UK Investor Magazine June 2015

UK Investor Magazine — 1 — June 2015

UK INVESTORMONEY // SHARES // INTERVIEWS ISSUE 1 // JUNE 2015

postcard from greece

UK house prices: they really MUST fall

Tom Winnifrith’s three stocks to crash this summer

Zak Mir’s 3 stock picks for June

Tom Winnifrith’s tip of the month

We are kebabbed whatever happens


Intro

I hope you enjoy the 22 pages that follow with material from myself, Steve Moore, Zak Mir, and our pal, Harry, at Beaufort Securities. This is the inaugural edition of UK Investor Magazine and over the coming months we will bring you articles from a range of other writers including Lucian Miers, Malcolm Stacey, Gary Newman and Ben Turney as we offer you ideas for making money from shares in this monthly e-publication.

The first rule of making money from shares is not to lose mon-ey and with markets at near record highs it may be tempting to think that you are the next Warren Buffett just because your portfolio has zoomed ahead. If only life were that simple.

In a bull market we seem to forget about risk. Fraud, over-pro-motion and stock manipulation flourish, but while shares are heading ever higher no-one seems to care. At the risk of sound-ing like a very grumpy old man, I must warn you that the good times will not last forever.

By any conventional metric of valuation UK equities are - at best - fully valued. At worst they are materially overvalued. Whether one looks at the Q ratio, at PEs or yields it is impossible to argue that shares are cheap. Yet they may go higher still. Calling the top on a bull market is always hard and there is a case to be made that equities actually appear to be value investments when com-pared to other asset classes, notably bonds.

And so we are not seeking to grab headlines with a prediction of an imminent correction, although we would not bet the ranch against it. But merely suggesting that it may be a useful exercise to review your portfolio and looking where you may, on a selec-tive basis, look to lock in a few profits. That would perhaps be the prudent thing to do.

We hope that you find what follows provides a useful source of ideas as to where you might withdraw some of your hard-earned capital, but also to invest it. This is certainly a stock picker’s mar-ket - or it will be shown to be one once the current bull market insanity wears off.

Best wishes,

Tom Winnifrith

Editor

WELCOME TO THE FIRST ISSUE OF UK INVESTOR MAGAZINE

INSIDE

4 The 11th, 12th, and 13th stock to buy for summer

Zak Mir

8 Look at miners for growth

Harry Stevenson

10 Postcard from Greece

Tom Winnifrith

15 The 2015 rally is done

Thierry Laduguie

16 Telecity: a reason to think thematically

Chris Bailey

17 Company of the Month: Adept Telecom

Steve Moore

18 The General Election means not a jot

20 UK Housing - where have all the doomsayers gone?

Tom Winnifrith

22 Feeling smug about my tips of the year

Steve Moore

CONTACT US

UK Investor Magazine 91 - 95 Clerkenwell Road London, EC1R 5BX

E: [email protected]

W: www.UKInvestorShow.com

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EDITORIAL

Tom Winnifrith

Editor

Cover

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TRANSENSE TECHNOLOGIES (TRT):It is interesting that prior to the best turn-arounds in the small/microcap space one tends to see similar combinations of tech-nical and charting reversal events. These in-clude unfilled gaps through the key moving averages, island reversals, bullish divergence in the oscillator, bear traps and of course golden crosses. On this basis it may be said that Transense Technologies looks to be one of the finer recovery situations in play at the moment.

The key drivers here over the Spring have been a final bear trap reversal from below the 1p area, followed by the recovery of the 50 day moving average in April and finally an unfilled gap to the upside through the 50 day moving average - now at 1.43p - in May.

In fact, the saucer-shaped reversal is backed by the way that following May’s gap to the upside we have an island reversal given the way that this move completed the right side of a March gap down.

All of this should ensure that, provided there is no end of day close back below the initial May resistance at 2.09p, we will see shares in Transense Technologies head to the top of a rising trend channel from Jan-uary at 3.5p, just above the 200 day moving average level of 3.21p. The timeframe on such a move is regarded as being the next 2-4 weeks. As far as the bigger picture is concerned, as little as a weekly close above the 200 day line could open up the prospect of a 6p plus destination for the stock 2-3 months following such a clearance.

Zak Mir's 11th,12th, and 13th best shares for summer

Based on Zak Mir’s new eBook

I have just published a book highlighting my top 10 shares to buy for the summer. Any top 10 list, whether it be shares to buy, or Miss World contestants that you’d like to shag, is somewhat arbitary in that your tenth pick is bound to be not much better than your eleventh, the one that didn’t make the grade. Here are the stocks that didn’t quite make the cut, but arguably should have done, to get into my new book.


XTRACT RESOURCES (XTR):Shares of Xtract Resources have been one of the highlights of 2015 to date in the small caps space from both a fun-damental and a technical perspective.

In terms of the technicals, what we have been able to enjoy is a sharp spike in March through the 200 day mov-ing average, then still falling, and now standing at 0.17p, followed by a golden cross buy signal via a gap to the upside at the end of April. This is a classic set up which usually is the precursor to an extended rally/re-rating of a stock or market.

The view now is that the technical picture here appears to be well set on the daily chart. This is said on the basis that it is possible to draw a rising trend channel from January this year, with its resistance line projection currently pointing as high as 0.55p. One should assume such a target for the stock, especially while there is no sustained price action back below former March resistance at 0.3p. Indeed, at this stage, only sustained price action back below the trailing 50 day moving average of 0.23p would really endanger the buy argument. The timeframe on the upside is seen as being the next 1 to 2 months.

