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Photo Me International Blog – FY 2012

Posted on January 22, 2013 by Share Research

This is my Photo-Me international blog. Photo-Me provide a number of photographic products. Their main product is the photobooth, which provide people with passport sized photos. They also have Digital Printing Kiosks for the printing of digital photos, Mini Labs, Photobook machines, Coin Operated copiers and business card machines, and coin operated Amusement machines .

The operations division includes the operation of unattended vending equipment such as the photobooths, digital photo kiosks, amusement machines and business service equipment. The sales and servicing division comprises the development and manufacture, sale and after sale servicing of the vending equipment.

Photo-Me have now released their full year results, I will start with the income statement.

Income from the Operations division has been fairly flat, up just £1.2M to £178.1M, where increased Asian revenues counteract lower revenues from the UK and Europe businesses, but income from the Sales and Servicing division has collapsed, down £13.2M to £29.8M. Thankfully, expenses have also fallen, including nearly £10M less spent on inventories and a slight fall in property lease rents counteracted by the R&D expenditure nearly doubling. We also see a £722K fall in income from investment properties to leave the operating profit £1.6M higher at £20M. The group received operating income from the investment property of about £1M. These rights have since been sold so this will be a non-recurring income stream. That small amount of profit on the sale of group undertakings occurred due to the recycling of accumulated exchange differences through the income statement.

The group benefited from increased financial earnings, as their cash pile and investments gains some interest but a higher tax charge means that the profit for the year is only £800K higher at £14.5M.

The total asset base of the group is quite a lot lower, £18.4M down at £159.7M. Almost everything has fallen in value, some of the largest falls are in Inventories, the value of the machine portolio, trade receivables (actually less than £10M, £2.7M down), £1.7M of which are overdue which seems like quite a high percentage, and a reduction in the cash level of £1.6M. This does seem a bit concerning, but I would expect the trade receivables to be low given the nature of the vending machines that the group is involved in. Those other intangible assets relate to the payments made for the right to occupy a space to site vending machines. The held to maturity financial assets are bank deposits where cash is held by the bank as security against contingent liabilities, the increase is due to agreed interest on the sale of the rental income of the Grenoble property.

Thankfully, liabilities have also fallen. They were a massive £26.5M lower at £62.8M. The largest decrease is in the instalments due on bank loans which were £11.8M lower due to the group using its positive cash flow to pay back debt – this should be reduced to zero within a year or so. We also saw a £4.7M reduction in trade payables and other payables were also down considerably. Employee related claims currently stand at £1.4M, and these have increased. They relate to claims made by former overseas employees of the group and should be met in the coming financial year. It is unclear as to the exact nature of the claims.

All the above leaves the net tangible assets nearly £10M higher at just under £78M, quite a healthy amount considering the lack of debt.

Moving on to the cash flow

The cash obtained from the profit was a disappointing £5.7M lower, at £42M. Changes in payable/receivable management had little affect and the cash generated from operations was £42.4M. This was actually £16M less than last year due to a reduction in trade payables and the lack of the cash from the sale of the rental income which occurred in 2011. The tax bill this year was also quite a bit higher, and £3M more was paid out in tax. This meant that the net cash from operations was £36.5M, down by £18.9M.

£15.9M was spent on purchase of property, plant and equipment, which seems like a lot, but it was over £1M less than last year. The other big cash expenses were the repayment of borrowings (£11.1M) and dividends (£7.2M, an increase of £2.7M). All the above meant that the cash flow was £267K, compared to £15.1M last year. With the differences in exchange rates, the group actually lost £1.9M in cash.

When compared to last year, this performance is actually a little disappointing. However, it should be pointed out that in paying back over £11M of loans, the group still managed a small cash inflow so when this expense is taken out, that cash pile should start growing again.

The group still seem to be struggling for profitability in Sales & servicing, so further restructuring has been deemed necessary. Already, costs have been reduced by reducing stock and staff and the headcount has already been reduced by 137. Photobooth sales have been going according to plan but some other product sales have been adversely affected by the state of the economy in the group’s geographic markets.

Geographically speaking, all regions are profitable and the performance in France has been particularly good. Trading has also been good in Germany, Switzerland and Japan, where business has improved after the earthquake last year. Revenues in the UK were down due to the loss of part of the business supplying driving licence photos and a difficult economic climate. The UK operations have now been bought under control of the CEO of European activities. Progress in China has been slower than expected but the group now has operating licenses in Shanghai, Beijing and Guangzhou and this is considered a long term prospect.

The fact that photo booths are increasing is good as they are a mature, cash generative business and make up the back bone of the profits that Photo Me make. The Digital printing kiosks seem to be doing well in France and Switzerland, which is also a positive sign. The amusement rides are suffering against a poor economic outlook but the latest range of simulation type products seem to be making progress. As already mentioned, the Sale and Servicing division is having some trouble as the revenues are driven by sales to third party retailers of photographic equipment, who seem to be doing badly in the current climate and resist making big orders.

Most of the profits for the group are generated outside the UK so the group could be adversely affected by a change in exchange rates and a 10% change in exchange rates would affect profit by £974K. Most of the cash is held in Euros (21.8M) but there are also reserves held in Sterling and Yen. The group’s loan is predominantly in Euros so there is a slight natural hedge which will unravel as the group pays back more debt. Going forward, the group is somewhat susceptible to a reduction in retail site owner base that provide the base for sites for the group’s vending equipment and they could lose operations revenue streams and market for equipment in the sales and servicing activity could be reduced should any retailer go out of business. There is also a risk that governments could introduce centralised image capture for ID photos that Photo Me currently provide. Many of these risks are out of their control so it would help to me mindful of them.

The company hired a few new directors and they are now in compliance of UK Governance code with regards to independent directors (they were not last year when I reported on the results). Also, during the year, a long standing director sadly passed away. At that point he owned a lot of shares, and they are now held under the Dan David foundation, the long term intention of which I am not sure about.

Overall then, this was a fairly good set of results but not amazing. Revenues are down and the Sales and Services business seems to be faring rather badly but overall profit is up just under £1M to £14.5M. Assets are down, including trade receivables but net tangible assets are up due to the lower liabilities (mainly because the group paid back so much of the bank loan). Although not as good as last year, the cash flow is still in pretty good shape. Despite paying back £11.1M of the bank loan and an increase in dividends, there was still a small positive cash flow recorded. The photo booths are still what is keeping the group in profit and successes in other products seem to be somewhat lacking but a lot in being spent on R&D so hopefully something else will start to shine soon.

There is a lot of net cash here (nearly £50M) so at some point something will have to be done with that (maybe in the form of a shareholder reward) but a recent rally in the share price has given a P/E ratio of 17.2 so they are no longer cheap. However, with a solid net cash position and a dividend yield of 3.7% on the current share price, there are worse places to be invested. Hold

Matchtech – FY 2012

Posted on January 2, 2013 by Share Research

Matchtech have released their results for the year ending 2012. I will start with the income statement.

Over the last year we can see that revenues have been very healthy, up nearly £70M to £371.4M. Revenue for IT recruitment and has been particularly pleasing when compared to last year. The only segment to suffer a fall in revenues was Elemense, which is generally used to add value for Matctech’s clients. We also see, however, that cost of sales are up by £60M which gives a gross profit of £36.1M, up a respectable £6.4M on 2011. Not all segments were profitable, however. The German Office, Elemense and the Professional Services arms are all still not making profit.

Admin costs are also up, including leases and legal & professional fees for something called the Value Creation plan which is designed to change the reporting structure of the group (more on that later). A slightly higher bank interest also comes into play to cause the profit before tax to be just £2.6M higher at £8M. A higher tax charge due to higher non-deductible professional fees and increased losses in Germany, then makes annual profit to be nearly £1M up at £5.7M. This is a respectable performance.

We can see that assets are up £7.2M to £65.9M. Almost all of the group’s assets are held as trade receivables, which increased by £6.3M to £62.1M. £7.4M of those receivables were overdue compared to £7.6M last year, which given the increase in overall trade receivables, is rather pleasing. There were also a few small increases in the intangible assets and leasehold improvements but nothing substantial.

Liabilities were also up (£4.6M to £38.3M) with the substantial increase here coming from future payments for contractor wages (as would be expected given the increase in revenues and receivables). Otherwise we see a fairly hefty chunk of the increase in Deferred income and a reduction in the bank loans. That dilapidation provision relates to several offices that are required to be returned to their original condition when the leases expire in 2015-2016. Overall then, this gives a £2.2M increase in net tangible assets to £27.1M.

We have quite a considerable swing from the terrible cash flow last year to something a bit more sensible in 2012. This swing is mainly due to a better control of receivables when compared to last year. In 2012, the difference between the increase in payables is very similar to the increase in receivables which gives a positive cash flow from operations of £9.2M compared to an outflow of nearly £5M last year. During the year over half a million was paid out on intangible assets but and a bit more was spent on plant & equipment but otherwise there was not much difference.

There was a cash inflow of £1.4M in 2012 compared to an outflow of £11.4M last year so quite an improvement.

During the year the group acquired the recruitment arm from Xchanging Resources for £400K. Following this, Matchtech now supply the rest of the Xchanging business with contractors. It seems to be a way for Matchtech to acquire some more contracts and is not much to pay really.

The group seem to be quite susceptible to interest rate movements and a 1% increase in interest rates would adversely affect profits by £258K. There is, however, no significant exposure to foreign currencies

The Professional Services sector of the group is fairly new – Alderwood and Barclay Meade are only 2 years old and although still unprofitable, the income from these segments seems to be ramping up, now accounting for 16% of NFI. Elemense is a managed services organisation that generates revenue through value added consultancy whilst providing account management support to key client framework agreements – it is used mainly to maintain client relationships. Barclay Meade is a high end recruitment business in the professional services sector and Alderwood is a recruiter focusing on the skills and employability sector. Barclay Meade has struggled somewhat as it has found it difficult recruiting the right people (interesting for a recruitment company). Apparently the right management team is now in place and it intends to invest in expanding into new markets. Alderwood is expanding quickly and has clients that include small companies and national framework providers.

