The Guide to Investing in Stocks and Shares

Eavesdropper's Dogged Investment Newsletter

By Alan Watson - A Shareworld Contributor

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June 2011 - Issue 10

Contents at a Glance

1. Market Comment & Strategy
2. Share of the Month:Anite
3. Share of the Moment:BATM Advanced Communications
4. Sniffing Around 1:Tristel
5. Sniffing Around 2:Compass Group
6. New Entrants 1:Restore
7. New Entrants 2:Lookers
8. Straight from the Kennel:Cluff Gold

Market Comment & Strategy

After several months of optimism, equity markets have fallen sharply as doubts have expressed over the recovery scenario which has been the basis of the rise in share prices. Problems in the Banking sector saw Lloyd's Bank's share price fall to a two and a half year low of 47p. The Chief Executive added substantially to the gloom by warning that the bank's problems were “more intense” than expected. This came on top of very real worries that Greece could default on its debts. The only bright spot was news that in Portugal the socialist government has been voted out and that the new Prime Minister had stated his intention to implement austerity reforms.

These problems are likely to be around for some months and the uncertainty generated is likely to subdue stock markets. Some optimism remains that later in the year the economic recovery scenario will return. Meanwhile, investors should be cautious in their share selections. Despite the doom and gloom there is still value out there.

Share of the Month

Comment on Anite

The company, the global leader in wireless device testing - it tests new technology for mobile makers - is benefiting from the increased in use of mobile phones. The Anite Conformance Toolset – is the first to be approved by the Global Certification Forum (GCF) for the certification of devices intended for deployment on LTE Bands 01, Japan, & 07, Europe. It is a provider of IT solutions, software, system integration and managed services.

Anite also provides Travel Firms with systems and applications which enable them to offer on-line booking services. On 27th April Anite signed a multi-year contract with TUI Travel to implement Anite's @comRes reservation system in the Tui UK and Ireland division. Anite's CEO, Chris Humphries used the occasion to say that he was increasingly confident that Anite would exceed market expectations.

Chris Humphries joined Anite in January 2009 when the share price stood at around 28p, having fallen from the July 2007 high of 85p. He has strengthened the management as well as investing heavily in research. He also closed down some of the peripheral activities. Helped by their rationalisation measures and the rise in demand for mobile phones, Anite is emerging as a winner.

The Interim Management Statement, published mid-February, was encouraging. It was revealed that trading continues to increase with operating profits ahead of the same period of 2010, thanks to growth on both Wireless and Travel, in particular Anite's handset business has maintained its clear lead for certified protocol test cases available to customers. Finally, it was confirmed the Anite's financial was "robust".

Analysts' consensus is that pre-tax profits for the year ending 30/4/11 could be set to emerge at around £14m, compared with £1.4m in the year ending 30/4/10. This suggests that the shares are trading on a prospective PER of 22. Good results are expected for the year to 31/4/12 and beyond - in other words, this could be a turning point. Strong Buy.

Mid Price 79p; Sector: Software and Computer Services; Market Cap: £210.3m; EPIC AIE Next Results: Finals July Full Quote

Share of the Moment

Comment on BATM Advanced Communications

Started in the 1970s, the company became famous in the dotcom boom when its share price hit the stratosphere, at one point capitalising BATM at over £1bn. The market capitalisation of BATM currently stands at the more modest level of £103.5m.

BATM is a growth orientated Israeli company formed in 1992 and first quoted on the London Stock Exchange in 1999. BATM works in 40 countries and is involved in the design and manufacture of innovative high performance data communications equipment. This is an exciting growth area, given that explosive growth in internet traffic is expected over the medium term and that mobile phone companies increasingly need to transmit data faster and more securely. These factors could be set to drive BATM's profits to much higher levels.

Phone operators are currently finding it difficult to keep up with increasing demand from, and the greater geographical spread, of users, particularly large international companies which demand ever faster and reliable service.

The Interim Management Statement, published on 4/5/11, was upbeat. The sales mix was 66% from Telecoms and 34% from the Medical Division, which continues to make progress, particularly with the processing of medical waste. This waste is hazardous so hospitals normally dispose of it by transporting it before incineration. But BATM has devised an environmentally-friendly way to make it safe. It shreds and sterilises it at a fraction of the price, with no toxic residue.