VERONA PHARMA (VRP):One of the better rules as far as finding and sticking to decent, reliable bull situations is to identify them early and then be determined enough to remain in place even after significant gains have been notched up. This can be seen from the current charting setup at Verona Pharma, with the way that the shares have been able to sustain the big January 2015 turnaround.

This started with the break higher above the 200 day moving average at 1.90p, followed by a golden cross buy signal between the 50 day and 200 day moving averages in February. Since then there has been sustained price action along the floor of a rising trend channel from June last year and above the 50 day moving average at 3.13p.

The view at the moment is that, at least while there is no break back be-

continues on page 6


low the 50 day line, we should see fur-ther accelerated gains, with a best-case scenario target over the next 2 to 3 months being as high as the top of last year’s channel and its resistance line projection heading to 8p. In the mean-

time any dips towards the 4p level/for-mer April resistance can be regarded as a buying opportunity as they would cool off the overbought RSI reading above the 70 level.

continued from page 5

Get your free copy of Zak Mir’s new ebook,Real Bulletin Board Heroes: The Ten Stocks to Buy for Summer 2015 by clicking here.


Star speakers from the world ofcommodities and investment including

Zak Mir, Amanda van Dyke,Willem Middelkoop and Tom Winnifrith.

Meet and chat to gold and commoditiescompanies, their CEOs and Chairmen.

Tickets half price for limited time.28 November 2015

QEII Conference Centre, Westminster, London

goldandbears.com

GOLD BEARS& T R A D E R S


Kibo Mining* (KIBO, 5.125p) – Speculative Buy

Look at miners for growth. Yes, really.

By Harry Stevenson research analyst, beaufort securities

In this inaugural edition of UK Investor Magazine we highlight three companies in the Basic Materials sector that have recent news activi-ty and which we believe warrant a closer look. It is a contentious view

that we are near the bottom of the cycle for mining companies and we would encourage investors to revisit…

The company recently released its operating and financial results for Q1 2015. Gold produc-tion from the 49% owned Blanket mine in Zim-babwe stood at 9,960 ounces (oz), compared with 10,241oz a year ago. Gold sales declined to 10,773oz from 12,210oz, while the all-in sustaining cost increased to Canadian$959/oz from C$923/oz. The average realised price for the year stood at C$1,200/oz.

Consequently, the gross profit narrowed to C$4.6 million from C$6.0 million. Cash and equivalents stood at C$26.1 million. The com-pany disposed of its non-core operations in Zambia and South Africa in order to reduce expenses. On 3rd November 2014, the com-pany announced a revised investment plan to improve the underground infrastructure and logistics of the Blanket mine and develop a Tramming loop.

OUR VIEW: 2015 is set to be a significant year for Caledonia Mining as the company moves ahead with sinking shafts at the Blanket mine to improve earnings and production for 2016. With increased production output, we expect the cost per ounce to decline. The company aims to maintain its dividend policy of paying 6 cents per annum in equal quarterly instalments while upholding its strong financial position. It contin-ues to benefit from the recent reduction in the Zimbabwe royalty rate to 5%, from 7%. In light of the above, and the modified investment plan, we reiterate a Speculative Buy rating on the stock.

*Beaufort Securities acts as a corporate broker to Kibo Mining plc

Kibo Mining is an exploration and develop-ment company focused on mineral and energy projects in Tanzania which recently announced an update on its Rukwa Definitive Mining Feasibility Study. Phase 2, Stage 1 of the Study (pre-feasibility) remains on schedule and within budget. More importantly, trade-off studies indicate that overburden material is free-digging and that the use of surface contin-uous mining equipment for the coal seams has proven feasible at this stage.

OUR VIEW: We are encouraged with the progress being made on the Feasibility Study and with the potential use of surface continuous mining equipment for the coal seam we expect to see a significant reduction in mine operating costs. We maintain a speculative buy on the stock.

Caledonia Mining Corp (CMCL, 49p) – Speculative Buy


ROCKETSROCKETSHot Stock

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Stocks Ready totake off

Stocks Ready totake off

At Beaufort Securities we offer a bespoke advisory service. Our people are dedicated to the markets day in and day out for one reason and one reason only - to help our clients profit. To discuss your strategies with a broker, please call us on 020 7382 8384.

Beaufort Securities Ltd is authorised and regulated by the Financial Conduct Authority, registered number 155104 and is a mem-ber of The London Stock Exchange and ISDX.

Hummingbird has two projects - Yanfolila Gold in Mali and Dugbe Gold in Liberia. The recent Q1 report highlighted an optimisation report on Yanfolila with an NPV8 of $72 mil-lion and an Internal Rate of Return (IRR) of 35% at $1,250/oz gold. This is with production in year 1 (first gold pour targeted H1 2016) of 100,000oz and 79,000oz over a 6.5 year life of mine, with an initial grade of 2.64g/t and all-in sustaining costs of $733/oz. There are plans for a longer life 1 Mtpa project. Yanfolila mine construction is in progress, with debt facilities secured.

At Dugbe, there is a current resource of 4.2 million ounces of gold from 2 deposits - with an NPV10 of $186 million and an IRR of 29% at $1,300 gold. The company anticipates 125k per annum production.

OUR VIEW: There is a combined gold inventory of 6 million ounces, with excellent grades and recoveries, with robust IRRs. We see a clear path to low cost production in H1 2016 at Yanfolila. The 5,000km2 fully permitted licence area also has life of mine extension opportunities so, with near-term production and exploration upside, we initiate with a Speculative Buy.

Hummingbird Resources (HUM, 35.5p) – Speculative Buy


As I write the sun is rising in Greece a day before the country is set to go bankrupt. Sounds dramatic? Well it could be but then

we have been here before, so many times before. Do a google search on Greece debt deadline and you will see that it has been two minutes to mid-night so many times before and yet somehow the can gets kicked down the road on every occasion.

