James Faulkner on WatsHot in the small cap markets: James Cropper, Immunodiagnostics Holdings and blur Group

4 mins. to read


James Cropper (CRPR)

James Cropper (CRPR), one of my tips for the second half of 2014, has been rallying on the back of news that its Technical Fibre Products (TFP) division, a manufacturer of advanced nonwovens, is to double its current production capacity through the installation of a third manufacturing line based on the company’s current proprietary wet-laid technology.

Expected to be complete in summer 2015, the installation represents “the latest step in an accelerated programme of capacity and capability improvements for the company, facilitating an increase in capacity to support sales growth, enabling shorter lead times and providing the opportunity to access new markets for which current production constraints have been a limitation.”

Updates like this serve to reinforce my view that Cropper remains significantly under-appreciated and indeed misunderstood by the market. Cropper is driving innovation in a business that has traditionally been seen as an ‘old industry’ stock, a perception which is clearly holding down the rating.

Taking the TFP business alone, house broker Westhouse expects divisional operating profit to rise from an estimated £1.3 million in FY14, to £2.3 million in FY15, £2.8 million in FY16, and £3.5 million in FY17, by which time operating margins are expected to have risen to 17.5% (from an estimated 9.8% in FY14). The firm is eyeing up numerous verticals to drive growth, including automotive, aerospace, medical and industrial. This is a story which could have a very long way to go.


Immunodiagnostics Holdings (IDH)

Specialist diagnostics business Immunodiagnostics Holdings (IDH) has had its fair share of problems of late, but companies like this are always worth keeping an eye on because of the annuity-like nature of their revenues. The latest news is that IDH has acquired DiaMetra, a small Italian diagnostics company that sells a range of manual immunoenzymatic assays.

This looks like a relatively straight-forward bolt-on given that Immunodiagnostic Systems has been working with the company for the last 9 months to convert one of these assays (free testosterone) to its automated IDS-iSYS diagnostic instrument. Brokers have put through small earnings upgrades on the news, but nothing to set the world on fire.

For me, the key take-away from the deal is that it signals a quiet confidence from management in that IDH feels it has enough cash to keep investing in its next-gen Mark II iSYS machine, whilst also splashing out a bit here and there. FY14 results released back in June were a reminder of the firm’s cash cow credentials, with £13.8 million generated from operations (not bad for a company with a market cap of £137 million), taking closing net funds to £26.7 million. They also seemed to show a business slowly turning a corner after what was a huge fallout from increased levels of competition in the manual vitamin D testing market.

There was a return to top-line revenue growth, with revenues up 5% at £52.3 million; automated revenues (IDS-iSYS), now 42.8% of overall revenues, increased by 21% to £22.4 million; and revenues from manual tests, 39.8% of overall revenues, decreased by 18% to £20.8 million.

However, an AGM statement in August cast doubt over whether the firm will be able to meet expectations for the current year.

Placements of the existing automated diagnostic instrument were worse than anticipated, manual sales were poor again, and forex headwinds impacted revenues. Management believes that winning some of the larger tenders will mean that the company can still deliver market expectations, but with the year now weighted to H2, there is a considerable risk of a profit warning later down the line. The shares are worth watchlisting for this reason, as I believe any significant weakness could be used as a buying opportunity for the following reasons…

1) Manual sales will eventually drop out as a main component of revenue, thus allowing revenue growth to accelerate as it becomes increasingly weighted towards rapidly growing automated revenues.

2) Diagnostics companies like IDH will have a key role to play in addressing the pressures faced by public health administrations, as they can help tackle health problems before rather than after the event.

3) Due to their annuity-like revenue streams, diagnostic companies can attract high take-out multiples (note Axis Shield back in 2011).

4) Longer term, the launch of the Mark II machine and the planned introduction of 80 new assay tests over the next five years should reinvigorate growth.


blur Group (BLUR)

blur Group (BLUR) seems to have settled down into its new trading range and I thought it worth catching up with this one after the firm released its interim results.

These showed 306% growth in revenues and 206% growth in bookings (i.e. the value of projects getting underway). This means that projects totalling $16 million in value kicked off in the 6 months to the end of June 2014, showing further acceleration from the $22.2 million kicked off during the whole of 2013, which underpins future revenue growth. The key takeaway from the results seems to be that an increase in the number of enterprise customers (defined as organisations with turnover greater than $500 million), along with a 170% increase in the value of projects from repeat customers, has driven a near doubling of average project values. This is key, given that this is essentially a story of growing a platform that can drive scale and generate operational gearing.

The valuation is a lot more reasonable now, and the net cash balance of $24.4 million gives management a fighting chance of making it to profitability (currently expected in 2 years). Clearly, this stock is speculative, but the disruptive nature of what blur is trying to do could make it a potentially very rewarding one.




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