Little talk of cuts
General election overshadowed by European debt crisis

Historically the UK stock market doesn't get too excited about general elections. Research from Goldman Sachs revealed that, on average over the previous ten general elections, the FT All Share index fell 1% in the three months to the run up to the polling date and then dropped a further 3% in the following three months. It is interesting to see what the parties aren't telling the electorate. In the midst of the election campaign, the Bank for International Settlements came out saying that 'Britain needs drastic austerity measures', with its baseline scenario including interest payments on UK public debt doubling from 5% of GDP to 10% within a decade, before going even higher. Any mention of cuts in budgets and an era of austerity seem to have been ditched on the campaign trial, as politicians found early on that any such comments proved unpopular in the opinion polls. But don't worry, whoever gets into power will be greeted by a vast pile of ministerial notes on how to cut budgets department by department and which taxes to increase.

An FT survey of leading investment funds earlier on this month, highlighted the concerns that a hung parliament would delay action to sort out the UK's budget deficit, which would hit sterling and undermine the appetite for gilts. However, such a view that a hung parliament would be bad news for sterling, seems to have been questioned by the recent strength of the pound. The real concern in the long term is the totally unrealistic public spending plan. Certainly, its difficult for sterling not to look good against the euro, as Greek government debt is downgraded to junk status. There are real fears that this contagion might spread as Portugal and Spain have also seen their credit scores reduced. 

Although the result of the general election could generate a knee-jerk reaction, looking to the medium term it seems likely that UK equities will continue tracking the global outlook, rather than focusing on domestic issues, as these stocks seem to have been doing for the past eighteen months. Much attention is paid to the top stocks that make up the FTSE 100 index, which is practically an international index as these days, close on two-thirds of profit comes from overseas. Whatever happens, there should be more confidence in equities, as there is nothing the stock market dislikes more than uncertainty.

More contract wins

There have been good recoveries amongst some AIM stocks over the past twelve months, but one  with a bit of catching up to do is the security specialist Pentagon Protection, which is currently sitting close to its low. The Company supplies and fits window film and glass protection that makes buildings safe in bomb blasts and also helps reduce energy requirements. The company has grown by acquiring SDS Group, which supplies security equipment for the detection of bombs, mines, guns and explosives. When the final results were announced at the end of March, Haytham ElZayn, the Chairman, was able to tell shareholders that since the year-end, Pentagon had been awarded a significant contract by the European Commission worth just over €3m (£2.6m). For a Company that last year turned over £2.95m, such a contract could be transformational. Well, that new business win has proved to be no flash in the pan, as it has been followed up in April by a £252,000 UK Government order for more portable x-ray systems. Also last month,,SDS announced a deal to act as the exclusive UK partner for supplying products from the ballistics and blast protection technologies specialist Unival. This will mean that on top of SDS's existing range of detection equipment, the subsidiary will also be marketing Unival's new handheld explosive detection device, night vision and thermal imaging equipment, along with a portable wideband jamming device. 

The acquisitions begin

Since technology developer Technis International listed on PLUS in September 2009, the team has been working on getting its most advanced technology in the portfolio, called Transcribe, to a stage where it could generate possible income via a licensing deal. Transcribe allows users to send text messages and emails on either a mobile phone keypad or keyboard by voice alone in eleven languages without needing to download any software. Part of the business strategy has always included acquisitive growth and the last time we checked in with Technis, the board were in negotiations with three potential acquisitions, which along with Professional IT (Logistics) Ltd, included Controlled Thought Ltd and Case Communications Ltd. Although these are planned to be largely paper deals, investors had been warned that any or all these acquisitions might fail, if funding for the cash element of the purchase price and working capital was not available. Well, Technis is kicking off its acquisition drive by buying a 51% stake in Professional IT, which is a leading provider of software for the management of private hire and courier contracts, for £331,500 to be paid in shares at 4p each; with the intention of acquiring the remaining 49% in the future. Professional IT’s software is used by the likes of major banks, law firms and media organisations, which each spend between £1m - £5m each year on ground transport contracts. Professional IT has been in operation for more than ten years and last year made an unaudited net pre-tax profit of £165,970 on £1.19m of turnover. Technis' CEO Jack Kaye, sees clear synergies between Professional IT's offering and the Company’s existing portfolio of customer-facing intellectual property and telecoms expertise.

