Smallcap Weekly

Driver – growth potential undisputed

Increasingly diverse in terms of geographic and sector presence, as well as services offered, dispute resolution specialist Driver motored in with record half-year sales and profits.

Steered by energetic CEO Steve Driver, the group grew sales 49 per cent to £11.25 million in the half to March, reflecting strong growth in the Middle East and currency benefits arising from sterling weakness, as well as a strong six months from early 2008 acquisition CMC, which Driver sees as a cracker of a deal, bringing cross-selling potential aplenty. Pre-tax profits powered north by 40 per cent to £1.3 million and the dividend was increased by five per cent to 1p.

Though feeling the impact of reduced commercial construction activity in the UK and Dubai, Driver is more than shrugging off the recession due to its geographic diversity and increasingly broad service offering.

Turning its hand to everything from dispute resolution to project consultancy and expert witness provision, Driver is able to earn money across numerous engineering and construction market sub-sectors, oil and gas, power and civil engineering among them.

Developing its expert witness and litigation support services in the growth markets of London, the UAE and Oman, while making progress in the Far East and Americas, Driver has plenty of growth to go for in highly fragmented markets.

For the year, WH Ireland number cruncher John Cummins has pencilled in growth in profits and earnings to £2.6 million (2008: £2.1 million) and 8p (2008: 6.3p) respectively, placing the shares, currently priced at 73.5p, on a forward multiple of less than ten times. That rating is ungenerous given growth rates – investors yet to climb on board should take the opportunity to do so now.

Resilient May Gurney underrated

Recommended here at 280p a year ago, May Gurney (MAYG) may be trading at a much lower 177p, yet the company has reminded the market about its resilient credentials with a tenth consecutive year of record sales and profits.

Full-year results to March from the AIM-quoted infrastructure support services star were bang in line with forecasts, showing sales improved from £437 million to more than £470 million and eight per cent growth at the pre-tax line to £20.2 million. Drawing confidence from better than expected year-end net cash of £18.6 million, the board upped the annual dividend payout by 11 per cent to 5.125p.

May Gurney’s robustness stems from the fact that more than 95 per cent of sales are derived from long-term contracts, through which it delivers maintenance and enhancement services to defensive public and regulated sectors. Crucially, the company is all about essential ‘front line’ maintenance – it is not exposed to capital project spend, the area at most risk from likely public sector budget cuts.

With a burgeoning order book worth more than £1.25 billion, May Gurney also boasts excellent visibility of sales and continues to see a healthy pipeline of bid possibilities and business wins. Recent contract wins and deal extensions include a canal and river network maintenance deal with British Waterways, worth £80 million over four years, and a new household waste recycling deal with Essex County Council, as well as extensions totalling £150 million for long-standing customers Network Rail and Norfolk County Council.

This year, City analysts see profits pushing higher again to £21.8 million, producing earnings of 21.9p and a 5.4p dividend. On those estimates, the shares are selling for eight times earnings, offer a three per cent yield and remain terrific value. Hold/buy.

Red24 in the black

Security risk management concern Red24 (REDT) turned previous losses into a £500,000 profit before tax in the year to March, after slashing costs and growing its top line.

The Berkshire-based company, which is steered by chief executive and former army parachutist Maldwyn Worsley-Tonks, lifted revenues 20 per cent to £3.3 million and, after taking out ‘unnecessary’ costs, turned losses of £343,000 into pre-tax profits of £537,000. This left the AIM-traded counter with much improved cash balances of £626,000 at the year-end, despite repaying a third of its loan stock in the fourth quarter.

A new service, ‘Travel Tracker’, which enables companies to locate employees travelling abroad, has been ‘well received’, while the group’s training arm enjoyed underlying growth of around five per cent. Of its two main distribution partners, HSBC and insurer AIG, now AIU Holdings, the latter famously suffered a tumultuous year, yet Red24 still managed to grow revenue ‘significantly’, particularly in North America.

Now cash positive and with payment of its loan stock extended to the end of September 2010, the news has been well received by the market, with the shares, tipped here at 3.25p in November, having marched higher to 4.62p, valuing the company at £2.05 million. They should have further to go, so if you bought on our advice, sit tight.

AMS ‘weighting’ on second half

Elsewhere, wound treatment developer Advanced Medical Solutions (AMS), backed strongly here at 32p in March and now 25p, says it is confident of further growth this year. However, the company concedes that growth will be weighted towards the second half.

At the Cheshire-based concern's annual meeting, chairman Dr Geoffrey Vernon assured that recent organic growth is set to continue this year, with regulatory approval for the AIM-traded group's LiquiBand skin 'superglue' in the US expected in the second half.

'The difficult global economic conditions are affecting our partners,' he admitted, 'and we expect to see a significant effect on half-year phasing, with a higher than normal second-half loading this year.'

'However, given the exciting, imminent product launches and market entry opportunities, the board remains confident in the outlook for the 2009 full year,' he concluded.

The company recently revealed that clinical studies had shown its surgical adhesive product InteguSeal 'significantly' reduced infection after cardiac surgery. Further data is expected during the second half and, says AMS, should boost demand for the product in 2010.

Shares in AMS, debt-free and having grown profits almost 55 per cent to £2.9 million in 2008, may be below our tip price, but the company's cost-effective offering has the potential to move the shares much higher over time and outperform many peers. Hold for recovery and more.