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!


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