But this week Greece is mean to repay loans which it simply does not have the cash to repay. As a bonus it must also repay to the IMF money taken out of its emergency deposit last month to repay that month’s loan repayment. It is a double whammy. Every single piggy bank has been raised by our valiant Government from bank accounts held by the embassies abroad to local authority bank accounts. But the game really does look like it is up this time.

Notwithstanding that, some fudge may well be found to allow for another can kick so the drama could be postponed that little bit longer. But the reality is that Greece is totally bust. It has heavy loan repayments to make not just this month but every month this year and every years up to 2057 and the struggling economy here simply will not generate enough revenues for the State to allow repayment.

Of course Greece should never have entered the Euro and never taken on such borrowings. That was political folly driven by those who wanted to enlarge the Eurozone and who did not under-stand basic economics and by a corrupt political class in Greece who saw all things European as a route to personal enrichment and sod the conse-quences.

That political class was swept away in the last elections. Traditionally Greece has only had two parties that mattered, Pasok (nominally left wing crooks) and New Democracy (nominally right wing crooks). The former was all but wiped out at the polls. The latter came a poor second to a new party Syriza led by the charismatic Alex Tsipras. But that party is itself a coalition of social Dem-ocrats like Tsipras, those who just wanted to kick the old parties in the goolies and a hard core of folks who in the old days who have voted Kappa Kappa - EuroCommunists.

Tsipras lied to the electorate, in the most charming of ways, claiming that he could get the EU and IMF to give Greece more cash, be more flexible on loan repayments without insisting on structural changes. For Greece needs to make radical structural changes to labour laws, to the size of the bloated Government payroll and to its pension system if it is ever to have a competitive

postcard from greece

It is two minutes to midnight

By Tom Winnifrith


economy within the Euro and to have a chance of repaying some of its debts.

Or put another way, why the hell should you and I and 80 million Germans work until we are 70 to pay taxes to raise money to go to Greece to pay the pension of my brother in law which he can start collecting at 52. You want to work until you drop so that my brother in law can sit on the beach from when he is 52? Nope me neither.

There is a hope in some quarters that Tsipras himself and perhaps half his party might agree to some reforms in order to get another bailout. But at least half his party would rather default than betray their promises to protect pensions and the bloated public sector. The Syriza coalition would fracture if such a deal was agreed. Tsipras could perhaps continue as Prime Minister in coalition with New Democracy but he knows that he would face a Nick Clegg style wipeout if he did that. No-one wants to be the new Nick Clegg.

At some stage Greece has to accept that it is bust. And also that as the bank run described op-posite demonstrates, that all of our banks are also bust. If the banks were honest about their level of bad debts and were forced to call those debts in only to get cents in the Euro back they would all be bust. The banks like the nation live in a state of pretence.

Oh poor Greece it gets worse for as well as the debt bomb there is another timebomb ticking away - demographics. The average age in Greece is now 46 and it is rising fast. In the good times the young people with drive moved from the vil-lages around where I live and from small settle-ments across Greece to Athens. They did not want to pick olives like their parents and so headed to the Capital. Those same young people now facing youth unemployment of 65% have now in many cases packed their bags again, heading for Lon-don, Berlin or to relatives in Melbourne or Asto-ria. And each week more young folks leave poor Hellas for a better life abroad.

The only people heading the other way are old Northern Europeans who want to retire in the sun and refugees from Africa and the Middle East who land on the Greek coast in rusty old ships. The latter are not mad. There are probably more job opportunities going in Chad than there are in Greece so after three months the refugees head North to Germany or Britain. They are a drain on the Greek state for just 12 weeks before they get EU travel clearance. But still they are an addi-tional drain on a Government that has no cash.

The young Greeks who leave may come back. But most will not. They will marry overseas and bring their kids up in countries with better pros-pects overseas. And so Greece will get steadily older and older. Within a decade the average age may well be greater than 52, the age at which my Brother in law gets to go sit on the beach draw-ing his pension paid for by you and I. The ability

of a country with those sort of demographics to support its own ageing population will be chal-lenging, but the idea that Greece could actually service or repay its debts as well is ludicrous.

Is there a way out? There is and it involves doing what our neigh-

bours in Albania did a few years ago, that is to say to default. Suddenly Greece’s loans will not be our problem but that of those banks daft enough to lend us money in the first place. The New Drachma notes have already been designed and we would head back to a soft currency. The banks will all go bust and their assets (ie those loans that can never be repaid) will be sold off to new banks that will emerge. Of course the new banks will call in the loans causing misery as houses and businesses have to be sold at knockdown prices. I accept that the value of the Greek Hovel where I sit would probably halve.

But that is the opportunity. Suddenly Greece will become terribly cheap. This country has real assets in minerals, in agriculture, in shipping and as a stunning and hot place to live.

The area in which I live is known as Toumbia. It is not a village but a scattering of isolated farm-houses. My guess is that of the forty or so houses, three - if you include mine - are inhabited. The majority are now uninhabitable unless you are a goat or a snake. But since no-one is forced to sell, none ever change hands at a realistic price. In the scenario I outline these properties would start to be offered for peanuts by forced sellers and folks from Northern Europe would buy. Heck I might pick up the neighbouring ruin which is current-ly used to house goats. And folks like me would slowly start to renovate these places creating real jobs for Greeks. The same drivers would see out-side investment in Greek businesses and agricul-ture across the land.

Yes the default scenario would cause short term pain. Tsipras would have to admit that he was elected on a false prospectus. But he can always blame the accursed Germans as he walks out of the Euro with pride. As the economy recovers thanks to the very soft New Drachma a sensible leadership would use that breathing room to start ther process of structural reform, firing pub-lic sector workers knowing that real jobs in the private sector were available to them and slowly increasing the retirement age so that my Brother-in-law has to work a few more years before head-ing to the beach.

