James Faulkner on WatsHot in the Small Cap Market: James Cropper, IndigoVision and GW Pharma

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Specialty paper products firm James Cropper (CRPR) issued a trading update on 30th July, and after having covered the shares in our August issue, I thought it worth following up on.

Trading is in line with management expectations and the comparable period last year. Meanwhile, the management restructuring now looks largely complete. The focus will now move to driving global sales and generating further operational synergies between the divisions.

However, the highlight for me was the growing presence in the aerospace & defence market, in particular the collaboration between TFP (Technical Fibre Products) and AGC AeroComposites in the joint development of electrostatic and lightning compatible composite pipes suitable for use in aircraft fuel systems. A world first, this new development “presents the opportunity to save weight in aircraft fuel systems by replacing the heavier metallic equivalents currently used.”

It is estimated that a weight saving of up to 200 kg per aircraft could be achieved, potentially equating to an estimated fuel saving of up to 26,000 kg per aircraft per annum. Anyone who knows anything about the airline industry knows that fuel costs are paramount, so Cropper could potentially be onto something big here. The parallels with Avon Rubber (AVON), another ‘old industry’ niche player which moved up the value chain, principally through tapping into the defence market, are striking.

But the excitement doesn’t end there. Cropper’s Technology & Innovation department has partnered with Södra, the Swedish forestry giant, to develop DuraPulp, a blend of carefully selected wood fibres and non-fossil based biopolymer which can be heat pressed to take on any rigid form. Unlike other composite products, DuraPulp is believed to be the only one available where the primary content is renewable, biodegradable pulp fibre. Initially, the partners are targeting premium markets such as luxury fashion, cosmetics, automotive and interior design; but there is also a long-term opportunity to explore how this unique product can provide a credible alternative to fossil-based materials.

The shares still look good value on a PE of 11.5x falling to 8.9x for FY16 and a PEG of 0.4x falling to 0.3x. All the above suggests to me that Cropper is well on its way to moving up the value chain, in a journey that could see the shares progressively re-rated.

IndigoVision (IND)

Sticking to the value trail, and we have a trading update from surveillance specialist IndigoVision (IND). This firm has a somewhat turbulent recent history. After the departure of its founder and erstwhile chief executive Oliver Vellacott in December 2011, IndigoVision became subject to a board-room battle between Vellacott’s backers and Scottish tycoon Angus Grossart, chairman.

The shares had traded as high as 580p in 2011, but fell as low as 165p in 2012 after Vellacott – still a major shareholder – made several approaches for the firm that were rejected by the board on the grounds that they “were not remotely close to levels which should be put in front of shareholders”.

Mr Vellacott has since been replaced as chief executive by Marcus Kneen, the former finance director, and in 2012 the new management team hailed a good start to reshaping the business for future growth, noting that “IndigoVision has the potential to be substantially larger than it is today, and has positioned itself well in a growing market, but much remains to be done to achieve its potential. The restructured management team has got off to an excellent start and made a significant difference to performance in a short space of time.”

Time to buy?

The foundations are present for an improved future performance. 13 new camera models were released in FY13, including an explosion proof camera range designed for hazardous areas for the oil and gas industry and a 20 megapixel camera range to service stadiums, events, casinos and traffic projects. In addition, IndigoVision is targeting additional revenue from storage devices through the release of the new NVR AS 4000 product range.

These server based network video recorders have been designed with a technology partner for the enterprise market segment, with 30 terabyte storage capacity per device, extending the revenue available to IndigoVision from larger projects. This range has the high sales value and lower margin associated with higher capacity storage devices. Development is currently focused on high performance intelligent megapixel cameras and niche products for the oil and gas and transport segments, to strengthen the group’s position in these markets. Furthermore, the uptake of the firm’s software products promises to add a high margin recurring revenue element to the group’s business in time.


The latest update, although evidently slightly short of what the market was hoping for, would seem to support the view that the company is being turned around. Sales for the 12 months to 31st July were up by 15% at £37 million, with operating profits up by 17% at £2.4 million. However, the firm conducts a lot of business in the US, so performance was impacted by the strong pound; on an underlying basis, sales were up by 20% and profits by a whopping 50%! That is a solid performance indeed given that growth was purely organic.

On the basis of broker N+1 Singer’s 49p adjusted EPS estimate for FY14, the shares are sitting on a current rating of just 9.8x. With the balance sheet showing a modest net cash position, the valuation doesn’t appear stretched by any means.

GW Pharma (GWP)

Moving away from the value theme, we have pharmaceuticals hopeful GW Pharma (GWP), which has posted its third quarter results today. The firm has generally been making pretty good progress with its portfolio of cannabinoid-based treatments. GW’s main drug, Sativex, is in phase III trials in the US for the treatment of cancer pain and the results of these trials should be reported during 2014. This will provide additional interest for the firm’s new US investor base. GW has already received approval for the commercialisation of Sativex in Italy, for the “treatment of moderate to severe spasticity in Multiple Sclerosis (MS) patients who have not responded adequately to other anti-spasticity medications”. Sativex is forecast to generate peak sales of $0.5 billion for cancer pain and just under $0.3 billion for MS spasticity.

A second US placing earlier this year underlined the appetite for GW shares among American investors. The $101.1 million gross proceeds provide GW with additional funding to accelerate the development of its orphan drug pipeline. Most notably, Epidiolex development in orphan childhood epilepsies (Dravet syndrome and Lennox-Gastaut syndrome) can now be self-funded, allowing GW to retain global commercial rights and benefit in full from downstream economics should this programme be successful in the clinic.

This could be a great move, as Epidolex is forecast for a potential 2019 launch and peak sales of $895 million. Separately, GW has secured Ipsen as a fifth partner for its lead product Sativex, which has been granted Latin American promotion/distribution rights (ex-Mexico and the Caribbean).

We like GW because it has plenty of products in the pipeline, each one of which could have a major impact on the future of the company should it come good. As ever, due to their nature, early stage pharmaceutical companies are high risk investments and this is no different at GW.

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