This year has been a record year for contractors on assignment (6700) for Matchtech. Permanent recruitment continued to be sensitive to economic conditions with some increasing time to hire experienced whereas there has been an increase in demand for temporary staff with the group supplying staff to new infrastructure projects, among other areas. The group are also looking to expand further overseas and as well as work won by the German office, some contractors have been supplied to an oil and gas project in Kazakhstan and they are working with a local partner in China to supply engineers to the aerospace industry.

During the year the group has seen strong demand in the Engineering sector, in particular for aerospace, where they have been supplying staff for Airbus projects, among others; automotive and marine, where the group has been involved in finding staff for the new British Aircraft carrier builds and this strong demand should continue with a new Submarine project, however demand in the commercial and leisure marine sector has been week. Demand in Information systems recruitment has been high across all of the group’s expanding customer base and the oil and gas sector has been boosted by an office In Aberdeen. The built environment recruitment has also been strong, with the water, rail and infrastructure sectors giving most of the demand. The group has continued to struggle somewhat in Germany, where they target the aerospace, automotive and energy sectors. They have relaunched the website to make it look more like an engineering consultancy which apparently aligns it more closely with German labour leasing business models. New contracts have now been won but the group has found it hard to find skilled engineers.

Going forward, the group has made steps to restructure their operations. From next year, Matchtech will consist of Engineering – which includes Elemense, Germany and Engineering rectruitment; and Professional Services which will consist of Barclay Meade, Alderwood and Information Systems rectruitment.

Overall then, this year has seen revenue increase substantially, driven by the traditional engineering recruitment while the German operation and the newer Professional Services divisions seem to be finding things a little harder. A £1M increase in annual profit is a decent performance given market conditions and the £1.4M of cash inflow is very welcome given the terrible cash flow last year. In the past few years, margins have been reduced due to client supplier rationalisation but this has now stabilised. Matchtech is not heavily reliant on one client, with the biggest accounting for just 6% of NFI but they do recruit for a number of public sector projects, so they could be affected by further government spending cuts. They are more susceptible to adverse changes in interest rates, with a 1% change giving fairly high reductions in profit.

On the current share price, the P/E ratio is 10.1, which seems a little cheap to me. The dividend yield currently stands at a very tempting 6.6% and is covered 1.6X by profits. The way forward is not easy, with the Professional Services sector failing to make profit but demand seems to be strong in other sectors. I see these shares as fairly good value at these levels.

On 16th November, the board announced that for the first quarter, trading was in line with expectations. The NFI was up 10% on the same period of last year, within which contract NFI was 16% higher with permanent fees at a similar level to last year. Skill shortages are driving demand for contract staff and apparently the diversification strategy at Matchtech is allowing them to take market share. This all looks fine, still good value.

On Feb 7th 2013, Matchtech released a trading update. They announced that the group is trading as expected which means that the NFI generation was 8% higher than the same period of last year. There has been as slight shift in the make-up of the fees and Contract fees now account for over 70% of the total.

As hinted at above, there was a strong demand for contractors in the engineering and technology sectors as clients with multi-year engineering infrastructure projects driving this demand. Fees for permanent staff have not increased, however, and while there has been strong demand for permanent staff, apparently subdued candidate confidence has hampered this area.

As mentioned previously, there is a change in reporting structure and the group has ceased to provide executive search and financial services recruitment. This has resulted in a small change in management and a one-off £400K charge. Net debt at the end of the half year stood at £7.9M, which is a confidence inspiring improvement. The price of these shares has ticked up but given this solid update I still see them as good value.

Ricardo – FY 2012

Posted on December 18, 2012 by Share Research

Ricardo has now released its full year results for 2012. As usual I will start the analysis with the Income statement.

The profit for the year of £15.1M was virtually unchanged on the profit for last year. The reporting segments seem to have changed from last year but we can see that total income was not much different either, with increased revenues from performance product sales counteracting the reduction in technical consulting revenue (blamed on tough conditions in the US). Cost of sales, however, fell quite a bit partly due to reduced R&D expenditure to leave the Gross profit some £8.2M higher than last year at £82.3M.

Admin expenses increased, partly driven by higher staff costs where the group is strengthening the business development department and giving bonuses to a wider range of staff, which caused the operating profit to be just £600K higher than last year. Next we see less money spent on finance considerations, with less being spent on pensions in particular counteracted by a much higher taxation level (it was zero in 2011) due to a reduction in the R&D credit received from the Government, which gives us the static profit after tax levels mentioned above. Unfortunately a huge acturial loss on the pension scheme caused the total income for the year to be £24.5M lower at £5.7M.

Next the balance sheet analysis:

Much like the profit for the year, the net assets have hardly changed when compared to last year. The assets themselves were £1.3M up from 2011 at £166M, which can be mainly attributable to an increase in the value of inventories. Likewise, liabilities were £1.1M higher where reductions in bank loans and overdrafts were more than counteracted by a £7M increase in pension obligations.

Of those trade receivables, £12M were overdue, compared to £13.3M last year, £1M of which were over 180 days overdue (£0.7M in 2011). Ricardo is currently struggling somewhat with its pension scheme. Currently it covers 81% of the needed amount and £4.3M was added this year to cover the deficit, which is now £20.4M. The group hope to eliminate this deficit by 2016.

Moving on to the cash flow statement:

On the face of it a positive cash inflow of £5.4M in they year was fairly decent when compared to a negligible cash outflow last year. Let’s delve a bit deeper into those numbers. The cash received from profit was on a par with last year at £26.8M but there was £5M more tied up in inventories than in 2011 and a tighter control on receivables counteracted rather less money put towards payables suggesting that perhaps the order process has been streamlined or the group currently has less business. So, the differences in working capital pretty much cancelled each other out but a £3M payment into the pension pot means that the cash from operations was £24.3M, £4M lower than 2011.

More cash was paid out in finance costs, but quite a bit less than last year so the net cash from operations was just £1.2M down on last year at £22.4M. There was slightly more spent on capital expenditure than last year but the real difference was the lack of new borrowing and no major payback of money owed in loans. A one off receipt of £1.4M was received in 2011 from the sale of a discontinued operation (the German exhaust business). In the coming year, more cash should be raised by the proposed sale and leaseback of the German office.

So, although it is pleasing to see a positive cash generation, if the net repayments of the bank loans and the one off costs were striped out, the cash flow is slightly less than it would have been last year.

An EPS this year of 29.1 is very similar to that of last year and on the share price at the time of writing, the P/E ratio is given as 12.4 which is not that taxing. Future EPS is predicted to be 32.6 next year and if this was the case, the P/E of 11 seems pretty good value.

ORDERS BY SECTOR	2012

CLEAN ENERGY & POWER GENERATION	7,490,000	7%
DEFENCE	11,770,000	11%
AGRIC & INDUSTRIAL VEHICLES	7,490,000	7%
RAIL	1,070,000	1%
MARINE	2,140,000	2%
COMMERCIAL VEHICLES	7,490,000	7%
HIGH PERFORMANCE VEHICLES & MOTORSPORT	23,540,000	22%
PASSENGER CAR	43,870,000	41%
GOVERNMENT	2,140,000	2%
TOTAL	107,000,000

I thought it would be interesting to analyse the future order book and from this we see that the vast majority of Ricardo’s orders are for motor vehicle projects – either everyday vehicles or motorsport. The work that the group does for the likes of McLaren is not just prestigious but actually makes up quite a lot of the orders. The clean energy and power generation is mostly related to Wind turbines but the group are also securing work in the tidal power sector. The order book value of £107M is exactly the same as that of last year.

ORDERS BY PRODUCT

ENGINES	52,430,000	49%
DRIVELINE & TRANSMISSION SYSTEMS	22,470,000	21%
VEHICLE SYSTEMS	21,400,000	20%
HYBRID & ELECTRIC SYSTEMS	4,280,000	4%
INTELLIGENT TRANSPORT SYSTEMS	1,070,000	1%
STRATEGIC CONSULTING	5,350,000	5%
TOTAL	107,000,000

Similarly here is a list of orders by product and almost half of the orders are for Engines which clearly makes up a very important part of what Ricardo do.

This year, Ricardo has entered into a contract with David Brown Gear Systems in offshore wind to design the turbine gearbox. In the rail sector, they have undertaken a collaboration with Scomi Rail in Malaysia designing drivelines for Monorail and Metro systems. In the UK, they have a contract with LH Group investigating upgrades for the power systems of diesel trains and the DTI have also commissioned Ricardo to study fuel efficiency in diesel trains.

In the automotive sector, Ricardo have already delivered 1500 engines to McLaren and make the full transmission and driveline system for the Bugatti Veyron. The group also continued to supply transmission products to all leading manufacturers in the Japanese Super GT championships and designed the engine and transmission for the BWM K1600 motorcycle. The group have also worked with Petronas to develop a new turbo charged spray guided gasoline combustion system and an auto train convoy where cars are able to drive in a “train” on the road automatically (with Volvo) and are heavily involved in the development of the engine for the Chevrolet Beat’s entry to the Indian market. Ricardo also do a lot of work for Jaguar Landrover.

In aerospace, they work for IAI on a semi-autonomous aircraft taxi system which will create a significant reduction in the use of aircraft fuel (a lot of fuel burned by planes is actually done on the ground). In defence, the group continue to supply Foxhound vehicles to the UK MOD and they are now active in Afganistan.

Although the group does have a diverse array of projects and clients, there are five that account for about 10% of revenues each. One Technical consulting customer accounted for £31.4M in the year and another client accounted for £26.8M so if one of these were to be lost, there would be a bit of an issue.