The market consensus is that pre-tax profits for the current year ending 31/12/11 could be set to emerge at £6.5, compared with £0.7m in 2010, with earnings per share expected to rise from 0.27p to 1.41p. This puts the shares on a prospective PER of 18.3. In 2012 analysts anticipate further progress to perhaps £8.3m pre-tax a forward PER of 14.3. Profits growth is expected to continue beyond.

Price 24.75p; Sector: Technology Hardware and Equipment; Market Cap: £99.75m; EPIC BVC Next Results: Interims August Full Quote

Sniffing Around 1

Tristel

At the beginning of April, Tristel, which designs, manufactures and sells infection controls, hygiene and water treatment products, saw its share price at a five month low of 49p following the publication of its results for the six months ending 31/12/10. These revealed pre-tax profits down 34% from £565,000 to £433,000 as a result of a decline in revenues from £6m to £4m although margins improved from 63.1% to 65.5%. An interim dividend of 0.435p was declared, up from 0.425p previously. Earnings per share fell from 1.52p to 0.88p and cash balances increased from £843,000 to £1.2m. The Chairman said that turnover growth was set to accelerate in the second half.

On reporting the results for the year ending 30/6/10 last October, the Chairman said that the company intended to invest £950,000 in creating a sterile manufacturing service with the intention of entering the European market for selling products and services to drug makers. Pharmaceutical companies require sterile environments for the manufacturing and packaging of their medicines i.e. "clean rooms". This extends to the manufacture of disinfectants, which also must take place in a sterile environment, hence Tristel's investment plans to create its own Clean Room. We think that concentration on the plan to enter this market may explain why first half 2010/2011 profits were down.

The company has just announced that its patented chlorine dioxide wipes solution has received further endorsement by both the UK and Italian health services. They praised the effectiveness of Tristel's wipes in treating both rigid and flexible instruments. Tristel is currently seeking to increase its global spread by registering its Wipes system in Australia, China and Hong Kong. Clearance is expected soon for use of the system in the German hospital sector.

The market consensus is that Tristel's pre-tax profits for the current full year ending 30/6/11 could be set to rise from £1.724m to £2.1m with earnings per share of 4.5p compared with 3.84p previously. It is worth mentioning that there was considerable institutional buying of the shares in the first half. In 2012 strongly rising profits are expected. We have pencilled in pre-tax profits of £3.7m which implies that the shares could currently be trading on a forward PER of 6.3, which looks very cheap. We regard Tristel as a gem of a company, well financed, well managed and heading for growth. Price 46p Strong Buy.

Sniffing Around 2

Comment on Compass Group

Compass Group is the market leader in providing contract catering and support services to clients in a wide range of sectors and markets. Operating in 55 countries it generates annual turnover of over £14.5bn of which £1.8bn is generated in the UK and has over 50,000 employees. Compass Group is a dynamic and evolving business offering significant opportunities to food and non-food suppliers.

In the 6 months ending 31/3/11 the group produced pre-tax profits of £528m compared with £459m, an increase of 15%, which reflected a good underlying performance and the impact of recent acquisitions. The Chairman pointed out that infill acquisition was now making an important contribution to revenues. Some £300m has been committed for mergers and acquisitions this year, including significant expansion of the business in emerging markets, India and, most recently, Turkey. This expansion has been supported from strong cash flow.

The group’s strategy remains to focus on foodservices and build on the fast growth opportunities in the support services business. It has built up business in all of the key markets sectors. As a result Compass is now moving into a period of sustained quality growth. The market is anticipating a good year to 31/3/11 with analysts forecasting pre-tax profits of around which implies a prospective PER of 15 and yield of 1.9%.

The consensus is that 2012 could prove to be even better with pre-tax profits rising to perhaps £1.2bn, ia forward PER of around 13.5 and a yield of 3.6% if,as expected, the dividend is increased to 21p. Given this the shares are beginning to look cheap. Time to buy.

