Warrington-based water provider United Utilities (UU.) may be the North West’s largest public company by some distance but the area has a fine tradition of innovation, not least because it presented the world with so many of the inventions which made the industrial revolution possible. An entrepreneurial spirit continues to run through the 73 listed firms in the region and we believe Manchester’s Enegi Oil (ENEG:AIM) can create shareholder value while at the same time upholding the North West’s rich heritage.
A substantial manufacturing downturn in the 1980s has left scars but centres such as Manchester and Liverpool have enjoyed a revival since then. The financial sector is a key factor in Manchester’s resurgence in particular. The city’s specialist independent financial advisor (IFA) Frenkel Topping (FEN:AIM) looks poised to continue its strong growth trajectory. Stockport packaging materials firm API (API:AIM) completes our trio of local heroes, not least because it is due to return to the dividend list this year.
Personal touch
A modest improvement in the backcloth for North West companies can be seen in figures from Ernst & Young which show just four listed firms in the region issued profit warnings in the second quarter of 2013, compared with the four-year average of six.
The boardroom of Frenkel Topping is certainly in buoyant mood when this writer visits the firm’s offices, just a lusty Kevin Pietersen swing of the bat from the Old Trafford cricket stadium where England had retained the Ashes a few days earlier, with the help of some reliable local rain. The executives’ positive frame of mind has nothing to do with the bat-and-ball game but instead reflects the group’s success in driving funds in its investment management service through the £500 million threshold, up 17% to £521 million in the first half of the year.
When I ask chief executive officer Richard Fraser (CEO) and finance director (FD) Julie Dean about the significance of the milestone Fraser is first to respond: ‘It was an internal target which we wanted to get by the end of this year so to get there six months ahead of time is nice.’
The £16.2 million cap advises on the investment of personal injury damages and clinical negligence awards. It also acts as an expert witness in Court of Protection cases where a person is no longer capable of handling their own business affairs, typically because of personal injury, whether through an accident or complications from an operational procedure.
Having worked with solicitors and barristers on the pre-settlement case, Frenkel Topping then offers its services to clients in the post-settlement area, advising on how best to invest any lump sum settlement awarded to provide structured settlements, or ‘periodical payments’. Fraser estimates around 50% of pre-settlement cases are converted by the group into post-settlement clients.
The group’s priority now is the introduction of a new IT platform which Fraser and Dean say improves its offering to clients to a ‘best-in-class’ standard. As the CEO explains: ‘Many companies are very focused on winning new business but they neglect to work hard on retaining the customers and clients they already have.’
Given the complex nature of the work and the level of trust needed to deal effectively with solicitors, the market has significant barriers to entry. Fraser expresses confidence the group has ample headroom for future growth.
Driving change
Since the 1980s many firms have diversified away from the region’s industrial roots but some companies have worked hard to build on them; vehicle transmission technology play Torotrak (TRK:AIM) was originally spun out of the now defunct car manufacturer British Leyland and it still operates out of the eponymous Leyland itself, a six-mile scuttle down the M6 from Preston.
The group’s CEO Jeremy Deering, who took the helm in September having previously held the role of finance director, is keen to stress the company is building on a strong heritage. ‘We’re very good at talking about what we don’t do well but don’t give ourselves enough credit for the things we excel at. A lot of the breakthroughs in vehicle technology have been driven from the UK and if you go to markets like India, British Leyland is still considered the mecca for this industry.’
Investors have had to be patient with Torotrak and Deering acknowledges the story has been ‘hyped up’ in the past. It remains loss-making and it is nearly a decade since it lost its initial backer, Japanese car maker Toyota (7203:T). Its latest key partner is US automatic transmissions manufacturer Allison (ALSN:NYSE) which has handed over a cumulative £30 million in licensing payments and built a 13.1% stake in the business.
Torotrak’s roster of technologies includes a variable turbocharger, V-Charge, which helps smaller engines to produce more power and KERS, a mechanical flywheel which retains energy from braking and releases it back into the vehicle. The company’s Leyland facility has an impressive amount of kit with a number of testing rigs busily humming away.
Much of the equipment was acquired using the £50 million raised when Torotrak first came to the market back in 1998. This has been augmented by February’s £175,000 acquisition of the assets of Bolton-based automotive engineering firm Motorsports Components.