Things can get better here but only when Greece accepts that there is no way other than default.

Okay it might screw the Euro and German banks but that is their problem not ours.


Jim Mellon says that the Greeks should build a statue in my honour as on Friday I opened a bank account in Greece and made a deposit. Okay it was only 10 Euro, I need to put in another 3,990 Euro to get my residency papers so I can buy a car, a

bike and a gun, but it was a start. But the scenes at the National Bank in Kalamata were of chaos, you could smell the panic and they were being replicated at banks across Greece.

For tomorrow is a Bank Holiday here and if you are going to default on your debts/ switch from Euros to New Drachmas a bank holiday weekend is the best time to do it. And with debt repayments that cannot be met due on June 5 (next Friday) Greece is clearly in the merde. If it defaults all its banks go bust.

But I had to open an account and make a deposit. Outside the bank in the main street of Kalamata there are two ATMs. The lines at both were ten deep when I arrived and when I left an hour later. Inside I was directed to the two desks marked “Deposit”. You go there to put in money, to open an account or if you are so senile that you cannot do basic admin of your account without assistance. As such it was me depositing cash and four octogenerians who had not got a clue about anything. Actually I lie. These folks may have been gaga but they were not so gaga that they were actually going to deposit cash, I was the sole depositer.

Friday was also the day when pensions are paid into bank accounts. On the Wednes-day and Thursday it was reported that Greeks withdrew 800 million Euro from checking accounts. Friday’s number will dwarf that. Whe you go to a Greek bank you pull off a

Witnessing the great bank run


ticket and wait for your number to be called. The hall in my bank contains about 60 seats all of which were filled. There were folks standing behind the seats and in fact throughout the hall, all wanting to get their cash out before the bank closed at 2 PM.

At the side of the room, shielded by a glass screen sat a man behind a big desk. He tapped away at his screen and made phone calls. Ocassionally folks wandered over, shook papers in his face and harangued him having got no joy elsewhere. So I guess he was the bank manag-er. I rather expected him to end one phone call and stand up to say “That was Athens - all the money has gone, its game over folks.” But he didn’t. He may well do so at some stage soon.

Eventually I got the the front of my five person queue of the senile and opened my account. Passport, tax number, phone number all in order. I handed over a 10 Euro note and the polite - if somewhat stressed - young man gave me about ten piec- es of paper to sign and stamped my pass- book. I have done my bit for Greece and have given it 10 Euro which I will lose one way or another in due course. So Jim - time to lobby for that statue.

The Government did not put up a default notice on Friday as I half expected. The can kicking goes on. The ATMs will be emptied this week-end and on Tuesday and in the run up to a potential default day next Friday the banks will be packed again with folks taking out whatever money they can.

It is not just the bank coffers that are being emptied. To get to The Greek Hovel where I sit now from my local village of Kambos is a two mile drive. On my side of the valley there is some concrete track but it is mainly a mud road. On the other side of the valley there is a deserted monastery so to honour the Church - even if there are no actual monks there - a concrete road was built in the good times. By last summer it was more pothole than road.

By law, since I have water and electricity, I can demand that the road be mended and so last summer I went to the Kambos town hall (4 full time staff serving a population of 536) and did just that. They said “the steam roller is broken and we have no money but will try to do it in the Autumn.” They did not.

But last week a gang of men appeared and the road is now pothole free, indeed in some places we have a whole new concrete surface. And as I head towards Kalamta there are ex-tensive road mending programmes. At Kitries, the village has found money to renovate its beach front. It is a hive of activity across the Mani.

Quite simply each little municipality is spending every cent it has as fast as it can. The Greek State asked all the town halls to hand over spare cash a few weeks ago to help with the debt repayment. The town halls know that next time it will not be a request but an order. But by then all the money they had hoarded will have been spent. That is Greekeconomics for you.

Everyone knows that something has to give and that it will probanly happen this summer. The signs are everywhere.

Tom Winnifrith


I explained that my sentiment indicator (34-day BTI) gave a sell signal, basically bullish senti-ment reached an extreme in the first quarter of

this year. This behaviour generally coincides with market tops. Furthermore there is a disconnect between the FTSE 100 and the S&P 500 – the FTSE 100 is lagging the S&P 500, and the econo-my and the stock market are not in sync. Further-more there is a bearish divergence between the Dow Jones Industrial Average and the Dow Jones Transportation Average. While the Dow Jones Industrial Average is making new highs, the Dow Jones Transportation Average was making a new 6-month low. According to Bob Prechter of Elliott Wave International, “I doubt this has ever hap-pened before…it is very bearish”.

On top of that the global economy is losing steam; China is slowing, Europe is flirting with deflation, Greece is running out of money. In the UK, consumer price inflation turned negative, it is the first time CPI has turned negative since 1960. In the US, the economic recovery is stalling, recent GDP data was sharply down and other eco-nomic indicators point to a slow down.

The stock market too is running out of steam. We saw a good example of a market running out of steam yesterday after the FOMC meeting min-utes. The news was good, Fed officials believed it would be premature to hike interest rates in June. Yet the S&P closed down. The Fed is concerned by the fragility of the recovery, the falling oil prices did not translate into increased consumer spending and they are worried about China and Greece. If the market can’t rally on good news, how can it rally?

The S&P produced a reversal day at the end of

a fifth wave, this is when prices make a new high and then close is in the lower third of the day’s range. This is a bearish pattern, so chances are the US index has turned down. For this reason and given the state of the markets it is increasingly likely that the trend in the FTSE 100 has turned down too and the high at 7122.7 on 27 April will remain intact. The FTSE 100 turned down before the S&P 500 because it is the leading index. The S&P 500 should follow. April 27th is a key date, Remember that date, it was nine days after my forecast at the UK Investor Show.

