HB Markets Daily Smallcap Newsflash including AFC Energy, Animalcare Group, Sky High, XP Power and others

AFC Energy (AFC, 14.75p, £22.13m) announced it has reached the first milestone in its Coal Gasification Agreement with the Alpha fuel cell unit ready to ship. We still see the most logical use of fuel cells in industrial scale applications and so we rate AFC as a SPECULATIVE BUY and continue to recommend the switch from over-rate companies such as CFCL and Ceres Power. Recommendation: SPECULATIVE BUY

Animalcare Group (ANCR, 120p, £23.4m), the leading supplier of veterinary medicines, identification and other products to the animal veterinary and livestock markets, reported prelims to 31 December 2009. Revenues up 15% to £8.9m (H108: £7.8m) largely driven by companion growth from the companion animal division, adjusted PBT up 134% to £0.89m (H108: £0.38m), adjusted EPS up 121% to 3.1p (H108: 1.4p) and net debt reduced to £3.82m.  The market for our key livestock products is challenging due to the implementation of the new regulations for the electronic identification of sheep and downward pressure on identification tag pricing. The division reported a revenue growth, but a loss for period due to weaker margins. The group have withdrawn from low margin activities, which should lead to an improvement in performance in H2.  Overall the group is trading in H2 is in line with FY 2010 market expectations of PBT of £2.5m and EPS of 8.7p. The market forecasts 2011 PBT of £2.87m and EPS of 9.7p. The stock trades on a prospective PER of 13.4x in 2010 and 12.4x in 2011. The group continue to seek acquisitions. The share price has risen 37% since our buy recommendation on 5/10/09 and exceeded our target price of 110p. We believe the stock is now fully valued. We therefore reduce our Buy recommendation to a HOLD.

Craneware (CRW, 390p, £98.7m), the leader in automated revenue integrity solutions for the US healthcare market, reports interims to 31 December 2009. Revenues increased by 25% to $13.3m (H109: $10.6m), PBT up 28% to $3.3m (H109: $2.6m), EPS up 18% to 0.092c (H109: 0.078c) and DPS up 1.6x to 4.7p (H109: 1.8p). Net cash increased to $26.9m. Increasing levels of legislation and growing fiscal pressure should help drive revenue growth going forward. Craneware continue to widen their product portfolio. The group has this morning won a new multi-year contract with North Shore LIJ Health Systems. Craneware will supply 14 hospitals, 17 long-term care facilities, The Feinstein Institute for Medical Research, 3 trauma centres, 5 home health agencies, the Hospice Care Network and dozens of outpatient Centers. The value of the contract has not been disclosed.  The group are trading in line with 2010 PBT of £4.15, EPS of 10.98p and DPS of 5.2p. In 2011, the market forecasts PBT of £5.37m, EPS of 14.0p and DPS of 6p. The stock trades on a prospective PER of 28x and a yield of 1.5% in 2011. We continue to believe the stock is fully valued. We retain our HOLD recommendation.

Hartest Holdings (HTH, 49p, £4.2m) the share price has fallen 21% today, following the termination of a 69p per share cash offer from Delta Controls Ltd. Delta believed it did not have a strong enough backing from shareholders. Peter Gyllenhammar, Hartest’s largest shareholders with 29.95% refused to accept the offer from the outset. We are disappointed by this. Nevertheless, the group has reported an improvement in earnings, which is supported by strong cash flow. The resumption of an interim DPS illustrates the group’s confidence in the business. The business is heavily Q4 weighted, but at this stage the Board is comfortable with the PBT estimate of £0.75m and EPS of 5.8p – a prospective PER of 8.4x. We reduce our recommendation from a buy to a HOLD.

Imaginatik (IMTK, 4.5p, £7.2m), has signed a multi-year software and services contract with The Windsor Quality Food company, a UD based manufacturer and marketer of frozen ethnic foods and appetisers. The value of the contract has not been disclosed. The share price has drifted of late. We believe this provide investors with a Buying opportunity. We upgrade our recommendation from a Hold to a BUY.