In the wake of a strategic review in November 2012 Deering explains he is looking to shift the emphasis from simply relying on licensing agreements with large original equipment manufacturers (OEMs) to building out the group’s own manufacturing capability. The plan is to take advantage of increasingly demanding carbon dioxide emission and fuel economy legislation, as well as also ever-more stringent air-quality standards.
‘Fundamentally we are looking to build a new business’, he says, explaining the initial focus will be on lower volume commercial and bus markets. In a message which may induce a wince from shareholders Deering says the group is looking for further investment as it attempts to bridge the gap from mere potential to tangible revenues and cashflow.
This includes an £8 million outlay, in the form of £6 million in cash and £2 million in shares, to secure the remainder of Silverstone-based business Flybrid. Earlier this year Torotrak spent £3 million on the purchase of a 20% stake. It has an exclusive option, expiring in December, to acquire the remaining 80%. Flybrid is developing a mechanical kinetic energy recovery system (M-KERS) that performs better than the main electric battery alternative, when combined with Torotrak’s existing technology.
A trial with bus operator Arriva in early 2014 could lead to commercial revenues within two years and tests in a Volvo (VOLV-B:ST) road car have demonstrated fuel savings of 25%.
Buoyant outlook
The headquarters of Enegi Oil lie in the heart of Manchester and are a world away from the opportunities the group is chasing in the North Sea, let alone its oil and gas assets in West Newfoundland.
Enegi and privately-owned ABT , founded by Enegi chief executive officer Alan Minty, announced a formal joint venture in June. The plan is leverage the latter’s unmanned buoy technology to secure access to already discovered and appraised North Sea oil and gas fields which have been deemed sub-commercial using traditional production systems.
The team behind the venture argue some of the execution risk is mitigated by the involvement of oil services group Wood Group (WG.). The Scottish firm is a strategic partner of ABT and is set to take care of the engineering elements behind the buoy.
The commercial director of ABT Martin Wallwork is keen to stress this is not a revolutionary technology. ‘Essentially it’s no different to a floating production storage and offloading (FPSO) vessel but instead of putting the equipment in a ship you put it in a unmanned buoy which substantially reduces the costs.’ The plan is for the buoy to be attached to the ocean floor using four separate tethers. The crude oil produced will be stored in a seabed storage facility before being collected by a tanker.
I ask him if the industry and authorities will be concerned about producing from oil fields using unmanned and, until now, untested technology. Wallwork acknowledges the importance of safety to oil companies but notes the use of unmanned facilities in the nuclear and utilities industries where the premium placed on safe operations is arguably even greater.
The market responded with barely a flicker last month (2 Jul) when the group announced an agreement with Antrim Energy (AEY:AIM) to develop the Fyne field using the technology. This could reflect concerns over funding. As of the end of 2012 Enegi had just £636,000 in the bank and in April it announced it had agreed a £525,000 loan with the Dutchess Opportunity Cayman Fund to bring more production onstream.
Enegi finance director Damian Minty acknowledges shareholders fear dilution at the ‘top company level’ but says he is confident this can be avoided. The plan is to use a mixture of project and asset-backed finance to fund the construction of the initial buoy. ‘We’re working on financing options as we speak so we can’t go into too much detail,’ he adds.
The group is also putting efforts into securing further tie-ups and Wallwork says the plan is to have a number of deals in place so as soon as the first buoy is in the water ‘a whole portfolio of projects can be derisked’.
Toy town
Shares then shifts seamlessly from buoys to toys. Ten miles north east of Enegi’s central Manchester offices is a Grade II-listed Oldham mill. It has a current incarnation as the main UK distribution centre of toy designer and distributor Character (CCT:AIM).
Character, which produces branded Doctor Who, Peppa Pig and Fireman Sam toys from manufacturing facilities in China, is looking to bounce back from a difficult 2012 when it issued two profit warnings. First-half numbers (2 May) unveiled a slip from a £5.6 million profit to £1.9 million loss as sales slumped 31% to £30.6 million.
Group finance director and joint managing director Kiran Shah admits to a difficult Christmas period and says the group took the pragmatic decision to sell its toys at discounted levels rather than leave them gathering dust in Oldham. Shah agrees the toy market can be unpredictable and says determining what is going to be the year’s successful toy is as much based on ‘gut feeling’ as anything else. Among the products shown to this author in the group’s gleaming spring 2014 showroom is a range to tie in with the first big screen outing for Postman Pat.
