Company Watch News

RC merits higher rating

We profiled Hong Kong-based RC Group, steered by modest chairman and chief executive Dr Raymond Chu, last June on the strength of its long-term growth prospects with the shares trading at 33.5p. Investors that followed us in are now sitting on gains of more than 80 per cent with the price having raced to 61.5p, valuing the business at
£86.3 million.

News flow from the company, which specialises in the development, manufacture and distribution of biometric and radio frequency identification (RFID) technologies, has been exceedingly upbeat, with dramatic 2005 sales and profits growth unveiled, first orders won in the Middle East and collaborations announced with Sony and Intel, the latter to jointly develop RFID solutions for the Chinese healthcare sector.

Recently, the company took a 60 per cent stake in two South East Asian IT equipment firms (with options to take the remaining 40 per cent) for a maximum £4.7 million, another major step for the group, which Chu says ‘will allow us to own both facilities for the manufacture of hardware products and retail outlets to sell our biometrics products directly to consumers’.

Corporate Synergy recently raised a bumper £25 million for the fast growing company through a new share placing pitched at 53.5p to boost working capital and the balance sheet. The funding should help RC tap its burgeoning target markets. These are on something of a tear and enabled RC to lift sales 360 per cent to over £15 million last year, with profits powering up 114 per cent to almost £5 million.

Despite its growth rates, profitability and cash generation, RC trades on a miserly forward multiple of 11.4 based on forecast 2006 profits of £7.7 million and earnings of 5.4p from sales of £24 million. The price seems to have been held back by the presence of a dominant – but now significantly diluted – shareholder, as well as perceived lack of City visibility, with the company located away from prying City eyes in Asia. But don’t be perturbed by this. Considering its growth, improved liquidity, recent collaborations and acquisitions, the shares are a strong buy.

Plenty still to see at Avesco 

We backed turnaround media services counter Avesco at 52.5p and, following a decent showing for the shares, urged investors to sell half at 103.5p (in March 2005). After spiking to 120p, the shares then drifted lower to the current 93.5p, for a market price tag of £17.85 million.

On the trading front, the AIM-listed group, which hires out video equipment and LED screens, as well as offering specialist audio and video staging services for live events, has enjoyed a real revival in fortunes under chairman Ian Martin.

Figures for the year to March ’05, a first full year of independence following a de-merger from InvestinMedia, revealed a swing from losses into profits as well as a reduction in net debt from £8.3 million to £7.8 million.

Subsequent half-time figures were less emphatic, with losses widening from £100,000 to £800,000 on £29.1 million turnover, reflecting the start-up costs of new operations in Las Vegas and Cologne. Furthermore, slight margin pressure was applied by aggressive pricing from competitors over a quieter summer, bereft of major international events such as the Olympics and Euro 2004, which had boosted the prior summer period.

However, the shares received a fillip on a recent update for the year to March 2006, with Martin flagging up substantial progress since the half year and cheering with news that full year figures will hit forecasts when they see the light of day in June. New equipment bought with proceeds from a funding last summer has already begun to show good returns, with the creative technology business in London performing particularly strongly and new offices in Cologne and Las Vegas trading strongly. Martin also says the new financial year has started well.

Forecasts in the market suggest a jump in profits from £1.6 million to £2.1 million, on higher sales of £65 million (£58.9 million), translating into 10.1p of earnings and placing the shares on a p/e of only 9.25, dropping to 8.1 on forecast earnings of 11.5p for March ’07. On balance we think the shares, trading at a 78 per cent premium to our tip price, are worth holding.

Hold your nerve at cash-rich DataCash
 
DataCash, the payments service provider chaired by former stockbroker David Bailey, marginally beat forecasts with its 2005 figures and still sports bags of potential.

Last year’s revenues spiked 32 per cent higher to more than £6.1 million on growth in the core ‘card holder not present’ (CHNP) processing business, sending pre-tax profits 66 per cent north to £2.53 million.

CHNP transactions (online and telephone sales) drove the strong financials, with transactions rising more than 50 per cent to 63 million.