During the year, most of the revenue was earned in the UK, and this was an increasing market. Other territories have rather disappointingly fallen, however. The group have formed Ricardo Asia to help expand there and they have already gained contracts in Malaysia, China and Korea. Germany and the EU have been difficult markets. New orders have been received but activity is generally subdued which Ricardo blame on the Eurozone issues. The US is down due to a slow start but the group received a strong defence order late in the year. Strategic consulting in general has been tough as customers cut back on discretionary spend and focus more on operations consulting.

Overall then this year has been a quiet one for Ricardo. The profit and revenues have been flat – albeit with a shift from consulting revenues to performance products and the strong UK market is masking difficulties in the EU and the States. Admin expenses are up slightly as the group concentrates on strengthening their business development, including a new office in Asia to concentrate on the market there.

Ricardo has a strong net asset base and along with a net cash position of £7.9M, this gives a very comfortable contingency and there is a positive cash flow here too. The current P/E of 12.4 is not bargain basement but I think it offers good value at the current share price. The dividend yield is 3.4% which is decent rather than spectacular and is covered 2.4 times. Also, I just like their products and what they do which helps on a personal level.

In the future as fuel emission regulation becomes more and more important, there should be plenty of opportunity for Ricardo. I see this as a fairly decent if unspectacular share and will hold onto the shares that I have.

In early November, Ricardo announced that they had completed the acquisition of AEA Europe for a cash price of £18M. AEA Europe was an environmental consultancy providing services to the UK public sector and the EC along with some private organisations. Along with the acquisition come 400 UK based members of staff.

The intention is to leverage Ricardo’s international network and AEA’s government agency contracts. While I can see that the businesses are very complimentary and Ricardo can afford an acquisition of this size, I am a little surprised they are moving further into the consultancy sector given in the statement above they noted how the discretionary nature of consulting has meant hard times in recession hit Europe. Also, the fact that AEA is UK and European based does not really allow Ricardo access to that many new markets. Overall then, I am not convinced by the value of this acquisition strategically but remain a holder as I still like the group as a whole.

On the 15th November, the group released an interim management statement covering the first four months of the year. The order book value is at a very similar amount to the end of the year (£108M). I am not sure if this included the recent acquisition or not (I hope not). Revenue for the group is up an encouraging 8% on the first four months of last year. Within technical consulting there is a mixed bag. The UK remains strong and the large defence project from the US has bolstered things there but a key German client has taken their consulting in-house which is a bit of a blow. Performance products continue to be strong, underpinned by defence, supercar engines and transmissions.

Overall not a bad update – the increase in revenue is encouraging but I will wait and see how the acquisition beds in before buying more I think. Remains a hold for me.

On the 4th December, a trading update was released. Within Technical Consulting, a good amount of new work has been secured in the UK and Japan, and there continues to be a good pipeline of work in China. However, the market in mainland Europe has continued to be difficult where work from an engine client and a Chinese motorcycle manufacturer has offset the reduction in revenues experienced in Germany. The US division retained a strong order book,

The Performance Products business continues to be busy, particularly in Motorsport, where more orders have been received from Bugatti. Other large projects include the defence vehicles and the Malaysian rail program. The acquisition, although still early days, is apparently delivering as expected and despite the acquisition, the group closed the end of December with only a marginal net debt balance.

A fairly decent update then, the reduction in German business is a shame but it is good to see sales in Asia improving. Still a hold for me.

Tristel – FY 2012

Posted on November 23, 2012 by Share Research

Tristel have released their full year 2012 results now so I will start with the income statement.

This does not look too bad on first appearance. We can see that the largest segment, Human healthcare is progressing well, with revenues up by £1.9M to £9M. Contamination control is starting to record a small amount of revenue but disappointingly Animal Healthcare suffered a decline in revenues of £420K to £1.7M due to the termination of the agreement with Medichem. Costs were down slightly to leave the gross profit at £7.4M (£1.5M higher than last year).

This year we can see that other admin costs have increased. Depreciation and Amortisation are up, partly because development costs were revised from unit sale basis to straight line basis from when the asset was available for use of Stella production tooling, which resulted in an amortisation cost of £60K.

Possibly more significantly, we see staff costs up £760K to £3.4M, which presumably includes new staff to directly market the animal healthcare products and some one-off costs relating to redundancies in some underperforming areas. There were also some costs relating to restructuring and legal advice, and provisions of £72K were made against inventories relating to 25% of the Tristel Shine machines which were either slow moving or obsolete.

All of this means that the profit before tax was only £70K higher than last year at £578K. The group, however, benefited from a tax rebate and actually made £91K here to make the profit for the year £669K, £232K up from last year. Finally a smaller loss due to the exchange rate meant the total income for the year was £300K up on 2011.

On to the balance sheet:

Total assets ticked up £829K to £14.7M. The largest increases were for inventories, which were up £350K, and cash, which was up £260K. There were other small increases but these were not significant. Liabilities were also up, with the largest increases seen in tax liabilities and deferred income. Overall, this caused net tangible assets to increase by £440K to £4.7M.

Trade receivables were up slightly at £2M but there were less overdue receivables than last year, which has got to be a positive thing. That goodwill amount was acquired with the previous purchase of Newmarket Technologies Ltd and the other Intangible assets include the marketing rights & know-how to a range of disinfectants in animal healthcare (£2.5M). The amount owed by associate undertakings relates to Tristel Italia.

Next, I will look at the cash flow:

This cash flow statement shows that Tristel has a small positive cash income for the year of £255K (£779K better than last year). Again, probably the main driver of this was the money they made on tax, which was £351K, almost a £1M swing to the positive which included a £354K adjustment in respect of prior years where previous year R&D claims were received during this year.

Aside from this, the group also made more cash on the revenues and slowed the rate of increase in receivables somewhat. Compared to last year, much less was spent on capital expenditure as the significant capital investment in new facilities came to an end and the group did not pay back any loans (£1.3M paid back last year).

We also see that there was no cash received from any rights issues, compared to nearly £4M last year and the dividends have been set at a more sensible level. I am quite pleased by this cash flow, it is fairly decent for a company the size of Tristel and much better than last year – not sure if they can repeat this without the tax rebate, though.

EPS	2012

PROFIT AFTER TAX	669,000
NUMBER OF SHARES	39,985,000
EPS	1.7
SP	29.5
P/E	17.6

At the year end an earnings per share of 1.7 gives a P/E value of 17.6, which is not particularly good value. Currently the share price is at a similar level but going forward, the group’s broker (never sure how independent they are) has given a forward EPS of 2.2, thereby giving a forward P/E of 14.1 which is bit better but still not amazing value.

The dividend has been increased slightly from the savage cut last year which gives the shares a 2% yield at current prices – not exactly amazing but could be worse. This dividend level is quite conservative though, and is covered by post tax profit 2.7 times so there is scope for an increase at current trading levels.

The group’s revenues are divided into 3 segments, which are the manufacture, development and sale of infection control and hygene products using Chlorine Dioxide. This is mainly used in hospitals and makes up 83% of revenues; the manufacture and sale of cleaning prods to vet & animal healthcare, which makes up about 15% of revenue; and pharmaceutical and personal care products (contamination control), which is a new business and accounts for just 2% of revenues.

In the human healthcare segment there are a large number of customers, but £3.692M is received from just one customer (40.2% of revenues). Within Animal Healthcare, one customer pulls in revenues of £1.404M (84.3% of revenue) and 33.2% of total group revenues are received from just the one customer, which clearly leaves Tristel somewhat dependent on these clients.

There seems to be a lot of transactions between Tristel and a number of different individuals who are on the board. During the year, £160K of royalties were paid to Bruce Green. Last year, Tristel paid £700K to this individual in order to terminate the consultancy agreement and settle royalties, which is why I am a bit surprised to see that they are still paying money to him. For a company the size of Tristel, this is quite a substantial amount of money. Margins have increased due to this arrangement, however. It doesn’t end there though, as £144K was paid to Tom Allsworth, director at Medichem and a small amount was paid to Mark Fraundorfer.

Although the group has grown both income and profit from last year, the board have stated it is far from where they want to be. In the past couple of years, Tristel has been investing in new products and technologies but so far the returns have not been there. Now that the investment has finished, the group are concentrating on increasing returns from these investments.

During the year, the group terminated their agreement with Medichem and is now marketing their own product in the animal healthcare segment themselves. There is a real effort to increase export markets for all products, which is a sensible strategy in my view.

As mentioned above, the group reports in 3 different segments. In the Human Healthcare sector, there are a number of different vectors in which Tristel products are used. One of the biggest is hospital instruments, within which Tristel wipes are now sold into the UK, Europe, Russia, Turkey, UAE, South Africa, Malaysia, China, Australia and New Zealand. Also in the instruments sector is Stella, which is an immersion technique to kill the organisms. Stella is battery powered and does not need a water source or electricity source to be used, making it very suitable for the developing world. So far though, it has been sold in UK, Ireland, Benelux, Romania, Spain, Germany, Italy, Russia, UAE, Israel and China.

Multi channelled endoscopy products are only sold in the UK and had revenues of £3M (£2.9M in 2011), whereas Non and Single lumened products had revenues of £4.4M (£2.6M in 2011) and saw overseas growth in sales of 154%. Management expect this side of the business to continue growing.

Tristel’s products for disinfecting surfaces grew revenues to over £1M from £867K the previous year. They are mainly sold in the UK but the export market seems to be gaining traction. For water disinfectants, Tristel is the exclusive European distributer for Bio-Cide, a US company that makes products used to control Legionella. The group has a 20 year agreement, ending in 2028. Sales of this product were £482K in 2012, compared to £611K last year and is not considered a growth market.

