Small-Cap Stock Picks

Picture brightening at Amino

Although internet television (IPTV) provider Amino Technologies endured a disappointing first half, its shares could represent a good buy for recovery, since the second half has started strongly.

Cambridge-based Amino, led by CEO Andrew Burke, is now upbeat and extremely confident that recent new business wins indicate that spending is returning to its recently depressed sector. The first half was blighted by a ‘challenging’ performance in the Americas, with customer destocking causing a 12 per cent drop in revenues to £12.8 million and rising costs causing previous profits to make way for losses of £3.6 million pre-tax.

Although the industry had been concerned that the consumer might give up pay TV during the credit crunch, Amino’s customers, ‘Tier 2’ and ‘Tier 3’ telecoms operators, happily found that people were still choosing paid-for services in spite of worsening economic conditions. ‘The recent barren period is freeing up,’ says Burke. ‘In the second half, we’ve had good wins in North and Latin America and we’ve signed licences in Asia-Pacific.’

Having cut costs and with volumes expected to build significantly, the City forecasts that Amino will break even this year while 5.75p of earnings are predicted for 2010.

Trading on less than eight times next year’s likely earnings, the shares are selling at a discount to peers and, given Amino’s net cash of £8.9 million, offer a decent recovery bet.

Eaga to please

‘Green’ support services group Eaga sounds confident after increasing annual pre-tax profits 33 per cent to £37.7 million.

The fully listed company, which works with government, local authorities, utilities and other commercial concerns to achieve residential energy efficiency and carbon emission reductions, grew turnover 15.6 per cent to £739 million in the year to May. Eaga, whose growth was enhanced by acquisitions, increased earnings 26 per cent to 13.4p a share and proposes a final dividend of 2.4p a share, for a full-year payout 16.6 per cent up at 3.5p a share.

Chairman Charles Berry says the company, which closed its financial year with cash doubled to £31.9 million, is focusing on opportunities in business process outsourcing, domestic heating and residential carbon saving, where he argues it is ‘well positioned’ for further growth. Eaga extended its contract with the government’s Warm Front fuel poverty programme to March 2011, with provision for a further two-year extension, and increased its carbon emission reduction activities with six major utilities, saving an estimated 9.1 million tonnes of CO2 in the process.

Drew Johnson, described by Berry as the ‘key architect’ of Eaga’s commercial strategy, replaced the retiring John Clough as chief executive in April, and in the same month Roger Aylard, ex-head of UK investment banking at Deutsche Bank, became a non-executive director.

Berry says trading in the first quarter of the current financial year has been ‘in line with expectations’ and argues that Eaga’s secured sales order book delivers ‘strong revenue visibility for 2010’. At 132.4p, the shares, tipped here in April at a higher 149p, offer the prospect of further potential growth in the medium term. Sit tight.

K3 – still clinching new business

Technology group K3 Business Technology Group continues to showcase its resilience while clinching healthy levels of new business.

Led by livewire CEO Andy Makeham, K3 provides Microsoft-based supply chain management solutions to the retail and manufacturing sectors. Strongly cash generative, its resilience stems from high levels of predictable annual software licence renewals and maintenance fees. Roughly 75 per cent of annual sales are recurring, though the bulk fall into the stronger second half.

First-half results to June reflected this seasonality as well as wider downturn, with sales easing to £15.9 million (2008: £17.1 million), reflecting lower than predicted services revenue following the late closure of orders in 2008, and profits from operations waning to £1.54 million (2008: £2.32 million).

Overall, however, the second-half outlook is encouraging. Services revenues have recently ramped up and new business wins in the core retail and manufacturing software divisions underpin revenue expectations for the latter half of 2009. Furthermore, in spite of recessionary pressures, K3 signed 24 new contracts worth £4.5 million in the first half alone, up from 20 deals valued at £2.4 million for the same period in 2008, and reports healthy new business pipelines.

Meanwhile, K3 continues to strip out costs, which, in tandem with the growing proportion of own-IP software sold to customers, should boost its second-half financials. Net debt is expected to reduce to £9 million by the year-end, down from £13 million at the end of 2008.

Mindful of the need to increase scale, K3’s management team remains keen on acquisitions. ‘We need to get bigger,’ explains Makeham, describing K3 as currently only ‘partly formed’.

On track to meet December 2009 expectations of a rise in pre-tax profits to £6 million (2008: £5.9 million) and earnings of 18p (2008: 17.9p), K3, backed here at 62.5p in March, now trades at 87p. At current levels, the shares are selling for less than five times forward earnings and scream good value. Buy/Hold.

Victoria scoops £6 million

Fallen Russian resources star Victoria Oil & Gas, followed here since 2006, has raised more than £6 million to accelerate developments at Logbaba in Cameroon.

Chaired by seasoned Australian entrepreneur Kevin Foo, London-based Victoria has raised the money at 4.25p through broker Fox-Davies Capital to bring forward revenue generation from the Logbaba gas project. The AIM-quoted company, whose other chief project is the West Medvezhye gas field in Siberia, currently expects to make its first gas sales from Logbaba to industrial customers in mid-2010.

Russian prospects sent Victoria shares soaring in the middle of this decade, but they later plunged from their boom levels. Having fluctuated between 2.68p and 9.25p over the past year, they now stand at 6p, valuing the company at £48.5 million, where they remain worth holding.