The pattern on the FTSE 100 is an ending di-agonal [1,2,3,4,5] in the fifth wave of a long term advance. The support line drawn from the bot-tom of wave 2 and 4 has been broken, the pattern is complete. This line is now acting as resistance, currently at 7037. The next move should be down.

At the UK Investor Show I made a bearish statement; I won’t tip any share this year because in my view, the rally in 2015 is done. I expect a large correction sometime in the not too distant future. The FTSE 100 could go down by as much as 10%.

“i will not tip any share this year”

The rally in 2015 is doneBy Thierry Laduguie

trading strategist, bettertrader.co.uk


You know that I am bearish about the mar-ket but there are still pockets of value. War-ren Buffett’s average annual return is 23%.

Those who promise to shoot the lights out with a share tip usually disappoint. My approach is more cautious and so my targetted return here is ..23%

INVESTMENT CASE: Having reached more than 70p in March 2014, shares in IT systems integrator, IS Solutions (ISL) have fallen back to a current 60p offer price, capitalising the company at £21 million. The shares rose from 46p on the back of a December announcement of the successful conclusion of negotiations for “a ma-jor Analytics contract” and that “the business also has a number of exciting opportunities within its pipeline; this together with recent business wins and a number of projects coming back on stream bodes well for the future”, but are thus far little changed in 2015 having commenced the year at 54.25p. This looks to fail to reflect continuing pos-itive progress and the shares are a buy.

OPERATIONS: Focusing on portals, analytics and enterprise content management, IS Solutions is a specialist in bringing together components from various technology providers to create unified systems. Early this year it added through acquisi-tion the ‘big data’ analytics capabilities of previ-ously long-standing trading partner, Speed-Trap Holdings Ltd – noting that this will “provide the company with access to additional routes to mar-ket, new geographies and a high quality customer base”.

MANAGEMENT INCENTIVE: With a background in

computer engineering and systems distribution, Managing Director John Lythall is a co-founder of the company and retains a 6.45% shareholding. His remuneration in 2013 totalled £143k. Last month the company announced Peter Simmonds had been appointed to the board and is to be-come Chairman after a short handover period. Simmonds has more than 20 years experience

at senior management and board level and was recently CEO for over six years at fellow soft-ware & computer ser-vices group Dotdigital – which has performed very well since joining AIM at 7.875p in March 2011. He soon acquired

his first shares in IS – spending nearly £50,000 at 54.5p per share. In total, the board hold a more than 26% stake.

FINANCIALS: For the 2014 calendar year, the com-pany reported a pre-tax profit of £0.98 million on revenue approaching 6% higher than in 2013, of £10.35 million, generating earnings per share of 3.17p, up from a prior year 3.14p. After partic-ularly a £0.64 million net working capital outflow and £0.28 million paid out in dividends, there was a £0.11 million increase in net debt to £0.28 million.

However, the net current asset position in-creased by £0.36 million to £2.05 million, with non-current liabilities reduced by £0.11 million to £0.43 million. The company particularly empha-sised “a strong return to profit in the second six months” – with this period producing a pre-tax profit of £1.30 million on revenue of £6.93 mil-lion as the company secured a major contract

tip of the month

IS Solutions at a 60p offer

By Tom Winnifrith


newsletters.advfn.com/tomwinnifrith

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after cancelled and delayed contracts hit first half performance.

Post the year-end the company completed the acquisition of Speed-Trap Holdings Ltd, which included £1.3 million of cash consideration. It noted an anticipated break-even result on rev-enue of £2.3 million for this business in 2014, moving into profit in the current year.

RISKS: There is the inherent risk of competition in this sector and the first half of 2014 highlighted the risk of contract cancellations and delays. How-ever, the second half of the year showed a swift recovery. There is also risk in any acquisition and that of Speed-Trap saw the company into a more significant net debt position. However, the overall balance sheet looks in decent shape, the prospects for increasing profitability look good and the acquisition risk should be significantly mitigated by the company having been a trading partner of Speed-Trap for more than 10 years and IS Man-aging Director John Lythall having held a non-ex-

ecutive director role at Speed-Trap. Indeed IS has already updated that “the integration of the two businesses has gone well, and almost complete”.

VALUATION: The March results statement noted “strong underlying demand from our Analytics sector which together with recent contract wins puts us in a good position for the 2015 financial year”. There are forecasts for current year earn-ings per share of 4.5p, with the company also “confident that we will resume our progressive dividend policy” following the Speed-Trap acqui-sition – 1.60p per share paid for 2013. At a current 60p offer price, this suggests a possible price/earnings multiple of sub 13x and dividend yield of circa 3%.

Given the growth outlook, these look attractive parameters and the shares are a buy. Target price to sell 72p. That is 20% capital gain plus 3% yield a 23% targetted return.

This article first appeared on the Nifty Fifty website run by Tom Winnifrith, Steve Moore and Lucian Miers - sorry pay-ing customers come first. To read Lucian’s next shorting idea this weekend and to catch the next value investment share tip from Tom & Steve out shortly click here.


UK Investor Show attendees will know from the presentation I made there that I am a fan of Telecity (TCY)

and its exposure, via its range of data centres, to the phenomenal growth in corporate data man-agement requirements. Today was the begin-ning of the end of the Telecity journey as it was confirmed that its large US peer Equinix will be making a takeover offer half in cash and half in Equinix shares.