Things were all change in the Animal Healthcare segment. Traditionally, Tristel supplied this product to Medichem International who sold them to vet surgeries. In March of this year, a dispute arose (the details of which were not divulged) which terminated the agreement. The group then set up its own brand to market the products directly, which incurred some one–off costs. Sales to Medichem during the year totalled £1.4M and direct sales totalled £272K. This represents a 20% reduction on the levels last year, when Medichem was the sole customer. Hopefully this will improve going forward but it remains to be seen what affect this will have on next year’s animal healthcare sales.

The third segment is that of Contamination control. These products are used in the clean rooms of pharmaceutical manufacturers and production units of manufacturers of personal care products. Sales this year were £235K (£38K in 2011) and management expect significant increases in sales this year.

Internationally the group is expanding and is seeing good sales in New Zealand (281% up at £335K), China (324% up at £521K) and Germany (382% up at £212K). Italy fared less well, being 9% down at £137K. A branch in Russia has just been opened. I believe this international growth is an exciting opportunity for Tristel.

One thing I have noticed is that the CEO & former chairman own a lot of shares but the finance director owns next to nothing, which is a little disappointing, particularly given the depressed nature of the share price at the moment and doesn’t totally inspire confidence.

So, not a bad year for Tristel, certainly better than last year. Profits were up a modest amount to £669K and revenues were up overall, although a good increase in the Human Healthcare division masks reduced revenues in Animal Healthcare. The reduction in Animal Healthcare revenues was due to the termination of the Medichem contract. This was a bit of a shock at the time and I am not sure whether marketing their own product instead will give immediate returns for the group. The cash flow was positive but would not have been were it not for the tax rebate in respect of previous years. In fact that tax rebate rather flattered the results this year so it would be interesting to see how the group does without it this year.

The high level of capital expenditure of the past couple of years seems to be coming to an end and the sales of Tristel products overseas really seems to be booming so I see no reason, Animal Healthcare not withstanding, why the group can’t build on the result this year. The P/E of 17.6 suggests that the shares are not cheap, but a forward P/E of 14.1 puts them at rather better value. Likewise the dividend yield of 2% is not exactly amazing but is quite well covered. Also there is no real debt to worry about and the group is in a net cash position. I have to say that I am not too pleased with all the money that seems to be paid out to related parties but the board really seem to be behind the push for better results.

On current form I think the shares are a hold but I will stick my neck out here and say that I can see enough reasons to suggest that profit will improve this year so I am very tempted to add a few more of these.

On 14th February, the group released an update covering the half year period and it does not make good reading. The endoscopy business is falling off at a much greater rate than originally thought due to new department of health guidelines and Tristel are now expecting a half year loss of £0.6M. There were also problems in China, where the acceleration of sales were slower than expected and the vet market in the UK is making solid progress, but is behind forecasts. A small dividend has been announced, but it doesn’t sound like the group can afford it!

Given the above, it has been decided that the group will exit the endoscopy business and this will entail an exceptional charge of £2M for the write off of some assets. Operations in China have been streamlined and the sales structure in the UK vet market has been changed somewhat which reduced costs by about £0.6M.

So, this is not a good update at all. The board are still confident of making a profit in the second half and beyond but I now feel this is a bit of a risky share so am not looking to buy and more and will instead hold what I have got.

Shaft Sinkers – Interim 2012

Posted on November 13, 2012 by Share Research

Shaft Sinkers have suffered quite a torrid time since I made the decision to buy the shares. I will start the analysis with the income statement.

So, this doesn’t look too good when compared to last year. Revenues have taken a tumble, down nearly £12M to just over £100M, while expenses have been reigned in a bit to leave the gross profit a rather disappointing £10.6M for the first half of the year, which is down £8.5M on the same period of last year. The revenue loss has been put down to the weakening Rand against Sterling and 89% of the revenues were earned in South Africa.

Operating profit, at £1.7M is £5.4M lower than the first half of last year and is better relative to the Gross profit due to the lack of IPO bonuses paid out. After a lower taxation than last year is taken into account, the resulting profit for the period was £785K, down £3.3M on last year. Unfortunately exchange rates were once again unkind to Shaft Sinkers, wiping another £1M off the value of the profits to leave a negative income for the year of -£282K.

Not great then, but not a total disaster I suppose.

Looking at the total assets, we see these have reduced marginally (nearly £5M) to £138.9M. Within this figure, we see £1.3M of capitalised development costs (intangibles) that were not present last year (these are funds invested in IP being developed by Sight Power for the group for use in mine inspection tech) but the big movers are the increase in Trade and receivables – which were £12M higher at £61M and a £15M reduction in the cash level, to a more precarious £7.3M. The increase in receivables relate mainly to the failed Eurochem project. The big reduction in cash levels is a worry.

Liabilities are also slightly down on last year, with small reductions in deferred revenue and the loans outstanding. A new bank overdraft of about £2M has appeared and in general current liabilities have increased, while non-current liabilities have fallen off a bit. Overall, net assets are down £2.4M at £45.6M and net tangibles are down a bit more, £3.6M to £42.2M. On to the cash flow statement:

This cash flow statement does not make pleasant reading. The cash received through profit has crashed from nearly £13M in the first half of last year to just £700K in the same period of this year. Despite almost £5M in client advances, a big increase on the money owed Shaft Sinkers in receivables means that the actual cash lost in operations is a massive £9.2M, compared to a positive cash inflow of £3.4M last year (a negative swing of £12.7M). The increase in trade receivables were due to the money owed by Eurochem that has not been paid following the termination of that contract. The management are confident of receiving these outstanding receivables before the year end, I wish I could be so confident about that…

Other than this, the group also spent £2.3M on dividend payments, which it could ill afford really. In addition, we see nearly £1M of development costs during the half year, which relate to developments in technology for automated mine shaft inspection, and nearly £2M paid back in loans. However, slightly less paid on capital expenditure due to the late starting of some of the projected work, and income tax mean that the rate of increase in the loss of cash is £11.4M, which gives a terrible cash out flow of £17.1M, which in turn leaves just £5.2M of cash left at the end of the half year. Clearly the group cannot have another 6 months like they have just had with regards to the cash position but thankfully they have received a £16.3M cash advance from Hindustan Zinc after this balance sheet was signed off.

I felt at this point it would be an interesting exercise to look at the order book as it stands.

*This list includes some of the post report contract awards.

The value of the future order book is similar to this point of last year, but we have lost the Eurochem business and replaced it with the Hindustan Zinc. This shows just how important that Hindustan Zinc contract win was – it accounts for nearly half of all future revenues and diversifies the project portfolio away from South Africa and Platinum. The order book now stands at £347.7M, compared to £301.1M at the end of last year, and £425.3M at this point last year. There is currently £1.1Bn on tenders, which shows quite a healthy potential pipeline.

The margins have been hampered by issues at Lonmin Karee 3 and Impala 16 and 17 which is partly why profit fell short of management expectations. At Impala 16, there were delays due to the main shaft being serviced through the ventilation shaft and in Impala 17, a fatality caused work to shut down for a lengthy stoppage. The Lonmin Hossy and Saffy shafts are progressing well but the Karee 3 contract is currently under review as it seems the group offered it on very low rates. Work at Afplats is progressing and should be complete during the year and the Anglo Platinum Skyldrift project is improving performance. Likewise the Anglogold Moab and the Hernic Ferrochrome projects are also progressing well.

Outside of South Africa, a Hydroelectric project was completed in India, which had particularly high margins and the Hindustan Zinc shafts are due to be commenced in the second half of this year. In Russia, the Eurochem project was demobilised and the group still expect to receive all of the amounts owed on this contract. It has to be said, though, that the loss of this contract is a real blow for the group’s efforts to diversify its business. A project was started in Poderosa (Peru) for METS (Mining Engineering & Technical Services). I am not sure if this will have much of a material earnings bonus but it does give the group some presence in the important South American market.

Apart from the Eurochem problems, other issues have been holding the group back in the first half of the year. The well publicised unrest in South African mines will affect the group, if not directly, then indirectly considering their exposure to the South African mining sector. The weakening Rand is also causing issues and has apparently been responsible for the loss of £12.5M of revenues.

Net debt is currently at £8.7M, which is a negative £14.7M swing and something the group will want to keep an eye on.

Overall then, this is a real mixed bag. These results are not good, the profit of just £785K was down by £3.3M with revenues of 100.4M down by nearly £12M that were put down to the weakening Rand. Net assets remained fairly stable but this was only because the crash in the cash level was counteracted by an increase in the value of receivables. Indeed, this has been the story for Shaft Sinkers over the first half of the year, with the group suffering a £17.1M cash outflow for the period. This was predominantly caused by the Eurochem termination as the client refuses to pay the receivables owed, hence causing the issues with the cash flow. As mentioned, the unrest in South African mines also has an effect on the group. However, there is one shining light and that is the Hindustan Zinc contract being awarded. I cannot stress enough how important this was – after the Eurochem debacle the group needed another large foreign contract to diversify away from South African precious metals.

The share price has taken a bit of a hit recently which seems to make these shares good value. At the moment, however, I feel there is a bit of risk here so I hold.

Since the date of this report, the unrest in the South African mining sector started to take its toll on the group. The strike affected AngloGold’s Moab project which delayed the work here. It did not account for a large proportion of the group’s order book, though. Additionally, on the 17^th October some of its workers at Lonmin’s Saffy shaft embarked on an unprotected strike which the group were trying to find a solution for. On 30^th October, staff returned to work at both sites so there does not seem to have been a huge amount of disruption, with just two locations affected for a few weeks.

Also in October, the group mentioned that Eurochem are filing a claim against Shaft Sinkers for the termination of the contract. Conversely Shaft Sinkers are also filing a claim against Eurochem over amounts owed due to the termination of the same contract. This looks to rumble on for a while, but in my opinion, the group are very unlikely to see any of those “receivables” relating to this project for a long time (if at all), which will likely result in a large write-down of those trade receivables mentioned earlier.