Impellam (IPEL, 64p, £28.80m) Final results to December showed revenues down 2.4% to £1,044.2m (£1,010m) with gross profits £170.2m (£189.6m) and underlying pre-tax profits of £15.1m (£6.7m) giving EPS of 44.4p (16.1p). Given the markets this is a strong performance, with the group benefiting from a full contribution from the Corporate Services Group and Carlisle Group acquisitions that were completed in May 2008. The group ended the period with net cash of £6.5m (£8.6m) – slightly depressed by revenues in December that rose 7.7% on the comparable period, putting extra working capital pressure on the group. These results are far ahead of market expectations (at least those published that we can find) and even a flat performance this year would leave the group on a 1/5x PER. Moved to a BUY with a 100p price target.

JSJS Designs (JSJS, 1.875p, £4.06m) The share price has risen 50% today. While we continue to rate the shares as a HOLD, we would not discourage long suffering shareholders from taking advantage of the move as we have not identified any reason for such appreciation.

Printing.com (PDC, 34p, £15.08m) Although the group has seen little recovery and the new year weather led to some office unable even to open, the group expects to report numbers broadly in-line with market expectations for the year to March, helped by the continued use of special offers and discounts. Sitting on 12x PER to March 2010 this is well up with events and is still a HOLD.

Sky High (SKHG, 23.5p, £3.0m) In a trading update the group states it has achieved sales at the same level as last year and are expected to show continued growth, with little associated increase in fixed costs, though it is recruiting in sales and marketing. The group states enquiries are running at record levels with the conversion to sales running at stable percentages. The Halifax Computer Services acquisition has completed its first full year as part of the group and is seeking additional customers. Similarly the Australian operation has won positions in framework agreements with orders up 49% since April 2009. The group is actively seeking acquisition opportunities. Trading at 0.5x market cap: sales and 12x prospective PER the group does offer some upside – so we start at a SPECULATIVE BUY recommendation.

Stadium Group (SDM, 47p, £13.55m) Trading statement is encouraging with the group highlighting strong Q4 trading that will result in numbers some 10-15% ahead of market expectations. Our previous recommendation of Hold (40p on 08/09/09) would still be appropriate, bar for statement that this strong trading has continued into the first quarter of the current year. Forecasts of £2.8m pre-tax profits with 7.5p EPS put the group on a 2010 PER of 6.3x – leaving upside towards 60p. BUY

Vitesse Media (VIS, 10.5p, £2.69m) Update for the year ending January 2010 is in-line with expectations which is for a small profit for the year. We maintain the SPECULATIVE BUY recommendation.

Waterman Group (WTM, 44p, £13.53m) Interims to December 2009 saw revenues of £42.9m (£71.1m) with underlying pre-tax profits of £0.7m (Loss £3.3m) with 1.2p (6.9p) EPS. Net debt fell to £7.7m - leaving net assets per share at 131p (126p at the end of June). The group has declared a reduced interim dividend of 0.9p (1.3p).  With over 70% of revenues historically coming from privately funded developments the market downturn has had a significant effect. The group has had success in winning work in Scotland with a previously announced appointment as a framework supplier and in London with Transport for London. Overseas work now accounts for 34% of revenues and the interims include the completion of major developments such as the Crowne Plaza hotel in Dubai.  This is a good performance given the circumstances, yet we continue our SELL recommendation with a target price of 35p due to the market conditions.

XP Power (XPP, 433p, £83.3m), the developers and manufacturers of critical power control components for the electronics industry, reports prelims to 31 December 2009 exceed consensus. Revenues fell 3% to £67.3m (2008: £69.3m), but a shift in the sales mix to in-house products increased gross margins to 45% (2008: 44.2%), which drove adjusted PBT up 9% to £8.7m (2008: £8.0m) and adjusted EPS of 17% to 40.8p (2008: 34.8p). Tighter working capital has reduced net debt to £18.7m. We are impressed by the group’s performance.  Expansion of the product portfolio combined with lower cost manufacturing capabilities should increase revenues and earnings going forward. The market forecasts 2010 PBT of £9.6m, EPS of 40.4p and DPS of 22p. The stock trades on a reasonable 2010 PER of 10.7x and a sustainable yield of 5.1%. The share price has risen 28% since our BUY recommendation on 16/11/09. The yield attraction and the reasonable rating encourages us to retain our BUY recommendation.

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