The rationale for the deal is strikingly simple: as data requirements from corporations go ever more global, Telecity’s customers will now be able to access Equinix’s American and Asian infra-structure as well as in Europe benefiting from a denser, better network. Given synergies, econo-mies of scale and stronger global balance my view would be that any investors with Telecity shares and a capability to hold Equinix stock should do just that. Valuation is not classically cheap…but there are not many companies out there with 10% plus annualised growth rates out there with strong certainty due to infrastructure and reputational barriers to entry.

Old school investment thinking was all based on asset allocation, sector selection and stock picking.

I think much of this rigidity should be cast away and investors should think thematically. Strict sector allocations are increasingly being blurred and the differentiations between companies nominally in the same industry classification are getting ever wider in a world where information flow and corporate interests are ever more global.

Additionally—and I hate to say this – economic growth is structurally slowing globally. Blame it on demographics or too much debt but un-less you focus on the big growth themes or solid dividend yields, current equity valuations mean that most stocks out there are going to struggle to make you money.

I said at the UK Investor Show that you should summarise your investment case for any compa-ny large or small in six bullet points and a couple of charts and if you have to question one of those aspects you should consider selling the stock. Cash flow, management credibility and share-holder remuneration should always be high on your list as check points for any stock. But also ask what global theme is providing a tailwind (or headwind) too.

And being a global themes investor sounds far more beguiling than a plain old stock picker!

telecity’s epic last year ends with a takeover Another reason to think

thematicallyBy Chris Bailey editor, financial orbit


As acquisitions followed, the shares initially performed well – rising to over 200p. However, the acquisitions brought debt; results for the six months ended 30th Sep-

tember 2008 showing this having grown to £11.08 million (net), with liabilities £13.21 million more than current assets. As turmoil hit global financial and credit markets, the shares crashed towards 10p as investors became indiscriminately petrified of debt.

However, the management team led by Chief Executive Ian Fishwick unassum-ingly set about adjusting to the new finan-cial reality – reducing overheads, tight-ening credit management and focusing on developing organic sales, improving customer retention and generating cash and paying down debt.

They noted that together with increasing fixed monthly revenues, a diverse customer base with the top ten customers accounting for approximately 11% of revenues, strong cash conversion with low capital investment requirements and three year banking facilities recently agreed, the company was confident of its position and that “we look forward to a period of provid-ing added investor value through delever-aging from continued strong operating cash generation”.

The embedded table shows deleveraging from continued strong operating cash gen-eration is exactly what they delivered – with net debt reduced to £2.96 million and total liabilities over current assets to £4.51 mil-lion by 31st March 2014, whilst the number of shares in issue was just little more than 4% higher than the 21,067,443 following the 2006 AIM listing.

The table also shows adjusted earnings per share having increased every year from 2010 – with the first half of the year just

ended’s 8.38p, a more than 12% increase on the comparative 2013 period.

An April trading update for the year to 31st March 2015 not-ed that adjusted pre-tax profit is again “ex-pected to be ahead of the prior year and in line with market consensus expectation”, a £1.4 million reduction in net borrowings over the year despite particularly £2.14 million expended on acquisitions and a proposed full-year dividend per share of 2.5p, taking the total for the year to 4.75p per share, up from a prior year 3p.

With now calmer financial and credit markets and having proven their ability to generate consistently strong free cash flow, management are now again advanc-ing the strategy “of consolidation of the fragmented fixed line telecom market in

the UK”, continuing “to identify earnings enhancing acquisition opportunities”.

This is with April having also seen the company announce the signing of a 5 year, £15 million revolving credit facility

agreement with Barclays Bank on im-proved terms to those in place under its previous facility and an announcement in May of an initial £7 million and up to £10.5 million acquisition of Centrix Ltd, a specialist provider of unified commu-nications and managed services.

The shares are now at 175p but, ahead of the results announcement for the company’s year ended 31st March 2015 which is expected in early July, the val-uation continues to look relatively un-demanding, including a dividend yield of still more than 2.5% and particularly with the proven cash generation and ex-perienced management who have shown their ability to adapt to both telecoms and financial market conditions.

AdEPT Telecom plc is a provider of a range of voice and data telecommunications services to

businesses and residential customers across the UK, with strategic relationships with tier-1 sup-

pliers. It listed in February 2006 on AIM (at 140p per share) to help it grow via acquisition as it

saw a fragmented business services provider sector presenting a consolidation opportunity and

had developed scalable back-office systems. By Steve Moore.

company of the month Adept Telecom

Chairman Roger Wilson has worked in the telecom industry for more than 20 years, with this previous experience including as the first Managing Director for Telewest Communications’ resi-dential consumer business in the UK and Managing Director of the European Competitive Telecom-munications Association.

Chief Executive Ian Fishwick founded the company and has been a chief executive or man-aging director in the telecoms industry for more than 20 years, including as a managing director at Telewest Communications managing Telewest North West, Telewest London and South East and Cable London. In that time he has completed more than 30 tele-coms mergers and acquisitions.


Crack out the champagne, the Tories have won and can govern unhindered by those pesky Liberal Democrats! That seemed to be very much the view on 8th May but three weeks later what has really changed for Britain?

Okay we admit, it was fun seeing Ed Milli-band have to eat his victory speech and as for the loon Vince Cable losing his seat it

was pure delight. The old fool can now go back to predicting 17 of the next four recessions as his full time job or maybe Rob Terry could offer Cable a job as a thank you for his valiant support while in office.

But the time for gloating is over. Okay it was also tremendous fun seeing economic illiterate Ed Balls losing his seat. The fact is that the whole election was fought on one great big lie. The left claimed that the last Government had im-posed austerity on Britain. The Right claimed that it was making great strides in balancing Britain’s books in a responsible manner. Both sides were lying.