There is not just bad news, however, as in the same month the group announced additional work on both the Impala 16 and 17 mines. The work on the 16 mine should add a further £5.9M to the order book and at 17, there should be a further £10.3M added. This work is due to be completed in H2 2013.

More significant, however, was the announcement in November that Shaft Sinkers has won the vertical shaft contract at the Randgold Resources Kibali gold mine in the DR Congo. This contract should add £82.3M on to the order book and should be completed by 2016. Although this addition is still an African precious metal contract, it does diversify somewhat from South African platinum. It is also good to have some long term project work nailed down.

The share price is still very depressed and I am tempted to add a few more given this new contract win. The main issue as I see it, is still the cloud of the Eurochem failed project and the related legal issues and costs.

On 15th November, the group issued an interim management statement which outlines the performance in the past few months. A big mention goes to the unrest in the South African mining sector but they confirm that all projects are being worked on again. 11 days were lost at the Lonmin shaft and 25 lost at the AngloGold shaft which will have a negative effect on the margins on these projects.

Elsewhere, the group continues to be in discussions with Lonmin over the Karee 3 rates. At the Impala shafts, Impala 17 is back to normal working levels but the Impala 16 shaft still has issues and Shaft Sinkers have replaced the management at this mine to help improve things. The Afplats Leeuwkop project is progressing well and the group are in discussions with the client about the next phase. The Styldrift and Hernic Ferrochome projects are both progressing well.

The Hindustan Zinc project has been started and the group have received a cash advance to help with the capital expenditure involved. The Eurochem situation rumbles on. Shaft Sinkers still think that the claims against them have no legal merit and are hoping to receive $15M from Eurochem for outstanding payments. This is not actually that much but would be a great help to the cash flow if they could get it. Honestly, however, I am not hopeful about this and think all they can realistically expect is not to pay any damages to Eurochem.

Most of that cash advance from Hindustan Zinc has gone and Shaft Sinkers only have £8M of cash balances left, with a net debt of £14M. Apparently in this industry, variation orders are quite common and they require extended debate with the client before agreement is made on the payment of the order. At the moment, the group is carrying about £21M of these orders in receivables. This is a bit of a worry as I was under the impression that the high level of accounts receivable was from the terminated Eurochem project. It now seems that receivables will be even higher than at the half year point which will further pinch cash flow.

At the end of the update, the group issued a profit warning and indicate that they expect the results for the financial year will be below market expectations. This is disappointing as market expectations were already at quite a low level due to previous issues with Eurochem and the strikes. It seems the continued weakening of the Rand is also having an effect but it is good to see the group pushing for new contracts in USD.

Although this update is not what I hoped for, the future order book is still looking much better than a few months ago. I will not look to buy any more of these shares before the issues have been worked through and the cash flow situation is sorted out but I will hold on to them for now.

On 20th November the group announced that it had secured £7M of extra work at the Afplats Leeuwkop site to continue the main shaft from 325m to 700m. The work is expected to be completed in 2013. It would have been a surprise if the group did not secure this as it seems to be part of the same contract they already have with Afplats but none the less, it is nice to be kept informed about such things.

On 13th February 2013, the group issued a trading update covering the full year of 2012. The issues that Shaft Sinkers faced during the year have been fairly well documented and revenue is expected to be 13% lower than last year at £197M. This translates to a profit before tax of about £3.5M, compared to £13.5M in 2011. The main reasons for this have been the labour strikes in South Africa and the late starting projects elsewhere. Net borrowings are due to be about £2.8M, compared to £8.6M at the end of the first half of the year and that is actually a pretty good performance considering the issues.

There seem to have been a number of problems in each of the projects. For Lonmin, work at the Saffy shaft progressed within expectations but the margin was impacted by increases in wages following the strikes. The work at the Hossy site was deferred due to austerity measures in the client’s business (A bit of a concern, but there was not that much extra to go). Work at Karee 3 has been progressing well but the group are in discussions to restructure the contract (not sure why).

For AngloGold, the Moab project was negatively affected by strike action but progress in now going according to plan.At Impala, performance was below plan at 17 shaft towards the end of the year which meant that costs overran and there was a similar issue at 16 shaft where the group have introduced a new management team and seeking other efficiency savings. The Leeuwkop project seems to be progressing well.

At Styldrift, full production rates were achieved by November. Margins here were adversely affected by certain heavy equipment failures, however. The Hernic Ferrochrome shaft performed within expectations. Outside of South Africa, the Hindustan Zinc project suffered delays due to issues with a subcontractor. This is a bit of a disappointment because this particular project is very important for the future of Shaft Sinkers so it needs to go well. Mobilisation activities are underway at the Kibali Goldmine.

The Eurochem issue rumbles on, there are no new developments but apparently Shaft Sinkers are being sued for $800M. I was not aware of the figure before now and this seems like a huge amount and would destroy the company if EuroChem were successful. There is a counter claim for $15M which seems like chicken feed in comparison!

Going forward, the order book is at £361M, an increase from the end of the first half and had the same value of outstanding tenders waiting to be awarded as before, 60% of which are outside of South Africa. Next year, the board expect that profitability will have improved as the Hindustan Zinc and Kibali contracts start contributing properly and with some potential new contracts in the pipeline. This will depend somewhat on conditions in South African employment and the avoidance of future strike action.

Overall, this is an interesting update. The full extent of the claim against Shaft Sinkers was a bit of a shock and there seems to be operational issues at a lot of the projects the group is involved in. The Hindustan Zinc contract in particular is so important as it is diversified from the traditional South African platinum projects. The board expect next year to be better going forward but a lot depends on the smooth running of these sites. The debt level is improving but I suspect this is due to the advance payment received from some of the new contracts. Overall, I still rate these as a cautious hold.

Swallowfield FY 2012

Posted on November 2, 2012 by Share Research

Swallowfield have now revealed their results for the year ending 2012, following on from my earlier post last year.

The income statement is as follows:

Looking at the profit for the year, we can see that the group had a modest increase on last year, up by £200K to £1.3M. UK Revenues have suffered a fall of £900K but this has been more than counteracted by increases in Europe and ROW revenues. Cost of sales increased slightly and admin costs have reduced. We can see that staff costs reduced slightly but building costs increased. The group also benefited from not having to spend £100K on the special AGM that occurred last year.

The total income from the year, however, has fallen £200K to just under £1M. The reason for this are differences in exchange rates for foreign operations, presumably as sterling strengthened against the Euro last year.

Moving on to the assets:

Total assets for the year fell by nearly £500K to £34.8M. There was an increase in plant and machinery cancelled out by a similar sized decrease in the value of buildings and land. Inventory levels have shown a small reduction, as did trade receivables (perhaps showing a streamlining of the order process). Otherwise we see a £300K reduction in cash to £900K.

Liabilities have also fallen – £700K to £21.1M. Trade payable have fallen by £430K to £11.5M but we see taxes and accruals/deferred income on the rise. This means that net assets are up slightly (£260K) to £13.7M – this all looks fairly stable to me.

The headline figure here is a net cash outflow of £260K, compared to an inflow of £2.5M last year – on the surface this looks rather disappointing, so what happened?

The cash from operations of £2.9M is actually £500K up on last year. As well as actually getting more revenues in, the group seem to have a better control over trade receivables (or perhaps orders have reduced) which has given the higher cashflow. We also see a reduction in taxation and cash paid out for the purchase of assets. During the year, the group also gained £420K from new loans.

The cash starts flowing out when we look at the other loans – the group has paid a net amount of cash out to repay the loans, and this added to the dividends are what has driven the cash flow slightly negative. Last year the group received nearly £3M in net loans, which is where the difference with last year lies. Indeed, were it not for these proceeds last year then cash flow this year would be better than the 2011 figures.

EPS	2012	2011

PROFIT AFTER TAX	1,263,000	1,082,000
NUMBER OF SHARES	11,306,416	11,306,416
EPS	11.2	9.6
SP	119.5	108.0
P/E	10.7	11.3

Earnings per share are higher than last year, but the share price has also risen. At the end of the year, however, the P/E ratio was a rather undemanding 10.7 and the ratio at the current share price remains unchanged. Going forward, analysts are giving an EPS for next year of 12.2, which gives the shares a very good value ratio of 9.8. Given the board’s conservative outlook, however, I am not sure I agree with this EPS prediction.

Overall then this seems like quite a stable, if unexciting year for Swallowfield. The profit was up marginally but within that we saw UK revenues down as customers rationalised and consolidated their supply chains but new business wins in Europe and the rest of the world counteracted this. The actual income received was adversely affected by the exchange rates. There was a negligible upwards movement in net assets and a small cash outflow, but overall, due to repaying of loans net debt was down on last year, with the group £566K better off in this regard.

The group do seem to rely quite heavily on a few large clients, with one customer accounting for 25% of revenues and another accounting for 16% which is rarely a good sign.

There seems to be a good control over trade receivables, with only £496K overdue, and all of those are less than 90 days old. The group may be hit by an increase in interest rates next year (a 0.5% interest rate increase would reduce profit by £27K) and there is no hedging in place but hopefully the current financial markets would make this unlikely. The group is somewhat hedged against exchange rates, however, but a 5% strengthening of the pound would still reduce profit by £82K.

In the coming year, customers are likely to continue rationalising and consolidating supply chains which will impact growth in the first half but with the help of some new overseas contract wins where the US and French sales offices are winning business, Swallowfield hope to return to growth in the second half. There is good news on the cost side of things, with raw material and input costs stabilising. The boardroom chaos seems to have quietened down somewhat and the board now seem to be pulling in the same direction but Gyllenhammer and Western Selection still control much of the company and have been at odds with some of the board members before so it could boil over again.

