The Guide to Investing in Stocks and Shares

Eavesdropper's Dogged Investment Newsletter

By Alan Watson - A Shareworld Contributor

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May 2011 - Issue 9

Contents at a Glance

1. Market Comment & Strategy
2. Share of the Month:Geong International
3. Sniffing Around:DDD Group
4. New Entrants 1:Deltex Medical Group
5. New Entrants 2:KCOM Group
6. Update 1:Chamberlin
7. Update 2:Punch Taverns
8. Straight from the Kennel:Sirius Minerals

Market Comment & Strategy

Investors are beginning to take the prospect of economic downturn seriously. Since last November the FTSE100 has risen from 5875 to just over 6000 on 25 April, but there are now signs that market sentiment has darkened and share prices have been slipping back over the past few days, sparked off by a fall in the price of oil.

Stock selection could prove to be difficult if recession develops. However, the sharp falls in the prices of mining and oil stock give some indication of what to look for. The level of demand for the products of resources companies has a direct relationship with the level of overall economic activity. This is ultimately true of most companies, but basic resources tend to be hit first. This is why the fall in the oil price has created some consternation amongst analysts.

This month we have tipped some smaller companies offering innovative products and services on the basis that they have the ability to grow, even against a poor background. Eckoh is a good example - its speech recognition services save money. Instead of expensive personnel dealing with routine telephone calls, a computer does the job at much lower cost. There are signs that the public are beginning to accept this service as they become more accustomed to using it. Elsewhere, DDD is involved with advanced 3D technology for games, TV and films internationally and Punch Taverns is an interesting, if speculative, situation due to major reorganisation.

Share of the Month

Comment on Geong International

Jersey based Geong International is engaged in the provision of enterprise content management (ECM) software and solutions. It focuses on providing consultancy service and software solutions to large multinational companies and small and medium enterprises.

It operates in two business segments: PortalAge which is its customised software focusing on large enterprises, and software as a service (SaaS) model which includes customer experience, social network computing and application management service. PortalAge is project and service-based, including providing consultancy services. The Company's SmartBox is a part of the PortalAge division. SmartBox is Geong's off-the-shelf software product which addresses management issues for Small and Medium Enterprises and has more than 130,000 licensed end users.

Geong has operations in Beijing, Shanghai and Guangzhou in China and in Canada. Its subsidiaries include Conceptual Approach Ltd., Geong Business Networks Ltd and Gorn Information Technology Ltd.

In the six months to 30/9/10 Geong increased pre-tax profits by 16.6% from £571,000 to £667,000 on turnover down 18% from £6.5m to £4.7m. Gross margins rose from 36% to 50%. Earnings per share rose from 1.26p to 1.31p and it was confirmed that full year results were likely to be in line with market expectations.

The results for the full year which ends 31/3/11 are due to be announced on 1/7/11. Pre-tax profits are forecast to emerge at £2.4m compared with £2.3m previously with earnings per share of rising from 5.2p in 2010 to around 6.0p. This implies that the shares are currently trading on a prospective PER of 6.0. Looking to 2012, pre-tax profits are expected to rise to £3.0m with earnings per share of perhaps 7p - a forward PER of 4.9 at which level the shares look very undervalued. It is also worth mentioning that in 2008 the share price reached a high of 86p. We think that the shares have considerable upside potential - Buy.

Mid Price 40p; Sector: Software and Computer Services; Market Cap: £15.1m; EPIC GNG Next Results: Finals July.

Sniffing Around

Comment on DDD Group

The company has published encouraging results for the year to 31/12/10 which we believe indicates that the share price could be set to rise significantly from current levels.

The company was founded in 1993. Using its own resources it has developed and patented hardware and software for viewing in 3D with or without glasses, Images, TV Programmes, Video and Computer Games. DDD currently has 48 products covering 15 inventions granted in 26 countries. It also licences its applications to consumer electronics manufacturers. These are included in the 3D display products supplied to end users. It also licences its software to end users who own 3D displays. Its core technology is TriDef which provides 3D features allowing 3D broadcasting and conversion of 2D into 3D.

We think it likely that DDD could be set for growth in 2011 and beyond. There are competitors in the market, but DDD's conversion solution is believed to be superior to that of the opposition. The company is well financed - the latest figures indicated that at 31/12/10 it had no borrowings and £2.7m in cash.

Revenues in the year to 31/12/10 were up from £1.2m to £1.3m and there was a pre-tax loss of £0.8m, an improvement of the £1m loss in 2009. The outlook for 2011 is positive, but remains difficult to forecast. However, we think that a move into the black is not impossible. Analysts expect revenues to rise to around £3.5m. The signs are that DDD is set to move forward over the medium term. Buy.

Price 35.8p; Sector Software and Computer Services: Market Cap: £47.8m; EPIC DDD Next Results: Interims - September

New Entrants 1

Deltex Medical Group

The group is involved in the research, development manufacture and sale of oesophageal Doppler haemodynamic monitoring systems. We last mentioned the company as a buy 15½p (PSP Jan10) on the basis that progress was being made in all of its key markets toward establishing its CardioQ - ODM system as a standard of care in the monitoring and management of patients undergoing major surgery. In this the company has made considerable progress and the share price has advanced to the current level of 28¾p.