There has been no austerity. Government spending has increased year on year under the last Government and there are absolutely no signs that it will not be the same again this time around. As a result, in the last financial year the UK Government spent more than £100 billion more than it recouped via taxation. National debt stood at £1.56 trillion or just under 82% of GDP at the period end.

The Government plans to eliminate the deficit in the current Parliament but like the projections offered by all parties at the Election that is pred-icated not on implementing real austerity but on economic growth trimming welfare payments and - more importantly - boosting tax receipts. Like all politicians those running the current Government are planning to spend today the assumed growth of tomorrow.

There are many black swans that could de-rail those growth projections, Britons as a whole have too much personal debt via mortgages and other loans. The inevitable rise in interest rates will not only increase the cost of servicing the Govern-ment’s own debt (currently £45 billion a year) but could also impact consumer behaviour and thus

economic growth adversely.

As for our ma-jor expert market Europe, it is not exactly delivering robust economic growth is it. Throw in the effects of the strong pound against a weak Euro and Britain’s ex-

porters could face a challenging few years. Again that could derail the prospects for growth.

The reality is that no party was honest with the electorate about how we are all living beyond our means. For Britain to balance its books it really does need to see austerity which meas dramatic reform of the pension system, of welfare spend-ing of how we fund the NHS black hole, of our bloated higher education system. These are the big ticket spending items for any Government but no politician dares to admit that we cannot afford to go on as we are.

There is not a cat in hell’s chance of Britain bal-ancing its budget by the end of this Parliament. At a debt to GDP ratio of 90% Country’s can easily tip into a death spiral which forces up the cost of borrowing so increasing the deficit and debt and it is hard to get out of such a spiral once you are in it.

A Tory win was the least worst option for Britain but in reality it changes very little as no-one is really prepared to face up to the big elephants in the room.

the house viewThe General Election

matters not a jot


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SHOW 2016“Main stage presentations were great… particularly Mark Slater, Luke Johnson, panel discussions and of course the inimitable Tom Winnifrith." - PS

"As a long term investor, I found the shorting session fascinating and frightening." - DM


House UK Housing - where have all

the doomsayers gone?

By TomWinnifrith


Until two or three years ago there were a myriad of websites pro-ducing very sensible data to demonstrate that UK house prices were set to crash. Looking at them now is like looking at one of

those old Western ghost towns with tumbleweed blowing down main-street. The websites are still there but folks stopped updating them a long time ago as house prices just carried on climbing. The doomsayers have just given up.

And who can blame them. House prices have continued to race away. One fifth of Britons made more from the, paper, gain on the value of their house in the past twelve months thany they generated from paid employment. One reads anecdotal evidence dai-ly that the love affair wth housing is reaching ever greater levels - the Surrey flat snapped up by a crowdfunded buy to let investment group in less than an hour. The lines of folks flocking desperately to snap up new builds in locations that can only be described as marginal. Housing is now seen by many as THE one way bet.

Humans are in many ways like goldfish - we have relatively short memory spans and are thus prone to believe that what has happened in recent times will continue forever. As such many people genuinely seem to believe that we will always enjoy low interest rates and that this will fuel further house price growth.

The reality of course is rather different. The average UK house now costs c£197,000. The average UK household income is c£38,000. As such the house price to income ratio is now comfortably well over five. That is well above the long term mean of c3.5. And the ratio is at a level which historically has only been reached before a sharp correction in house prices. So might it be “different this time?”

The bulls will argue that wages are now increasing at well above inflation levels ( 2.2% versus 0.1%). And they argue that in a low interest rate environment historic price to in-come metrics are irrelevant. They point to an underlying shortage of housing in the UK and expected population growth. Hmmmm.

The reality is that there are well over a million empty properties in the UK. Okay many are in a poor condition on in places where folks are not queuing up to live. But perhaps a Tory Government might do something to force Local Councils to not sit on so many vacant homes? There are measures that can be taken to free up properties in a way that will easily cope with any growth in the population.

Wages are indeed increasing at above inflation levels but at a slower pace than house prices are increasing and there is an awful lot of cacth up on that metric from the past few years. The fact is that housing is NOT becoming more affordable but less affordable. As for interest rates? They will clearly increase.

The Bank of England recently forced mortgage lenders to consider the ability of pro-spective borrowers to service their loans if there was even a modest increase in base rates of 3%. That more stringent test resulted in a sharp fall in mortgage approvals. Which begs the question of how many borrowers who have been granted mortgages in recent years will struggle with a modest increase in base rates. The answer is a lot.

Property is by definition an illiquid asset. When interest rates increase as they must surely do within a year not only will that choke off the supply of new buyers but it will also create forced sellers. And that brings us back to the house price/earnings ratio now being at levels which have always just preceeded a sharp correction in the past. Will it be different this time? No.


K3 BUSINESS TECHNOLOGY (KBT)

OFFER PRICE: 225p

CURRENT BID PRICE: 255p

COMPANY DESCRIPTION: Pro-vider of software, hosting and managed services to the retail,

manufacturing and distribution sectors. A member of Micro-soft’s Global Independent Soft-ware Vendor programme and the first such Microsoft Dynam-ics AX partner for the fashion retail sector. From its Man-chester head office and regional centres, the company supports more than 3,000 customers in over 30 countries.

ANALYSIS: Shares in K3 reached more than 230p in 2011 before falling back, slipping to sub 100p in 2013 post an announce-ment that “due to the deferral in signing certain significant retail

deals, coupled with investment in the group’s Microsoft AX offering, K3 will generate pre-tax profits below current market forecasts”. There has though since been substantial progress made.