After climbing substantially every year in the last 5, revenues seem to have stagnated. It is also true that profit is still lower than in 2008 so there is still some work to do here.

This year has been a quiet one for the group. They have concentrated on making efficiencies and driving overseas grown, to the detriment of trade in the UK. Given the current climate I think this is a wise strategy. The current dividend yield is 5.3%, which is covered by earnings 1.8 times, which is a decent return that is getting towards a sensible coverage. The group has a gearing of 30%, which again is a sensible level in my view and they are able to pay back some of this debt out of the cash flow for the year. At a current P/E ratio of 10.7, these shares are pretty good value in my opinion but the lack of any real likelihood of growth this year is likely to mean there is not much capital appreciation so I would buy on any dips for the dividend.

On 15th November, Swallowfield issued a profits warning that stated that during the year the group have experienced more difficult trading conditions due to customer caution and some customers have taken work in-house. Apparently new customer conversions and launches is gaining pace for the second half but they still expect full year earnings to be significantly below market expectations. This is a real blow, especially with the use of the word “significantly”. As usual the market reacted to the news before I read the update so my selling opportunity is passed. Some may say this is a good entry opportunity but I will not be buying any more of these shares until I can study the half year results and assess the damage. So I now hold, looking for a possible exit.

After a small rally, I have sold my holding here.

Dechra Pharmaceuticals – FY 2012

Posted on October 26, 2012 by Share Research

Dechra Pharmaceuticals is an animal pharmaceuticals company who sells products to both the companion animal and farm animal markets. These results will be dominated by the recent acquisition and I will start by looking at the income report.

The total income for the year seems to have taken a big hit, down £14.2M to £3.3M but let’s see how that took place. The Gross Profit figure of £99.3M (up nearly £11M) is very healthy and although costs are up, revenues are up even more. Service revenues increased by £19M, European Pharmaceuticals did very well, up £14.3M and US Pharmaceuticals were up a more modest £3.5M.

Operating profit for the year fared a little less well and was just under £1M off last year’s amount at £20.9M. The reason for this seems to be predominantly the effect of the acquisition and we see that Amortisation of Intangibles and Rationalisation costs are both up £2M, with Acquisition costs up £1.6M and Admin Expenses up £5M.

The profit for the year has fallen further when compared to last year, down £2.4M to £11.7M. This is mainly caused by the effect of foreign exchange differences as the Euro has weakened against Sterling. Finally, huge negative swing in the Total Income I mentioned above has also been caused by exchange rate differences with the currency translation on foreign operations taking a huge swing of £11.8M to the negative. The group does not hedge against foreign currency differences, but looking at this, perhaps they should consider it. Apparently a 10% appreciation in the pound against Danish Krone would cause losses of £4M, but appreciation against other currencies does not seem to have much of an effect.

Although, when compared to last year these results are not that great, I think it is important to realise that the main causes of the negative swings are one off costs relating to the acquisition and the unfortunate changes in currency values.

EPS	2012		2011

PROFIT AFTER TAX	11,749,000	-2,385,000	14,134,000
UNDERLYING PROFIT AFTER TAX	24,302,000		22,748,000
NUMBER OF SHARES	75,306,859	2,928,205	72,378,654
EPS	15.6		19.5
UNDERLYING EPS	32.3		31.4
SP	486.0	-5	490.8
P/E	31.2	6	25.1
UNDERLYING P/E	15.1		15.6

This year the EPS is 15.6 but when we take out the one-off costs, the EPS becomes 32.3. This translates to a P/E of 15.1 for the end of the year. However, if we take the share price as I write this, the underlying P/E is 18.5, which seems a little high to me. The consensus for the EPS next year is 40, giving a future P/E of a more reasonable 14.9.

Moving on to the Financial Position Statement

Looking at assets first, we can see that this is up a huge £134M to £404M but tangible assets are only up £33.3M. The largest increase in assets has come from Acquired Intangibles, up £67.5M to £157.2M. I am always wary about these kinds of assets as they can be used to put a bit of a positive spin to a balance sheet. I have no idea whether the intangibles are worth this much, but by definition they cannot be realised by the group in times of need. In this case, the bulk of the acquired intangibles relate to the development costs and product rights of the products made by the acquired companies. The next largest increase is seen in inventories, and particularly finished goods. No doubt gained as part of the acquisition. Similarly we also see that the value of freehold land and buildings increased £6.3M to £8.2M – traditionally Dechra has not really held much in the way of property. Cash remains fairly stable, up £2M to £32.4M. The Patent rights mentioned here relate to the payments in order to acquire and market Trilostane, the active ingredient in Vetoryl, an important product for Dechra.

It should be noted that 13.4% of those trade receivables are owed by just one company. This is a little high considering no company accounts for more than 10% revenues so hopefully the group have an eye on this.

We can see that liabilities have also increased, up £78.7M to £250.7M. This is almost entirely due to the £60M hike in the bank loan – that will take some time to pay off! £15M is due to be paid off within 2 years, and the rest is due before 5 years – presumably the loan will have to be re-negotiated before that point. Otherwise we see a £15.9M jump in acquired tax liabilities – I am not sure exactly what would have caused this, but my guess would be that these were inherited in the acquisition too. We can also see that a large chunk of contingent consideration has been moved from non-current to current, so this will have to be paid off quite soon.

Overall, net assets are up £55.3M to £153.7M but when we strip out intangibles, there is a less rosy picture with the net tangible assets falling £45.4M to -£72.2M, which makes me a little nervous.

During 2012 the cash generated from operating profit was up £1.8M to £36.2M. The group seems to have done very well in raining in the increases in money owed, and through this has enabled the cash generated from operations to increase by £3.8M to £26.1M. An increase in tax paid then caused the net cash from operations to increase by slightly less, but still up by £2.5M to £19.2M

The actual cash flow is pretty meaningless in this context. £112M of cash was paid for the acquisition, which is balanced against £56M of net new bank loans and £59M received through the issue of new share capital. Cash was also spent on some assets to leave the cash flow at a positive £2.6M. As I say, however, this will be much more meaningful next year when we see how the new group settles down.

Overall most of the segments seem to be performing well with solid organic growth seen from licensed pharmaceuticals, there was also modest growth seen in the pet diet segments and third party manufacturing. Margins in the services segment suffered somewhat from the competitive market.

In Europe, sales have been increasing in line with inflation as consumers continue to treat sick animals but the high level of growth has slowed somewhat due to the economic issues and spending on discretionary items (such as diets) has reduced. In the US, revenues were about 26% higher than last year. The US is the world’s largest veterinary market and offers a good prospect of growth for the group. Service revenues increased by 6.5% where operating efficiencies counteracted the effect of more customers buying cheaper alternatives from the internet, but profits were actually down due to the squeezed margins brought about by the competitive nature of this segment at the moment.

This year for Dechra is one that is characterised by acquisitions. The world-wide rights for HY-50, a treatment for lameness in horses, was acquired for £5.1M and should be earnings enhancing from the off. The biggie, however, was the purchase of Eurovet for €135M. This is a company that in some ways is quite similar to Dechra and offers a quick route for expansion into mainland Europe and the farm animal market. Hopefully after the synergies have been realised and the new markets have an effect, Dechra won’t have overpaid. It was a lot of money, but the acquisition does seem to be a good one. I would like them to focus on organic growth for a couple of years, however.

The group continues to develop new products, some new pharma registrations were Libromide in 11 Euro countries, Vetoryl in Brazil and Methoxasol in the EU. As far as diets are concerned, the group developed endocrine diets, diets for cats with gastrointestinal disorders and a diet to support cats with reduced joint function. The product pipeline also looks healthy-ish with the next novel pharma product due to enter production in 2014 (equine lameness). In 2015 a canine and feline endocrine product should enter production too but a feline gastrointestinal product has been terminated due to high costs and negligible market, which is a shame.

In 2013, three new diet products should be developed (orthopaedic, critical care and urinary for cats/dogs), and in 2014 there is a dental diet and an allergy diet for cats and dogs (nothing after this, though so far).

The UK still accounts for the majority of revenues, at £322M but revenues from Europe (£72M) and the US (£26M) are both increasing rapidly due to acquisitions. Revenues to other parts of the world are down, however. I like to see the company diversifying away from the UK but also think it should consider expanding outside of the traditional markets.

Overall then, I feel the underlying performance of Dechra has been quite good. Revenues are up nearly across the board but profits were hit by the costs associated with the acquisitions, and problems in currency exchange rates seems to have had quite an effect on the actual income received. The P/E at the moment is quite a high 18.5 but the predicted earnings for next year means the ratio on the current share price for 2013 is 14.9, which is not mega-cheap but not a bad valuation.

The dividend yield at the current share price at 2.1% is not exactly that exciting but it is steady and is covered 2.2 times.

Assets increased as would be expected with the acquisition but most of the increase was from intangibles while the new bank loan meant that liabilities increased considerably too. This led to the net tangible assets falling further into negative territory. The cash flow is pretty meaningless as cash was raised to pay for the acquisition but the underlying cash flow was positive and improved from last year.

Overall, given the fairly high current valuation and slight uncertainty over the bedding in of Eurovet, I would rate these a Hold

On the day of the AGM, the group released an interim management statement which stated that they are trading within expectations. Overall, revenue in Q1 was up 24.9% on the same period of last year, excluding Eurovet this was a lower increase (6%). In Europe, excluding the contribution from Eurovet, revenues were up by 3.2% (16.7% at constant levels). This increase is due to both pharmaceuticals and diets. It also looks like they are being hit by some adverse exchange rates.

In the US, revenues were up 24.8% on the same quarter, which is pleasing growth and services were up 6%, at a constant margin.

Overall, this does not contain any surprises and I continue to hold this share.