Price 580p; Sector Travel and Leisure: Market Cap: £11,149.3m; EPIC CPG Next Results: Interims - September Full Quote

New Entrants 1

Comment on Restore

Restore is a support services company mainly focused on developing and expanding services to offices. It was floated on the Alternative Investment market in November 2004 in the process changing its name from Mavinwood plc to Restore plc. The company is involved in document storage with customers predominantly in London and Southern England. It has sites in Kent, Surrey and Cornwall and has a 70-acre underground, high-security facility in Wiltshire. The business has a stable, growing earnings stream. The business was recently augmented by the acquisitions of Datacare in Oxfordshire in September 2010, and Formsafe in Sussex in December 2010. It also operates Sargents which is a leading office relocation and logistics business based in Belvedere, Kent.

Restore specialises in managing commercial relocation and offers associated services including records management, furniture hire and storage. Its customer base is similar to that of Restore. Peter Cox, also part of the group, is the leading UK specialist in damp-proofing and timber treatment. Based in Manchester, with 12 locations across the UK. It has an excellent reputation with domestic, commercial and public sector customers over the last 50 years. Pre-tax profites for the year to 31/12/11are forecast to recover from £0.7m to £4.3m, a prospective PER of 9.8. Further progress is expected in 2012 with profits rising to perhaps £5.2m, a forward PER of 8.2 and dividend yield of 3.5%. We met with the management on 2/6/11. Buy.

Price 65p; Sector: Support Services; Market Cap: £30.7m; EPIC RST Next Results Interims August AIM Quoted (Restore is quoted on the higher risk Alternative Market. See Important Notes on last page )

New Entrants 2

Comment on Lookers

Lookers is involved in the sale, hire and maintenance of motor vehicles and motorcycles. Although the motor sector may be facing a difficult time when Government cuts begin to hurt Lookers' shares have been active on rumours of a bid. The lack of an actual bid prompted the management to approach the Takeover Panel to issue a "put-up or shut-up" order. The potential bidders have until June 6th to make a move. Lookers AGM is scheduled for 25 May.

Meanwhile, it is worth mentioning Lookers' results for 2010. Pre-tax profits rose from £11.5m to £31.1m, although earnings per share were 5.9p compared with 7.42p in 2009. The dividend was partially restored with a payment of 0.6p.

The market is forecasting for 2011 pre-tax profits of £35.5m with earnings of 6.7p, a useful rise. An annual dividend of 2p is expected. You can use these figures to work out whether the shares are cheap or dear or, indeed, the possible takeover price if there are possible bidders.

The forecasts suggest that the shares could be trading currently on a prospective PER of 9.7 which does not look demanding, especially since a further profits advance, to £38m, is forecast for 2012. A bid for Lookers at, say, 80p would take the shares out on a PER of 11.9 on the 2011 forecast and 10.7 on forecasts for 2012. 80p looks a good level to begin talks.

Of course, nothing might happen. In that case, holders would be aware that the shares are undervalued and be happy to continue to hold on. They might even decide to increase their holdings. Either way the shares look good value. Consider as a Strong Buy..

Price 75p; Sector: General Retailers; Market Cap: £248.4m; EPIC LOOK Next Results Interims August Full Quote

EAVESDROPPER
Straight from the Kennel

Cluff Gold

Despite strong rises in the gold price over the past three months Cluff's share price has retreated from 128p to current levels.

As the Ivory Coast has had relative peace for 9 years, the real hope is that there could be some resistance to a return to the old days of internal strife. Indeed, some signs of returning stability have been reported which, if true, could suggest that the situation might be resolved sooner rather than later.

Outside the Ivory Coast, Cluff's management is optimistic that its Baomahun project, which it is developing in Sierra Leone, could produce 157,000 ounces of gold per annum when in production. Cluff's annual total output is currently around 70,000 ounces annually. The Group also owns the Kalsaka mine and other prospects in Burkana Faso which is adjacent to Mali and Cote d'Ivoire. It can be seen that Cluff stands to gain substantially if peace is restored.

We think that this situation looks a good speculation. The fall in the share price amounts to around 30% which suggests that there has not been a complete sellout and that perhaps the situation may not be as bad as it appears. This is not for the poor or the faint hearted. Speculative Buy.

Price 90.5p; Sector: Mining; Market Cap: £119.3m; EPIC CLF Next Results Interims August Full Quote