ending 31 July 2007 will be in the order of £10.5m. The shares slumped c80%!

With the group’s market capitalisation standing at £21m at the close of play today you could be forgiven for thinking that the shares now look a bit of a steal. However, it’s the debt that’s worrying! At 31 January 2007 the Group's net debt was £85.9m and it has made several more cash acquisitions since then. I’m not sure today’s 80% share price fall is actually accurate (trying picking up a good chunk at this level!), however, a dramatic fall of even half this level surely still implies that many out there think something more sinister is afoot.

The group is also in the process of renegotiating its bank facilities to reflect the revised expectations and the outcome of this will be key.

The exceptionally strong tendering pipeline referred to in the interim results doesn’t look quite so strong now!

Anyway, surely it’s all immaterial relative to the sad event in May

Jetion - it could have got off to a better start but at least I know what it means!

My shares in Jetion could have got off to better start but thanks to one of our clients at last I know what it means!

Apparently the name "Jetion" comes from the company's Chinese name "Jun Xin" (浚鑫 in Chinese) where "Xin" in Chinese is pronounced roughly as "-tion" or "-sion" in English, as in "action" or "vision".

I'm none the wiser as to the share price lethargy but thankfully know a little more about the name-so, overall I consider that I'm in profit, which can't be bad!

Bramdean Alternatives-I said it was a big ask!

I see that the Bramdean Alternatives float managed to get away, however, rather than raising the desired £250m only £131m was raised.

So I was correct when I said that £250m was a big ask in the current market, however, although £131m is substantially less than originally sought given all the IPO activity at the moment I actually think it's quite an achievement.

GLOBAL MARINE ENERGY – another nightmare for shareholders

Global Marine Energy the specialist crane manufacturers, notably for oil installations have announced that ‘in preparation for the audit of the results for the year ended 31 March 2007, it has emerged that it is likely that the results will be materially worse than the Board's expectations’. Management are apparently now asking ‘the group’s advisors to urgently review the results and the group's resultant future funding requirements’.

I’m not exactly sure what more the advisers can do over and above management. Weren’t the latter group supposed to be running things and have an in depth knowledge of the group's funding requirements?

I think it means that the poor old advisers (ok, not that poor!) will have to try and rustle up a few more funds to keep this business going.

Furthermore, it appears that we are now to conclude that up to now the management actually had no idea what the real numbers were?

The shares fell c36% today which actually sounds quite mild given the disappointments of the past. I suspect that many think GME’s claimed order book will encourage a white knight approach.

Fast on the heels of the Torex debacle this looks like another AIM nightmare.
Thankfully I avoided this one. For me, it was another case of being put off by another one of those flashy tie wearers-there’s a theme starting to develop here! Much like an early accountancy school lesson of avoiding those companies run by Chairmen driving Rollers and with fountains in the entrance I think one can also add Chairman wearing flashy ties to the list!

ACM SHIPPING GROUP - great numbers and please forget about the currency issues-this is a shipping broker!

Forget about currency translation issues, the group came out with great numbers. Furthermore, who on earth invests in a ship brokerage business if they are worried about US$ currency issues!

ACM Shipping Group recently reported full year results for the period to 31/3/07. At the earnings per share level they were 10% below the house broker’s expectations, however, the difference is fully explained by the weaker US$. The currency impact is purely translational and nothing to do with the strength in the underlying business with a strong performance from all divisions.

Some have spoken about the group’s need to hedge its currency exposure but will this alter its rating or perception in the City-I think not! After all, surely you shouldn’t contemplate investing in a ship broking business whose whole business is US$ based if you are in the slightest worried about US$ exposure.

The currency issue is transitory. ACM earns revenues in US$ but its costs are in GBP. There is clearly a downside to earnings as US$ weakens but the opposite occurs when it strengthens. The impact is purely translational not transactional so there is no loss of competitiveness.

US currency issues aside ACM hasn’t really put a foot wrong since coming to AIM. Furthermore, it’s a joy to behold the ACM presentation team at work. In one corner you have die hard, passionate, shipping broker CEO John Plumbe, in the other smooth City operator Chairman Peter Sechiari, ably supported in the wings by new boy FD John Hartley who probably welcomes the change after nursing Mayborn through its sale.

John’s, tell as it is, free speaking approach at analyst meetings is certainly a breath of fresh air in the stuffy old City!

WORTHINGTON NICHOLLS-as expected, the old contract slippage problem creeps in!

So all the acquisitions can’t hide the fact that the promised contracts haven’t come through as expected!