On the 30th November, the group announced that they had paid an extra £9.4M consideration to the vendors of Dermapet which was triggered revenues from Dermapet products exceeding $15M in a year. Although it is positive news that the products are performing well, £9.4M is a lot of money that will make a considerable dent in the cash flow for this year. Another payment of $5M will be paid should revenues exceed $20M over a year.

On 8th January 2013, the group issued a statement covering trading in the first half of the year. They state that trading has been in line with expectations, up 20.2% on the year before. European pharmaceuticals grew revenues by 61.4% but taking out the effect of Eurovet, revenues declined by 2.4%. This was blamed on changes to distribution arrangements in France and Germany but these new arrangements should lead to improved margins in the medium term. US Pharmaceutical revenue grew by 10%, which is a decent result with Dermapet, Vetoryl and Felimazole performing particularly well. Services revenue over the period was 5.1% up on the previous year.

Overall, this seems to be a good update and I will continue to hold, waiting for some figures coming out in the next month.

On 31st January 2013, Dechra announced the appointment of Anne-Francoise Nesmes as CFO. She has joined from Glaxo Smithkline where she worked as senior vice president, finances of vaccines. She is a French national who has had work experience in the UK (although with Glaxo she was working in Belgium). I do not know much more about the woman but this looks like an interesting position for her.

Laura Ashley PLC – FY 2012

Posted on June 4, 2012 by Share Research

27 Bagleys Lane, Imperial Wharf, London, SW6 2QA

Laura Ashley is primarily a UK based department store. In the stores it sells furniture, home accessories, decorating products and fashion. It also operated a few store in Ireland and France and has a franchise business targeting more overseas growth. The group also has a small licencing division and has recently purchased a hotel.

Looking at the income statement:

When compared to last year, these results are a little disappointing. The operating profit is £6.7M lower at £17.9M. Looking at the revenue, we see that this has hardly changed year on year with a lower revenue from the stores due to a reduction in the number of stores run counteracted by an increase in other areas – particularly e-commerce/mail revenue (where an increase in e commerce has more than made up for a fall in mail order revenue) and a £1.7M increase in non-retail revenue, driven by the franchising operation. The cost of sales were on a par with last year to leave gross profit slightly up. Indeed, now non retail and e-commerce/mail order now make up more of the profits than the stores do.

Under operating costs we see a £1.6M increase in wages, a £1.3M in distribution costs and a £1M increase in other admin expenses. However we see that the 2011 figures have benefited from some one-off income – particularly a £4M gain on disposal of property and a £1.9M benefit from a store disposal premium. So, when taking these into account, the £6.7M reduction in operating profit does not look so bad.

There were some modest gains on last year for the share of profit from the associate in Japan with some small swings to gains in interest payments/receivables to leave the profit before tax £5.7M down on last year at £18.4M. A higher taxation amount then leaves the profit for the year £6.3M down at £13M.

So, given the one off gains for 2011, these results are actually much better than it originally appeared, proving how important it is not just to take the headline figures.

At this point I am now going to have a look at the earnings per share to see how that compares.

EPS	2012		2011

PROFIT AFTER TAX	13,000,000	-6,300,000	19,300,000
NUMBER OF SHARES	727,763,000	0	727,763,000
EPS	1.8		2.7
EPS EXCL EXCEPTIONALS	1.8		2.0
SP	21.5	-2	23.8
P/E	12.0	3	9.0

At the time of writing the P/E ratio is a non-demanding 12 whilst various broker forecasts put future EPS at 2.0 which gives a forward P/E ratio of 10.7 which seems fairly decent value to me.

Now, moving on to the balance sheet:

An increase in both assets and liabilities has caused the net asset level to remain fairly stable. As far as the assets are concerned, we see that there has been a sizeable jump in the value of freehold property, up £5.4M to £9.2M with a smaller reduction in the value of leasehold property. This increase is the addition of the Corus Edgewarebury hotel to the portfolio of the group. There is also a £1M increase in investments in both associates and quoted shares. Finished goods inventory is up nearly £4M to £51M while cash is down £3.5M to £35M, still leaving a sizeable cash asset.

Total liabilities are up £5.7M to £87M. Within this, trade and other payables are the big risers with trade payables up £3.3M to £30.5M and other payables up £4.2M to £21.3M. There were not any other significant rises.

We can see here that there was a £3.5M cash outflow for the year compared to a massive £21.1M inflow last year. Looking more closely at the figures we can see that cash flow operations fell nearly £3M to £23.2M. As we have already seen, there has been an increase in the value of inventories but an increase in payables has more than counteracted this to give a net cash inflow from operations of £24.4M (down £4.7M on last year). There was a £2M increase in payables which related to the increase of trade payable days from 30 to 33 – a good way to control cash flow somewhat.

There are two items which seem to have caused the negative comparison with 2011. Last year there was a £12.1M cash gain from the sale of property and equipment (compared to 0 this year) and £8.9M was spent on the purchase of property, plant and equipment this year, compared to just £1.6M last year. This was made up predominantly by the purchase of the Edgewarebury Corus Hotel, which cost £5.8M) Other items of note was a £4.2M reduction in the cash spent on tax and a hike in dividends paid out, which increased the cash paid on this by £5.4M. Given the large cash reserve, this dividend hike seems sustainable assuming there is no deterioration in the cash from profits in future years.

These figures should be taken in context. Last year was an exceptionally good year for the group with regards to profit and revenue, and despite this year being not quite so stellar, the profits for 2012 are still, historically speaking, very good.

The revenue streams for Laura Ashley seem to be diversifying. As mentioned, the franchise and e-commerce/mail order segments now contribute more combined than the traditional stores and the group is now branching into hotels! They purchased the Edgewarebury Corus hotel from Corus Hotels ltd for £5.8M which will continue to be run by Corus hotels and Laura Ashely will gain 4% of the gross operating profit of the hotel, which is capped at £50K. It may be relevant here that Corus hotels are part of the Malaysian United Industries group (the largest shareholder of Laura Ashley), make of that what you will. I am not sure why they purchased the hotel, it is certainly not going to make much money for the group. Apparently it will be used for “brand marketing development”.

The group continue to reduce their selling space as they close unprofitable stores. During the year 7 were closed (with one new store opening) which gives an insight into the falling revenues for UK stores and the larger contribution from other sources as the group now sells products through its website to Germany, Austria, Italy and Switzerland in addition to the UK.

Within the UK, most product lines increased sales. Like for like furniture sales were up 4.1% with particular success in the expansion of the bed category and continued success with mirrors; LFL decorating sales were up 4.7% with the curtain and blind business growing particularly well; LFL fashion retail was up 5.6% with a new range of perfumery and related products launched but LFL home accessory sales fell 0.2%, with the blame placed on an increasingly competitive market. Franchise income continues to increase with 5 new stores in this category with 2 stores now opened in Moscow. The group is targeting emerging markets with franchises. Licencing income increased by a pleasing 13% to £3.5M as licenses were awarded for new categories, including sewing machines, bathroom furniture, lingerie and t-shirts.

Sales for the first few months of 2012 are looking good so far, up nearly 11% on a like for like basis.

Overall then, I believe this is a fairly steady set of results. Although the profit levels look poor when compared to last year, this must be taken in the context of 2011 being an exceptional year for Laura Ashley and there were a number of one-off factors that affected profitability. Similarly for the cash flow. As far as revenues are concerned, there is a good improvement in e-commerce, licensing and franchising operations, slightly counteracted by the reduction in sales space for UK stores. I am not sure the hotel purchase is a good idea but it seems the group wanted to do something with the cash it has accumulated (it also increased dividends. There is currently a P/E of 12, which is fairly decent and it now has a mammoth 9.3% dividend yield (although this does not seem to be covered very well by earnings). HOLD, perhaps a tentative buy.

Dividend Yield: 9.3

Change in Net Cash: -3.5M

Gearing: -64%

Future P/E: 10.7

Tristel PLC – Interim Results 2012

Posted on May 2, 2012 by Share Research

Tristel have now released their interim report for 2012 so let’s have a look at the income statement to start with.

So, this is quite interesting. We can see that the profit for the year of £531K is £230K up on the same period of last year but within this is a £269K net tax rebate, which is to do with an R&D tax credit, against a tax payment of last year of £132K. The profit before tax is actually £171K down on the first half of the 2011 financial year. The cause of this is increased depreciation (obviously a non cash charge) and a £559K increase in other administrative expenses. I am not sure what these are but it is clear that this is where Tristel has lost out when compared to last year. Revenue is actually up for all sectors with the diversification strategy being implemented is clearly working to some extent as we see the pharmaceutical sector show it’s first revenues.

Moving on to the asset statement:

This seems to be fairly decent – net assets are up nearly £500K and net tangible assets are up £380K. The largest increases can be seen in inventories and receivables suggesting that Tristel has been increasing its order book (or has issues with the ordering process). All liabilities have increased by small amounts to give the net increase seen in the net asset base.

Cash Flow:

We can see here that there is a small cash outflow of £43K compared to an inflow of £175K in the same period of last year. However, when considering the new share issue that raised £3.9M last year, this is actually a rather better comparison than it first appears. Increases in inventories and receivables are only partially mitigated by an increase in payables, leaving the cash from operations at £213K (compared to an outflow last year). Added onto this is the £352K tax rebate which does flatter these figures somewhat. The capital expenditure on intangibles and property, plant and equipment is much lower than in H1 2011 suggesting Tristel is scaling down investment. We can also see a much lower spend on dividends which is far more sustainable given the cash flows seen here.

Overseas sales have doubled in the first half of this year to be £775K as a result of more sales in Germany and an agreement to enable to group to make sales in China. Indeed Tristel has appointed 15 regional distributers in China and sold 35 Stella units so far – due to the huge market here I have decent hopes for this venture. Tristel have also now launched into the Australian hospital market. Although this is still small when compared to the UK, I feel this is the start of a very positive step to diversify abroad.

