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.

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?

Vertu Motors – there is life in motor retail

Shares in AIM quoted Vertu Motors have staged somewhat of a recovery over the last weeks rising over 200% off their lows of 10p. Although this is nowhere near the meteoric rise in share price experienced by the likes of larger peers Pendragon and Inchcape it’s nonetheless encouraging given all the misery surrounding motor retail.

Vertu hasn’t really done much wrong since arriving on the market at the end of 2006 other than choosing a poor time to grow a motor retail group from scratch. However, at least financial markets were accommodating at the time enabling them to raise well in excess of the required funds; it’s just a pity they didn’t hold back a bit longer before going on the acquisition spree!
The group’s trading update on 5th March was actually quite promising, relatively that is! Same-store used car sales rose 12% on the year between September 2008 and January 2009 and the company announced that they would meet market expectations of pre-tax profit c£3m.

Unlike their larger heavily indebted peers Vertu has a relatively modest debt burden which should have fallen further over the second half of their financial year. At the interim stage net assets were £59m or around 64 pence per share. Admittedly this includes a good dollop of Goodwill of £18.6m, however, even after stripping out the Goodwill and taking a hatchet to the property and inventory values you are left with a group seemingly trading at a discount to written down tangible net asset value.

As the shares have tumbled over the last few months the Chief Exec has also been happy to add to his holding most recently acquiring a further 94,000 at 10.5p in December 2008 - he’s done well with that trade at least!

Northbridge Industrial Services – cracking news of contract win

The AIM quoted industrial services and rental company announced that its wholly owned Middle East subsidiary has been awarded a rental contract to supply generators, transformers and associated equipment together with a maintenance agreement to the Jabali Zinc Project in Yemen. The good news never stops with this one!

The contract which is due to start in September 2009 has a minimum service period of 12 months and a minimum value of US $2.9 m. The customer and main contractor is the Jabal Salab Company (Yemen) Ltd whose majority shareholder is AIM quoted Zincox Resources Plc, a business Investor’s Champion issued a commentary on back in July 2008. Zincox was also the beneficiary of good news today having signed feed agreements for the supply of zinc bearing waste dust with the nine largest electric arc furnace operators in.

Having only setup in their new premises in the region in June 2008 this appears a highly encouraging contract win for Northbridge, a business with full year revenues of £15.7m in 2008. The group continues to perform admirably and if the good news continues they should surely start to benefit from increased interest.

Consensus estimates for 2009 are for earnings per share of 22.5p and dividend per share of 4.25p. At the current share price of 148p this leaves the shares trading at 6.5x current year estimates and yielding just under 3%. Following on from today’s announcement estimates are surely likely to be upgraded.

Dart Group - a positive trading update, but corporate governance issues remain!

The pre-close trading update from Dart Group, the somewhat bizarrely structured low cost airline ( and distribution group (Fowler Welch-Coolchain) resulted in a steep rise in the share price. I have always considered this an interesting little company but one which leaves any analyst scratching their head.

Since the announcement of its interim results in December, the Group has continued to trade ahead of market (2 brokers cover!) expectations over the second half of the financial year with cash flow remaining strong and positive cash balances at year end – expectations are for £7m to £10m cash at year end. Full year results are now expected to be ahead of current market expectations (previously 10.2p per share), as a result of both the strong trading performance and one-off treasury gains, driven by the strength of the US dollar.

The driver of this has been which has apparently benefited from a cautious approach to its winter schedule, supplemented by a strong charter programme. Fowler Welch-Coolchain, performed in line. also appears to have benefited from the collapse of airline XL, which led to some additional one-off flying.

All very positive and the shares do look cheap trading as they are at sub 5x current year estimates and sub 1x EV/EBITDA for the current year. However, the real issue with Dart is the dominating influence of the group’s Chief Executive, who also happens to be Executive Chairman, 40% shareholder and unfortunately somewaht reluctant shareholder communicator- why bother if you own 40%!

Given the hullabaloo surrounding corporate governance at the moment isn’t it time for Dart to appoint an independent Chairman and indeed other independent Directors. The board of this substantial business with revenues of over £400m currently consists of 2 Execs and 2 Non Execs!

I also remain unconvinced of the logic behind the 2 unconnected businesses sitting in a small AIM quoted group. Sector classification is bizarrely Industrial Transportation yet approximately 70% of revenue is from Aviation with the closest quoted peer probably Easyjet!

Each operating businesses would clearly be attractive to different acquirers yet any deal is almost solely dependent on one individual – it’s an interesting one!

Advanced Medical Solutions gets hit with some big abortive costs

The risks of acquisitions for small caps! Poor old Advanced Medical Solutions (AIM:AMS) has announced that an acquisition opportunity that had reached an advanced stage of discussions has now terminated.

Unfortunately the costs relating to this aborted transaction are expected to be between £700,000 and £800,000 – wow, it would be nice to know how they reached this level!
The ‘exceptional cost’ my not be so exceptional if they experience another one of these!

It illustrates the risks attached to small caps seeking to grow by acquisition. Thankfully AMS had net funds of over £7. 3m at the year end so they can stomach this kind of blow, others can’t!

