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.

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!

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