In Winsford, South Cheshire, the finance director of wound care product maker Advanced Medical Solutions (AMS:AIM) extols the virtues of the company’s location. According to Mary Tavener, ready access to infrastructure and excellent educational institutions should help support the company’s growth. Set up more than two decades ago by husband and wife team Keith and Diane Gilding, in the last four years the company’s pre-tax profits have grown at a compound annual growth rate of 31.1% and they totalled £12.1 million in 2012.
There is a pharmaceutical tradition in the North West. While industry giant AstraZeneca’s (AZN) decision to ditch its longstanding research base at Alderley Park near Macclesfield was a blow, in May it did appoint life sciences incubation business BioCity to establish a new centre for bioscience companies centred around the Alderley Park facility.
A significant proportion of Advanced Medical Solutions’ products are made and developed at the Winsford site which employs nearly 45% of its 450 staff. On a tour of the manufacturing and distribution centre the site’s engineering manager Ian Caldwell, a veteran of the textiles industry, explains the equipment is not a big step away from what he was used to in his previous stomping ground. What is different is the emphasis on cleanliness and a strict segregation of different processes.
REGIONAL PORTFOLIO
API Group (API:AIM) 69.5p Buy
Sector: General Industries
Market value: £53.3 million
Stockport foils, laminates and holographics play API (API:AIM) could be poised for a market reappraisal as it plans to reintroduce a dividend alongside December’s interim results. The £53 million cap’s products are used in packaging for luxury goods as well as passports, bank notes and certificates. Based on Numis’ earnings per share forecast of 9.9p for the 12 months to March 2014 the stock trades on a price/earnings ratio of seven times against an average multiple for the general industrials sector of 10.6. The broker is also forecasting a dividend per share of 2p a share for the March 2014 financial year, for a prospective yield of almost 3%. Strong cash generation has helped reduce net debt from a 2007 peak of £23 million to just £2.6 million as at the end of March, although the group does also have a £13.1 million pension liability on its books. The paydown of debt has been achieved despite £5.7 million of investment in the business as the group continued to strengthen its competitive position.
Enegi Oil (ENEG:AIM) 7.34p Buy
Sector: Oil & Gas Producers
Market value: £11.8 million
Manchester-headquartered oil & gas firm Enegi Oil (ENEG:AIM) is worthy of investors’ notice as it demonstrates its ability to leverage proprietary unmanned buoy technology that secures access to marginal North Sea oil fields. Enegi and its joint venture partner Advanced Buoy Technology (ABT) has agreed to farm-in to Antrim Energy’s (AEY:AIM) Fyne project which had initially been sidelined after the economics failed to stack up using traditional development methods. Once the new field development plan (FDP) has been completed and approved by the Department of Energy and Climate Change (DECC) Enegi and ABT will together earn a 50% interest in the field. The £9.7 million cap sees scope for further deals. Eighty-eight fields hold less than 15 million barrels of oil equivalent of reserves (mmboe) and Enegi believes no conventional offshore unit can develop economically. The company still needs to secure project finance for the construction of a production buoy but these uncertainties look to be reflected in a share price which has nearly halved year-to-date.
Frenkel Topping (FEN:AIM) 27p Buy
Sector: Financial Services
Market value: £16.2 million
The quality of its earnings and the scope for further growth and upgrades mean Frenkel Topping (FEN:AIM) could continue to rise even after a considerable rerating over the last 12 months. Based on house broker Shore Capital’s 2013 and 2014 earnings per share forecasts of 1.56p and 1.9p the shares trade on a forward price/earnings (PE) ratio of 17.3 falling to 14.2. This is not too demanding. Shore makes the comparison with wealth manager Brooks Macdonald (BRK:AIM) which it estimates trades on a 2013 PE of nearly 24. The firm provides independent financial advice on the investment of personal injury damages and clinical negligence awards. Last month’s interims (15 Jul) revealed recurring revenue represented 68% of total sales. Client retention remained at 99% for the fifth consecutive year to evidence the business model’s considerable resilience. In addition, damages awards are not cyclical and effectively constitute new money.