A good show

There seemed to be a very positive mood amongst the 2,000 plus investors that attended The Master Investor Show held at the Business Design Centre in Islington in late April. Amongst the 100 companies exhibiting was Sutherland Health Group*, which seems to realise the importance of getting its message across to the investing public.  A current funding round has been buoyed by interest shown at the show and the board now expects to raise a total of £245,000 at 2.5p with £100,000 from Worship St Investments, £72,000 from the t1ps Smaller Companies EIS Fund and with the board chipping in £15,000. The new money will be used not just to accelerate the sales and marketing effort but to also help fund a new product development programme, which has already begun. The Company has a 5% share of the NHS condom market and is using this position as a springboard to launch more products and to also sell to more NHS regions. Over recent years, the product range has grown to include personal care consumables along with: pre-op razors, ultrasound probe covers and a pregnancy diagnostic kit. The board is to get some funded specialist consultancy advice in researching new market opportunities. This help will be provided by Thames Valley Innovation and Growth, a body which has been set up to support innovative and fast growth businesses in the Thames Valley, with whom Sunderland Health have signed a Relationship Letter.
*Bridge Hall Corporate Finance Ltd is the PLUS markets adviser to the company

Ahead in the cloud

Awareness seems to be growing of cloud computing, which is a technology that uses the internet and central remote servers to maintain data and applications. Last week, research company TechMarketView predicted that the UK will be spending £1.2bn on cloud computing by 2012, which is twice as much as today. This looks positive for Nasstar which provides hosted desktop and hosted exchange cloud computer services that allow subscribers to access their corporate desktop, all their files and applications plus email in the cloud rather than relying on local hard drives. The service frees corporate customers from the pulse racing levels of capital expenditure required by traditional, on the premises, IT. Interim results showed that, in the six months to 31 March 2010, turnover was 10% higher at £1.16m, which allowed EBITDA to climb from £3,000 to £127,000; and overall the pre-tax loss almost halved to £161,000. The improvements stem from a 55% increase in Hosted Desktop subscribers to 1,370, with numbers set to continue to grow as a further 100 subscribers are contracted to join in April/May, plus 400 more subscribers under contract for future delivery over the next eighteen months.  At the interim stage, the board was able to report that it now has 38 distribution partners, which includes The Netherlands and Canada; a strategy which will allow Nasstar to reach a substantially larger potential market. Looking ahead, the directors believe that the release of the Microsoft Windows 7 operating system may act as a catalyst to get more businesses to adopt a cloud service in order to gain the benefits of this operating system without the capital investment.

Intelligent learning

Whether it is training for medical staff or anti-money laundering training for the financial services sector, all this can now be delivered by e-learning.  In fact, these are both examples of work by Intellego Holdings, which uses e-learning in its high quality training solutions to improve productivity and help with compliance and process change. Recently, Intellego announced the sale of the UK distribution rights for the EKP range of Learning Management software back to NetDimensions Limited for £464,000. Of this figure, £276,000 will be paid on completion of this deal, with the remainder being performance-based payments over the next two years. Certainly, these distribution rights have served Intellego well, but even post the disposal; the Company will remain an affiliate of NetDimemsions and will receive commissions based on the ongoing selling of its products.  In the year to 30 March 2010, £451,000 of Intellego's revenue came from the business being sold. Intellego's background was in selling this e-learning authoring software, so this announcement just shows how much the Company has moved on. Today, Intellego offers training solutions, which requires contact with customers at a higher operational level than the Company had previously targeted. In this move, more value is added to its e-learning, as Intellego is now targeting bigger contracts generating larger revenues over a longer term.

Worth a second look

Unfortunately, as people are living longer, some diseases seem to be becoming more prevalent. In the West, Alzheimer's disease is now the third biggest cause of death after cancer and heart disease. In the UK, just 2.5% of the government's medical research budget is spent on dementia research, whereas 25% is spent on cancer research, even though 1-in-3 of the over 65s will die from some form of dementia. ReGen Therapeutics owns the rights to Colostrinin™, which is a product derived from the first milk from ewes, which have been shown to benefit Alzheimer’s disease suffers. Colostrinin™ has been developed into a nutritional supplement to support healthy brain ageing and cognition in humans, with deals already signed with distributors in Cyprus, Turkey, Poland, the Balkans, the UK and last week India. The marketing effort looks to have stepped up a gear, as the team is also working to get the product on the shelves in Turkey, South Korea and China. The Company has not given up on developing the pharmaceutical potential of this product, with pre-clinical studies being carried out at the University of Texas Medical Branch on the constituent peptides of the Colostrinin™ complex. ReGen has probably tested the patience of many investors, as the stock has continued to fall for many years; however the share price now seems to have dropped to such a low level that it might be well worth a second look.