This achievement has just been acknowledged by the National Institute for Health and Clinical Excellence (NICE) in its final guidance recommending Deltex Medical's CardioQ-ODM system. Importantly, the endorsement of the system has come at a time when the NHS is faced with having to deliver £20bn of efficiency savings over the next four years. The efficiency of CardioQ-ODM system, if generally introduced, could help this process. It would also improve the care given to those patients undergoing major and high risk surgery.

We think it possible that Deltex will move into the black in the current financial year, which ends 31/12/11. Pre-tax profits of perhaps £0.2m could be achieved, rising to around £1m in 2012. There is a clear message that Deltex is on its way and that now is the time to buy the shares.

Price 28p : Healthcare Equipment and Services; Market Cap: £37.4 EPIC DPMG Next Results: Interims - September

New Entrants 2

KCOM Group

Formerly known as Kingston Communications, the group is poised to enter a growth phase now that the restructuring of activities is nearing completion. The problem was that it was trying to compete with considerably larger operators in the IT and Communications sector when it lacked the scale and breadth of facilities to compete effectively. The managed services activities have now been revamped and KCOM is organised to compete effectively on price when bidding for business. While the reshaping is not quite finished, the danger of taking on work beyond the company's ability has substantially diminished.

KCOM group provides a range of integrated IT and communications services to businesses as well as internet and telecommunications to selected consumer markets in the UK. The new structure is likely result in strong profits growth. The consensus is that pre-tax profits for the year to 31/3/11 are likely to emerge at around £35m compared with £32.7m previously, indicating that the shares could be trading on a prospective PER of 9.7, which we think undervalues KCOM's growth prospects. We consider the shares a timely buy.

Price 61½p; Sector: Telecommunications Services; Market Cap: £317.7m; EPIC KCOM Next Results: Finals - June

Update 1

Chamberlin

Chamberlin is involved in the production and sale of iron castings as well as light engineering products. Business is currently improving as demand recovers both in the UK and internationally. Having improved the business the management team is looking to acquire complementary businesses.

In the six months ending 30/6/10 the group returned to the black. Pre-tax profits emerged at £163,000 compared with a loss of £692,000 previously. The figures showed that performance was helped by the programme of efficiency measures completed before the downturn hit in 2009. The Board expects the full year results to be in line with upgraded market forecasts. The positive trading momentum established since the end of 2009 has continued and demand at the Group's three specialist foundries, in Walsall, Leicester and Scunthorpe, has further improved. The Group's financial position remains strong, with confirmed borrowing facilities in place to provide sufficient headroom to support working capital requirements as recovery continues.

We think that pre-tax profits for the year ending 31/3/11 could be set to emerge at around £0.8m compared with a loss of £1.4m in the year ending 31/3/10. Given this earnings per share could be 7.7p, a prospective PER of 13.6 at the current price of 105p. Looking to the year ending 31/3/12, progress should continue and the consensus is that pre-tax profits could be set to rise to £1.5m . A dividend of 1p per share is anticipated. The shares look cheap at the current price - Buy.

Price 100.5p; Sector: Industrial Engineering; Market Cap: £7.5m; EPIC CMH Next Results: Finals - June

Update 2

Punch Taverns

The group is one of the leading pub companies in the UK with a core estate of around 6,500 leased and managed pubs. In the 28 weeks to 5/3/11, there was an improved underlying financial performance resulting from strong growth in Managed Pubs and improved trends in Licensed pubs. The management is now confident of meeting its full year targets.

It was also indicated that there has been good progress on demerger plans. The board intends to separate Managed and Leased businesses on the basis that a demerger will enable the right focus to be given to each business to execute the plans required to maximise value for shareholders and other stakeholders. Punch is now process of an external search for a new Chairman and will make a further announcement in due course. Peter Cawdron, currently Group Chairman, who has indicated his intention to retire this year, will remain in position until a successor is appointed.

It is difficult at this stage to make any profits forecasts. The plans look well considered and it is possible that two profitable companies could be created by the demerger. On balance we think that Punch Tavern's shares could be a good speculation at this point. Consider as a Speculative Buy at around 75p.

Price 75.75p; Sector: Travel & Leisure; Market Cap: £486.7m; EPIC PUB Next Results: Interims - October

EAVESDROPPER
Straight from the Kennel

The other day, while I was having a rest in a quiet corner of the office, I heard the Editor ask one of the analysts why people took an instant dislike to him. The lad thought for a moment, coughed and said: "It saves time." I thought this was a good answer. Moreover, I'm going to save you some time by saying right away that I'm going to talk about Sirius Minerals.

Those of you, including me, who bought the shares at 19p on our tip in January will no doubt recoil in horror at the thought of looking at the shares again, given the fact that they're now standing at 9½p (Bid 9p Offer 10p). If so, you can save time and stop reading now.

Sirius is a globally diversified potash development company. It seems to be doing all the right things and has recently received licences for the Canning Basin project in Western Australia. Elsewhere, while its primary focus is on bringing on stream major potash mining facilities, it is involved in ongoing R and D into the secondary uses of salt and potash beds for energy storage and carbon dioxide sequestration (removal of carbon dioxide to prevent build-up).

Basically, I've decided not to panic and average my holding by buying at around the current price level. There might, in fact, be a case for waiting, but I'm inclined to grab the shares now. I'm serious about Sirius - Buy.

Mid Price 9.5p; Sector: Mining; Market Cap: £100.43m; EPIC SXX Next Results: Finals July.