First half pre-tax losses were £0.3m, as a result of contract slippage into the second half-could it be a sign of contract disappearance!

The house broker argues that the group stands on a compelling valuation despite being at a substantial premium to sector peers with a 2008 PER of 16.4x vs 14.2x. There might be great growth potential but they need to deliver and not merely though acquisitions. What about those peers that have delivered!

Jetion-I hope the sun shines on this cracking solar play

Well, I’ve made a big commitment to the Jetion IPO.

Jetion (I don’t know what it means) is a China based manufacturer of solar cells & modules and is one of the few green plays to have captured my attention (not necessarily a good thing!).

I’ve really had enough of all these fuel cell offerings so it’s a pleasant to come across something that is making money!

The business is already profitable in its second year of operation which is a great achievement and a good sign of things to come.

The business case is largely an industry argument and it’s an industry which has strong demand characteristics. Jetion’s competitive position is based on superior cell efficiency at 16.5% versus industry standard of 15-16%. It’s a small competitive position but at least it has one!

The industry is dominated by Chinese producers as cost control is so vital in an expensive product (US$7000/KW) so don’t bother looking elsewhere for your core solar exposure.

Industry growth is driven by demand for renewable energy source and government subsidies. The main markets are currently Germany, Japan and California – all of which have a renewable resource policy and heavy subsidies. The current environment looks unlikely to change although one would assume that eventually there will be rapid price deflation. However, this industry is still at an embryonic stage so it’s not something to worry about in the short term. Unlike other trendy renewable sectors (fuel cells come to mind again!) this industry is also profitable and producing actual product.

Our research suggests there are approximately 24 other Chinese solar cell suppliers. There are about 8 listed in Europe or NASDAQ and the closest competitors are Suntech Power (NYSE) and JA Solar (NASDAQ). The sector has generally performed well.

There is obviously an extreme gross margin sensitivity to input prices, however, the doubling of silicon prices in the last 2 years has been entirely passed on to customers as demand is so strong. Silicon prices are expected to come down as new refining capacity is coming on stream.

Market demand is obviously spurred by government subsidies and the removal of these would make the economics questionable, however, in the short term there is no sign this may happen although there may be a crunch in 3-4 years as governments expect unit costs to fall and start reducing subsidies.

The valuation of other quoted solar cell manufacturers implies a PE ratio of 20x in 2008 (or 14-15x for the smaller players) whereas Jetion is being priced on 12.2x 2008 estimates. The valuation therefore looks attractive although a small company, AIM, new boy, discount is clearly applicable.

Management really looks up for it. Dipesh Shah built BP Solar into one of the world biggest players and Roger Gai (CEO) was on the board of Suntech.

Jetion has secured its equipment & silicon supply to enable the expansion to 100MW and beyond.

It would be nice to know a bit more about the founder and I’m still not sure why a business of this size needs to come to AIM, but otherwise it looks a great story lets hope it can deliver on all that promise.

Not that it matters to the share price (at least I hope not) but I would like to know what Jetion means!

Braveheart-patience rather than bravery is probably needed by investors!

I met the management of Braveheart Investment Group recently the technology commercialisation and investment management group which has a decent track record built up since 1997 of delivering attractive returns to investors by making investments in companies which commercialise intellectual property. Braveheart has established relationshiops with several universities and is well placed to benefit from the boffin’s endeavours.

The model looks interesting although with the shares now trading at 154p, having floated in March at 160p, investors seem less interested. I can sympathise with them as it’s hard to get excited about a business that has a host of investments, one (or two) of which might, just might, prove to be a huge successes!

It looks like one of those investments to lock away in a drawer (electronically speaking) and forget about for a few years. So probably one for the patient and not the brave!

Murgitroyd - could history be repeating itself?

I recently attended a meeting with Murgitroyd, the AIM quoted patent attorney. From a fundamental point of view, this company appears to tick all of the right boxes. Profit before tax is growing year-on-year and has doubled over the past two years through a mix of organic growth (that's refreshing) and acquisitions.

There continues to be strong demand for the group's services with European Patent Office filings up 7% in 2006 and trade mark filings up 20%.

Murgitroyd's share price chart (not something I generally worry too much about!)makes interesting reading. In each of the past 4 years, the stock has rallied sharply in the days and weeks leading up to their results announcement (generally in early September) following a previous period of weakness.

Could history be repeating itself and more importantly does it really matter?

Short term chart issues notwithstanding, AIM's only patent attorney looks quite an interesting investment proposition.

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