Bailey flagged up particularly good progress among retail clients, with the public increasingly eager to shop online, as well as in the gaming market (this area makes up more than half of all transactions). DataCash continues to make moves in the cardholder present (chip & pin) market, but disappointingly has yet to sign any deals of significance.

That said, cash balances of £4.9 million (£3.2 million), equating to 11p a share, should impress investors, as should the rise in the dividend to 0.75p (0.5p) and the recent addition of experienced payment systems entrepreneur Andrew Dark as chief executive.

Analysts suggest 2006 pre-tax profits of £3.6 million, giving earnings of 6.2p, ahead of profits of £4.8 million the following year. Those numbers mean the shares, priced at 142.5p, are double our original recommendation price of 71p and trade on a forward multiple of 23, falling to 19.2 for 2007. We were early backers and believe the shares should not be sold. Hold

Stick with fallen Creston

We remain fans of the mildly crestfallen marketing services star Creston, a venture we backed at 57.5p back in 2002. Although the shares have enjoyed a less than spectacular recent performance – currently priced at 166p versus a  year high of 218.5p – we still advocate exposure to a superior growth company.

Led by the respected Don Elgie, Creston has hit the acquisition trail once more, buying marketing services agency TMW for £38.3 million and market research firm ICM for £37.2 million. To help fund the deals, Creston announced a £15 million placing priced at 165p.

Elgie is yet to disappoint on the acquisitions front and ICM has an impressive client list including Vodafone and BT Mobile, scoring sales of £14 million and pre-tax profits of £2.5 million for the year to June ’05. Meanwhile TMW reported revenues of £23 million and profits of £3.4 million for 2005 and boasts both British Airways and Diageo as clients.

Creston has proved a persistent outperformer of the UK marketing communications sector throughout some tricky times and at the half year back in December revealed a 150 per cent pre-tax profit increase to £3.6 million from a top line £37.4 million. Hold.

Cut losses at Careforce

Last month in Company Watch News, with its shares trading at 151p, we reiterated our support for Careforce, the deal-hungry healthcare specialist we originally backed at 149p.

This was on the strength of impressive interim figures to January, which showed losses of £612,000 turned round to pre-tax profits of £203,000, on revenues up 70 per cent to £14 million (£8.2 million). Under chief executive Mike Rogers, Careforce closed the half with a strong balance sheet – net assets moved from £6.4 million to £7.1 million, of which £1 million was cash.

Sadly, since then, a profit warning has left a severe dent in the share price, sending the market valuation sharply lower. In a surprise trading update, Careforce said profits for the year to July will likely miss market forecasts on the back of an expected £1-£1.5 million revenue shortfall, caused by low levels of new care referrals from many local authority customers. Cash-strapped social services departments have tightened up eligibility criteria for receiving the group's care services, for people with ‘low and moderate’ domiciliary care requirements.

Long-term, the company looks well placed, with strong fundamental growth drivers (such as an aging population) likely to benefit trading and the cost-effectiveness of its outsourcing model proven. However, given the old adage that profit warnings come in threes and our disappointment with the news, we urge readers to sell and reinvest elsewhere.

XL Tech bearing fruit 

April Company Watch suggestion XL Tech, the innovative technology business builder, has seen its share price climb as high as 337.5p (now 325p), with investors’ spirits recently buoyed by an encouraging full year update.

Thus far the group’s reputation has evolved with the success of its first business AgCert, a generator of greenhouse gas emission credits in which XL continues to hold a 27.2 per cent stake. With this company now established (and enjoying a market valuation in excess of £380 million following last summer’s London flotation), attentions have shifted to the two other businesses in the portfolio.

Natural insecticide and pesticide specialist TyraTech, for instance, continues to progress steadily – recently announcing a development agreement with a division of Scotts Miracle Grow and a distribution deal in Mexico. Medical diagnostics hopeful DXTech, meanwhile, has entered into relationships with Proctor & Gamble among others. In both cases XL retains its stated aim of achieving valuations of at least $400 million within four years.

Several other opportunities are being evaluated, with a fourth portfolio business likely to be announced soon.

Given the nature of the business, investors should continue to monitor progress over the coming months and retain their interests for the time being. Hold.