Norman Hay shows the way - confirmed yield of over 6% should be of interest

AIM quoted Norman Hay (AIM:HNN) came out with a reassuring set of results for the year ending 31st December 2008 with pre-tax profits up to £2.4m (2007: £2.3m). However, of greater relevance was final dividend of 2p making the total for the full year 4p.

I acknowledge that the dividend is down on the 4.4p from 2007 but with a share price of 62.50p (up 5% on the day) it still represents a confirmed yield of over 6%, comfortably covered.
The results were boosted by foreign exchange gains and the sale of a freehold site.

The Balance Sheet looks in reasonably good shape with net assets of £11.8m and net gearing of only approx 13% (2207:12%). Stripping out intangibles of £2.9m leaves net tangible assets of approx £8.9m and broadly the same as the current market cap of £9.2m.

Cash generation could have been better with higher inventory a notable drain on working capital. The current ratio was 1.95 (2007:1.8x) and quick ratio 1.45x (2207:1.46x)
Business can’t be easy at the moment and the results statement confirms that economic weakness in the group’s main markets has significantly affected trading in the first quarter of this year. However, they expect trading to improve in the second quarter as some of their customers will need to re-stock.

The Non Exec (or at least his wife!) clearly thought the shares represented reasonable value acquiring a further 5,000 at 63p to add to the 264,000 he had already.

Jetion - an awful announcement this morning!

They might produce high performance solar cells but communication is distinctly low performance – a further illustration of the risks associated with investing in the shares of China based small caps!

Having announced in January that they would meet market expectations Jetion has now issued a trading update stating that profit before tax is now expected to be reduced by approximately US$5 million and that profit before tax will be below market expectations - but not below US$20 million!

Despite the seemingly lowly valuation (c3x December 2008 numbers, haven’t a clue now for 2009!) management’s credibility is surely destroyed with today’s statement.
Management confirmed that the audited results for 2008 will show sales and gross profit in line with market expectations but as the audit has not actually been completed could further surprises await!

A sudden change of accounting policy relating to additional provisions against inventory and prepayments to suppliers has been the cause, but surely this was known!

Additional provisions against inventory and prepayments to suppliers at the year end total approximately US$3 million. Of this figure, US$1.8 million relates to prepayments to suppliers for silicon raw materials that, whilst paid for by the Company, have not yet been received post the year end. Does this mean that the suppliers in question have gone out of business?
How many more accounting adjustments can we anticipate?

Even the house broker agrees that management should not have made the January statement without knowing what the audited results would look like.

Taylor Wimpey - with a revised financing package in place how can you go wrong with this one?!

Taylor Wimpey’s debt refinancing has come at a huge additional cost (c£60m) with loads of incentives to seek further equity to pay down debt sooner rather than later – I assume there are some equity holders out there that consider house building, at least in the form of Taylor Wimpey, has a future! Hopefully the latest round of exceptional write offs will have covered things and we are left with a more realistic picture of the current state of the business.

The shares have staged a decent recovery over the past few months rising off lows of 4.4p at the end of November to the current heady level of 43.50p facilitating the possibility of an attractively discounted Rights Issue. One thing is for sure, with these punitive finance costs they won’t be able to stomach that debt package for too long!

Yesterday’s announcement stated the group recorded an unaudited loss from continuing operations before tax and exceptional items of £74.7m and exceptional costs of a whopping £1,895m (one can assume/hope that was sufficiently prudent!), primarily relating to goodwill and other intangible asset impairment and land and work in progress write-downs.

More encouragingly and before the impact of previously committed land spend, the Group created £842m of positive operating cash flow in 2008. Unaudited tangible net assets per share at 31st December 2008 were 158p (c£1.7billion?), with the Group having 106,216 plots in its owned and controlled land bank – doesn’t that equate to a value of only approx £16,000 per plot?

Recent trading has been at the upper end of management’s expectations with net debt at approximately £1.57 billion on Friday 3rd April – so debt nicely in line with net assets!
After today’s little boost the shares are trading at an approximate 73% discount to net asset value and are sure to continue to attract a lot of interest from traders!

PLASTICS CAPITAL benefits from some ‘post Fred’ RBS generosity!

The specialist plastics products group provided an update on an agreement reached with its bankers, Royal Bank of Scotland ("RBS"), in relation to the banking facilities that RBS currently provides to the Company.

Minor amendments to these facilities have been agreed in order to provide the Company with greater covenant and cash headroom over the next 12 months, as bank debt is repaid. Management commented that the costs associated with amending these facilities were not significant.

It must be an opportune moment to renegotiate with RBS. Having given Fred a wacking great pension in recognition for his contribution towards the biggest loss in UK corporate history it’s probably hard for them to justify charging a small UK engineering group an excessive renewal fee - wishful thinking perhaps?

Shares in Plastics have staged quite a recovery off their lows of 29.5p but remain some way off the float price.

Investor's Champion is a registered trade mark of Investors Champion Ltd.  Investor’s Champion Limited is a company registered in England and Wales under number 03577867 whose registered office is at Langwood House, 63-81 High Street, Rickmansworth, Herts WD3 1EQ. Investor’s Champion Ltd is associated with Fundamental Asset Limited who is authorised and regulated by the Financial Services Authority.