Small Cap Weekly

Iomart – profits rapidly approaching

AIM-traded managed hosting group Iomart may be approaching profitability sooner than expected, having acquired a fast-growing data centre business.

Iomart, which hived off its online directory to BT for £20 million last summer and had £13.7 million net cash in the coffers at the half-year stage, has since been hunting for ‘quality, high-margin’ acquisitions to build up its new Iomart Hosting division, which ‘hosts’ the websites and servers of larger corporate clients.

To this end, the group has purchased profitable Berkshire-based RapidSwitch, a managed hosting specialist boasting some 1,600 clients ranging from SMEs to large corporates.

RapidSwitch is on the up, having grown revenues 75 per cent to £2.6 million in 2008, and Iomart chief executive Angus MacSween says the deal will be immediately earnings enhancing.

MacSween says the market reaction to the new focus on managed hosting and data centre services has been ‘very encouraging’ and he is convinced that RapidSwitch ‘will accelerate growth opportunities and profits for the group’. By September last year Iomart had broken even and was operating profitably on a monthly basis.

House broker KBC Peel Hunt has upgraded its forecasts for March 2010, calculating that the new addition will help drag the group into profitability by adding £1.6 million of earnings before interest, tax, depreciation and amortisation (EBITDA), for group earnings of 0.3p per share.

Though shares in Iomart, at 36.5p, trade on a very high prospective price-to-earnings ratio, the company is cash rich and has strong growth potential. Buy and lock away.

Symphony – still an appealing snack

Tipped here at 3p in April, shares in Symphony Environmental Technologies have risen to 5.88p on sweet-sounding noises from the AIM-traded minnow, valued at £6.83 million.

In its latest missive to the market, Hertfordshire-based Symphony said it has launched a pioneering snack food packaging film in alliance with Latin American bakery giant Bimbo Mexico.

The company claims its d2w product, an additive blended into the manufacture of plastics to enable them to biodegrade, is the world’s first proprietary degradable metalised film for snack foods. Symphony says d2w is to be used by Bimbo’s Barcel subsidiary for its premium range of snack foods, including Takis and other brands, such as crisps and sweets.

Bimbo has operations in Brazil, Argentina and most other Latin American countries, as well as the USA, China and the Czech Republic. The agreement could provide another shot in the arm for Symphony, which cut last year’s losses from £1.95 million to £400,000 and, suggest analysts, could make £500,000 this year and £1.4 million pre-tax in 2010.

Floated at 30p eight years ago, Symphony had several problems and its shares had plunged to 2p by last December. However, since our recent recommendation here, they have bounced again and, though clearly speculative and not without risk, could make further progress. Therefore, bolder souls might consider adding to existing holdings.

Clean Air Power raises £2.4 million

Dual fuel technology specialist Clean Air Power (CAP) has raised £2.38 million after boosting revenues and cutting losses.

The AIM-quoted company, which reduced losses 19 per cent to £2.34 million last year on revenues up 38 per cent to £6.5 million, says the placing money, raised at 21.85p a share, will go towards product development, working capital and cooperation with other manufacturers. Under the terms of a financing package agreed in March, Endeavour Capital Management has backed the placing and will emerge with 35.5 per cent of High Wycombe-based CAP and warrants covering another 19.2 per cent.

So far this year, CAP, whose ‘Dual Fuel’ technology enables heavy-duty diesel engines to run on a combination of diesel and natural gas, has signed a letter of intent with Volvo to incorporate Dual Fuel in the Swedish motor group’s lorry engines, sold five ‘Genesis’ Dual Fuel conversions to Sainsbury and won several other orders.

Floated at £1 three years ago, CAP shares had collapsed to 11.5p by last December, but have since moved significantly higher to 27p since their mention here at 21.5p in January and should have further to go. Sit tight.

Dignity – dependable and delivering

Dignity, the UK’s only quoted funeral services provider, recommended here at 742.5p last summer, continues to deliver dependable growth.

In an update covering the 13 weeks to 27 March, Dignity flagged up an excellent start to 2009, during which turnover grew by almost 13 per cent to £53 million and operating profits rose by more than 15 per cent to £20.4 million.

Moreover, boss Mike McCollum reassured investors with news that trading for the full year remains on track, with ‘all three’ businesses – funeral services (the core business representing the bulk of revenues), crematoria and pre-arranged funeral plans – continuing to perform well.

Dignity, whose main source of debt finance remains publicly traded bonds, continues to expand astutely. In April, the company acquired the operating rights to a further five crematoria (the freehold or long leasehold interests were bagged last year), taking its total number of crematoria sites to 30.

Back in March, Dignity cheered followers with robust financials for 2008, which demonstrated its downturn-defying credentials (funeral services is a defensive market, since the death rate is stable and, sadly, dependable).

On ten per cent growth at the top line to £175.8 million, underlying pre-tax profits rose by 14 per cent to £34.3 million. With an improved £62 million of cash generated from operations, shareholders were treated to a ten per cent hike in the total payout to 11p.

Though Dignity shares have fallen back from our recommendation price to 596.5p, they have recently reclaimed some lost ground and remain good long-term value. Hold/buy.

Keep your H&T on

Expansive pawnbroker H&T issued a positive update in advance of its annual general meeting this week, saying it had ‘traded significantly ahead of the board’s expectations’ so far this year.

Since being backed here in August at 191p, the company’s shares fell as far as 147p in November, but have since recovered to 203p.
 
With the price of gold continuing to dazzle, retail sales of jewellery, as well as auctions, scrap and gold purchases, have all been boosted. Unlike its listed peer, Albemarle & Bond, H&T has not hedged against the gold price and will therefore continue to benefit from the metal’s strong performance. Management also mentioned that its store expansion programme is continuing successfully.  

With H&T, which boasts defensive qualities, trading at a discount to listed peers and expansion continuing on track, its shares remain a firm hold.