I noted positive trading mo-mentum in the piece at the end of 2014 and this was borne out in results for the six months to 31st December 2014. These showed an adjusted pre-tax profit of £3.56 million on reve-nue of £41.67 million, generat-ing earnings per share of 8.4p, up from a 2013 comparative

Steve Moore smug as he updates on his tips

of the year

More gains to come from these ‘3 for 2015’?

At the end of 2014/beginning of 2015 many of the writers on the shareprophets.com website were asked for their top share selec-tions for the year ahead. I provided three – which are reviewed in

the following. Although they have performed well (for reference the AIM All-Share, which they are all in, is +10.1% year to date, 702-772.6 and the FTSE All-Share is +7.5%, 3,532.74-3,797.12), I continue to believe there is potential for further upside in each…


7.7p, and seeing net debt re-duced by £1.55 million to £12.07 million. They also saw the com-pany emphasise “we continue to be confident of the exciting growth prospects available to us”.

Subsequently K3 has an-nounced a £1.75 million acqui-sition of Willow Starcom Ltd, a Greater Manchester-based provider of IT support ser-vices, with particular expertise in Microsoft products. It noted this “will be readily integrated at limited cost within K3’s existing hosting and managed services activities”.

This latest move saw house broker to the company, finnCap, nudge up its pre-tax profit and earnings per share forecast for next year by 3% - it anticipating 19.5p in earnings per share for the year to 30th June 2015, now rising to 25.3p (on a pre-tax profit of £10 million) next year. With increasing own-IP bene-fitting margins and around half of revenues recurring in nature, finnCap is targeting a 330p share price here. This looks reasonable enough to me – and suggests still good upside from current levels.

VISLINK (VLK)

OFFER PRICE: 38.5p


COMPANY DESCRIPTION: Auto-mation software and wireless communications products and services-focused technology business. It serves two main markets; broadcast (e.g. the col-lection of live news, sport and entertainment events) and sur-veillance (e.g. defence, law en-forcement) and employs more than 300 people with offices in

the UK, USA, UAE, Brazil and Singapore and manufacturing operations in the UK and USA.

ANALYSIS: Vislink saw positive share price momentum into September last year hit by in-terim results which noted that “in our core markets of the US, the UK and Europe, our hard-ware business found market conditions challenging and we continued to witness longer decision making cycles”. How-ever, the company added that it had “already begun to see some of these key orders convert post the period end”, that in Q2 the order book had “strengthened significantly” and that its “soft-ware strategy is on track, pro-viding the group with improved margins, cash generation and visibility of earnings”.

March-announced results for the 2014 calendar year showed an increased adjusted pre-tax profit of £7.06 million, though tax effects reduced earnings per share slightly from a prior year 4.2p to 4.1p.

Additionally, net cash fell by £3.33 million to £0.38 million – though this after particularly £5 million of acquisition spending (after new shares issued), £1.47 million paid out in dividends and with the company not-ing that “inventory levels were unusually high at year end due to a number of projects which were fully or partially com-plete awaiting shipment in Q1 2015” and that “trade receivables included a significant debtor at the year end. The expected pay-ment of which is due in H1 2015. There are no significant adverse trends in debtors”. With these, net current assets were a much healthier £14.78 million, with there £8.02 million of non-cur-rent liabilities.

The results statement also noted that, though its “markets continue to be challenging”, the company is buoyed by its ex-panding higher-margin software offering and more efficient inte-grated communication division under new leadership. These see there forecasts for earnings per share to advance towards 5p this

year, with a 1.60p per share div-idend – suggesting that, despite the share price re-rating so far in 2015, the rating and dividend yield remain quite attractive. I consider that 65p does not currently look an unreasonable target.

IMPELLAM (IPEL)

OFFER PRICE: 510p


COMPANY DESCRIPTION: Spe-cialist staffing and managed services provider based pri-marily in the UK and North America, with smaller opera-tions in Australasia, Ireland and mainland Europe. It comprises Specialist staffing and managed services businesses in the UK and North America and Carlisle Support Services – with a focus on security and cleaning for the transport, retail and leisure sec-tors across the UK, Ireland and mainland Europe. The com-pany reported with its results in March that it is the second largest recruitment business in the UK and 12th worldwide, with more than 2,500 Impellam peo-ple across over 234 locations.

ANALYSIS: Positive in outlook and with increased growth fore-cast, shares in Impellam looked very cheap at little more than 500p towards the end of 2014.

A January trading update and March results for the 53 weeks ended 2nd January 2015 have seen positive share price mo-mentum. The January update noted that “full year trading will be in line with expectations with strong performance in the UK Specialist Staffing and Managed Services businesses, and the turnaround in performance of Carlisle Support Services off-setting under performance in North America”.


This was followed by the results statement showing an adjusted pre-tax profit of £34.6 million on revenue of £1.323 billion (+4.7% like-for-like on the prior year, gross profit £193.9 million - an unchanged margin of 14.7%), generating increased earnings per share of 65.9p. The company also then noted that it “expects improved margins going forward in all segments and particularly in the US where action was taken mid-way through 2014 to address under

performance”.

This positive trading progress turning into positive share price progress saw Tom Winnifrith opt to take profits and sell from the Nifty Fifty portfolio in March. The shares initially con-tinued their upwards progress but, having reached 840p earlier this month, have now slipped to current levels.

There are forecasts for the cur-rent year pre-tax profit to rise to around £46 million, generating

earnings per share of circa 75p. A balance sheet with £14.8 mil-lion of net debt at last year’s end looks comfortably manageable and the valuation still far from excessive. The cautious will like-ly have banked the significant quick-fire gain here, though there still looks to remain some further upside potential and I’d currently consider a circa 900p share price not an overly de-manding valuation.

Documents

UK Investor Magazine June 2015