Last year the group invested heavily in new product areas in order to mitigate the fact that their traditional market of digestive endoscopes is a declining area. The new business area was sterilization products for the pharmaceutical and personal care industry. This capital expenditure seems to be relaxing and hopefully the group can now push on and realise more profits. The traditional niche of digestive endoscopy reduced by nearly 9% in earnings in the half but the rate of decay is less than last quarter. The products that Tristel sell are generally low cost and as such hospitals that are looking to save money should be looking more and more at these kinds of products.

Overall then, these results suggest to me that things are starting to bear fruit. I have a bit of a worry that profits are growing at a slower rate than overheads which would have dented the profit were it not for the R&D tax rebate. The net assets are tracking up slightly and the cash generation is pretty much non existent but I am excited by the new business areas and territories being explored by Tristel. I would like to think there is a lot of potential there. This is a tricky one but I think this may be a risky buy.

On 3^rd April 2012, Tristel made an announcement that they had terminated their marketing agreement with Medichem. Tristel has traditionally sold £2M of products to Medichem which they will now have to market themselves. Although this is an opportunity to gain margin on the products, the fact that it was unexpected is rather worrying. In the short term, this is likely to affect deliveries and profits. Now an even more cautious buy.

Tristel PLC – FY 2011

Posted on April 30, 2012 by Share Research

Unit 1B, Lynx Business Park, Fordham Road, Snailwell, Cambs, CB8 7NY

After initial gains my Tristel shares are now below the price I paid for them. Could this be a buying opportunity or signs of problems to come?

The core business of Tristel is hospital infection control. They manufacture and market products designed to disinfect hospitals and control the spread of superbugs. They now also manufacture disinfectants for use in animal healthcare and recently started manufacturing disinfectants for the pharmaceutical and personal care industries.

Within the hospital control sector, there are the following vectors:

Instruments – This is how Tristel started out. Their devices disinfect instruments used in hospitals. The largest area within this is the endoscope sector but this is now declining, mainly because instrument manufacturers are introducing their own disinfectants.

Water – This disinfectant is produced by Bio-Cide Inc, and sold by Tristel in Europe. It combats the bacterium Legionella (found in potential drinking water) and also used to reduce spoilage of plants in horticulture, such as Orchids. This is not a growing market, but stable.

Surface – This is a disinfectant that is used on hospital surfaces, it needs to be powerful as these disinfectants dry out quickly on surfaces. If the company can continue to increase sales abroad, this is a potential grown market.

In the Animal Healthcare market, Tristel manufactures products for a company called Medi-Mark. I am not sure the margin Tristel makes on these products, but income is increasing and Tristel has no control over the sales strategy.

The Pharmaceutical business is named Crystel and the products are used to disinfect manufacturing plants and clean rooms. This is a very new business and Tristel are looking to develop relationships with international distributers over the year.

The company has only been trading on the AIM exchange for 7 years so is still quite a new entity.

So, this doesn’t look to be a particularly good set of results at first glance. The deadline income of £364K has tumbled £800K from last year’s figure, and is the first reduction of profit the group has experienced in recent history. The income figures are a little more encouraging. The Hospital Infection Control segment remained static because of the reduction in sales of the endoscope disinfectants. The sales of the Animal Healthcare are up, apparently due to the fact that Tristel is now manufacturing the whole products range. Finally, we see that the Pharma and Personal care segment has made its first sales – more hopefully to come from this in future.

The main reason for the reduction in profit is the increased costs. Wages are up £700K, operating leases are up slightly and other expenses are also up. This is due to the increased investment in the new product line of Pharma and Personal care – particularly the hiring of more staff. As an aside, there was an impairment last year for development into new delivery systems for their chemistry that it was not considered viable to continue. The impairment of property, plant and equipment was due to non recoverable leasehold improvements on an early vacation of the property. During the year, £700K was paid to Bruce Green as a partial settlement of royalty fees. There is no indication of whether this deals with most of the consideration or not, but it is a lot of money (presumably recorded under admin expenses)

These results, then, although they are not great, they are not as bad as they initially seem. Of more concern, I think, are the reducing revenues from the endoscope disinfecting business (hidden somewhat here by the increase in revenues from other vectors).

EPS and P/E Ratio

Something linked with the income statement and the performance of the company is the Earnings Per Share (EPS). This can be a good way of comparing performance on a like for like basis, taking into account acquisitions etc . Related to this is the P/E Ratio. This is calculated by dividing the share value by the EPS, thereby giving an indication of how much the market is willing to pay for the earnings. Apparently a value of 15-20 is about average, and one lower than this can indicate that a stock is undervalued or that the market does not expect future earnings to improve. The figures for Tristel are below:

EPS	2011		2010

PROFIT AFTER TAX	437,000	-758,000	1,195,000
NUMBER OF SHARES	39,290,000	6,127,000	33,163,000
EPS	1.1		3.6
SP	47.5		52.5
P/E	42.7		14.6

Taking the share price for today, the P/E is 28. This is certainly a high P/E, which seems to suggest that the share is overvalued. I suspect that it indicates that the market thinks the problems with the profit are a one off due to the investment made, detailed above. In fact, the consensus among brokers is that the EPS next year will be 3.15, giving a forward P/E of 12.9. We can also see that the company has issued a lot more shares, thereby devaluing those already in existence.

Now to look at the Balance Sheet:

Net assets overall are up considerably to just under £12M, within this we see a large increase in development capitalised as an asset and overall, a large amount of the asset make up is intangible. Moving on to tangible assets, apart from an investment in motor vehicles, we a reduction in raw materials, and an increase in finished goods suggesting progress has been made on the production of goods. It can also be seen that trade receivables are up – could this indicate an increase in customer orders or a worsening in credit terms? Sadly we see that cash has almost halved to leave it at £441K. The £84K for amounts owed by group undertakings relates to Tristel Italia, which the group owns 20% of.

As far as liabilities are concerned, the only thing I think is of interest is the reduction in bank loans – over £1.2M have been wiped out, which is an encouraging sign.

On to cash flow…

Looking at the cash flow, we see that there is a negative cash flow of about £500K. This isn’t that bad, but it is a little concerning that the cash level at the end of the year was £441K so this would not be sustainable for another year. The cash from operations, at -£2K is not great. As mentioned under the income statement, this is caused by slack increases in revenue and a large investment in staff and new products. There was a tax bill a lot higher than last year. Apparently a refund of £325K due from HMRC for R&D work done was not received during the period, as expected but was received in August of the year (after year end)

There was less money spent on intangibles, probably lower R&D and no more money spent on acquiring patents. It’s also worth noting that Tristel paid off its loan during the year. Finally it should be noted that this cash flow is flattered by the floating of new shares. Nearly £4M was made doing this, and without it the cash flow would be heavily negative.

The cash flow, then is not bad but is only being kept respectable by new share issues or, in previous years, loans. This is not sustainable long term and the company needs to start making some proper cash.

I will now have a quick look at the shareholder make up.

Largest Shareholders

Amarti Global Investors 6.4%

ISIS EP LLP 5.4%

Downing Corporate Finance 5.3%

Uniform Asset Management 4.1%

Williams De Boe 4.0%

Not really much of interest here. These are all asset management companies. However, it should be noted that the chairman, through many different vehicles and family members owns 20% of the shares after he purchased some more after the date of this report.

In conclusion, these results are not great but they are not that bad either. The company is undergoing somewhat of a change as its traditional revenue sources are running out and they are investing in new markets. Of course there is no guarantee that these markets will be fruitful but I have faith.

I have some concern that the company cannot make any cash without raising more capital by issuing shares or taking out loans. The lack of debt is a good sign, but there needs to be some sign that Tristel can accumulate some cash. Perhaps with this in mind, and with one eye on investing more in the group, management have decided to increase dividend cover to 2.3 times earnings (now it is 1.5 times) until such a time that the company can return to profit levels seen in 2010. After which, it will reduce it to 2 times earnings. This is a prudent move even if it does mean less money for shareholders in the short term.

During the year we saw almost £1M invested in developing new products and £530K on obtaining new patents and gaining regulatory approval which, presumably are one off costs. There seems to be no borrowing to speak of and net cash stands at £441K so gearing is not an issue here. Also, the board have stated that the German operation has established a foothold in hospitals there, which would be a great new market and that the Chinese subsidiary gained regulatory approval to sell goods there.

At this point I am going to quickly look at trade payables overdue, which is summarised in the following table:

TRADE RECEIVABLES	2011		2010

CURRENT	1,444,000	164,000	1,280,000
OVERDUE 0-30 DAYS	437,000	9,000	428,000
OVERDUE 31-120 DAYS	259,000	158,000	101,000
OVERDUE 120+ DAYS	65,000	36,000	29,000
TOTAL	2,205,000	367,000	1,838,000

In my opinion there seems to be quite a lot here that is overdue, and the amount overdue seems to be increasing more than that not overdue so the board should keep an eye on this.

There are some potential risks ahead. One customer accounts for nearly a quarter of all revenues so a collapse of this customer would be disastrous. One disappointing announcement was that the US distributer of the surface disinfectants, Clorox, has terminated an agreement to distribute Tristel’s products which is definitely a set back. Finally, considering the sector, Tristel is susceptible to NHS cuts. It must be said, however, that the current government does not seem to be earmarking the NHS to undergo cuts as much as other public sectors.

Overall then, despite the disappointing headline figures, I agree with the board in their assessment that this is mainly due to investment in the future and these are products that should only become more popular as hospitals and other areas consider sterile environments to be important. As mentioned above, however, I am a little concerned about the inability of the company to make cash which is preventing me investing more in this company, despite the depressed share price. Therefore they are a HOLD for me.