Improvement in margins

The longest established provider of security services in the UK is Legion Group. This stock used to be called SectorGuard, but was recently re-named and re-branded following a series of acquisitions, which has seen this manned security guarding business grow dramatically in scale over the past five years. The real turning point came in March 2009, when the Company acquired Legion Group plc from the Royal British Legion Attendants Company Trust, which was established back in the 1920's as a forces resettlement organisation. In one fell swoop, the business doubled in size and this was confirmed in a trading update for the twelve months to 31 March 2010, which revealed that sales had climbed from £29m to £60m. The gross profit margin rose from 14% to 16% and so the board are not chasing cut price work. Bad debts and historic write-offs, totalling £0.5m, shaved a bit off the operating profit, which was before exceptional items came out at £3.1m, compared to a loss of £0.76m in the previous year; although there will be £2.1m of non-recurring integration costs. Legion Group has a strong order book, with many 3, 5 and 7 year contracts spread across its client base, which includes public sector, critical national infrastructure as well as blue chip corporates. There is little doubt that Legion Group is a strong brand name and the board is seeking to widen its interests in the support services sector and such a move might be well received by the market.

Beefing up its advisory board

The scientists at Sareum Holdings are beavering away to create a drug that will either slow down the progress of a cancer or even stop the disease, using their knowledge of the 3D structure of proteins that actually cause this disease. The Company has recently reported a number of advances in its cancer research programmes. New data has shown that Sareum's Aurora compounds potentially inhibit the proliferation of acute myeloid leukemia (AML), which is essentially a cancer of the blood and bone marrow, as well as being the most common type of acute leukemia.  The team has also demonstrated that the Company's FLT4 compounds are effective in preventing lymph vessel growth in cell models and that efficacy specifically arises from FLT4 kinase de-activation; the importance of this work is that cancer spread often follows once a tumour has developed in the lymph system. The Company is beefing up its advisory board by bringing in Dr Bob Jackson, the ex-Chief Scientific Officer at the cancer drug discovery company Cyclacel Limited. Sareum's CEO, Dr Tim Mitchell, commented: “We are delighted to welcome Dr Jackson to our Scientific Advisory Board. His expertise, particularly in the area of Aurota Kinase will greatly assist our progress towards clinical candidates. We have produced encouraging data with our cancer research programme, which we look forward to presenting to potential pharmaceutical company customers at forthcoming partnering meetings.”

Featured stocks

Intellego Holdings (IHP)
AIM
Share price:  0.45p
12 months high-low: 1.13p – 0.25p
Market value: £0.94m
www.intellego.co.uk

Legion Group (LGNG)
AIM
Share price:  1.75p
12 months high-low:  2.83p – 1.38p
Market value: £11.32m
www.legion-group.co.uk  

Nasstar (NASA)
AIM
Share price: 7p
12 months high-low: 33.5p – 7p
Market value: £2.50m
www.nasstar.com

Pentagon Protection (PPR)
AIM
Share price:  0.23p
12 months high-low: 0.79p – 0.23p
Market value: £1.84m
www.pentagonprotection.com

ReGen Therapeutics (RGT)
AIM
Share price:  3p
12 months high-low: 6.63p – 1.38p
Market value: £1.50m
www.regentherapeutics.com 

Sareum (SAR)
AIM
Share price:  0.32p
12 months high-low: 0.87p – 0.23p
Market value: £3.76m
www.sareum.co.uk 

Sutherland Healthcare Group (SHGP)
PLUS
Share price:  2.75p
12 months high-low: 3p – 2p
Market value: £1.51m
www.sutherlandhealth.com 

Technis International (TECP)
PLUS
Share price:  3p
12 months high-low: 8.50p – 2.75p
Market value: £2.05m
www.technis.co.uk

Written by Dr Michael Green - Independent analyst – DOC Investments Limited – doc@docinvest.co.uk




 

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