Wednesday, 12 February 2014

2014 Stock Picks: Group 5 Micro Caps

Last, but certainly not least, it’s time to have a quick look over the final group of stocks that some of my twitter followers selected as their hot picks for 2014. To see the full list of 41 stocks click here.

But these final few are the micro caps, those lovely little tiddlers with a market cap of under £12 million. These are the stocks that are going to make us all millionaires! These are the ASOS’s of the future, who may go from a £5m to a £1billion market cap and turn our £2500 investment into £500,000! Well.... that’s how the dream goes and for some the reality too. So let’s have a look at what you’ve chosen. Once again this is only a briefest of overviews to allow you to follow up and do your own research an anything you like the look of please.......

Micro Cap (Under £12m)

Chosen By
Starting Market Cap
Starting Share Price
Nostra Terra
@paul18280, @X1ACX
Reach Entertainment
Motive TV

Herencia Resources Plc (HER)
Herencia is a multi-commodity explorer with a focus on developing its high quality projects in Chile. It is well-established in the Chilean resource sector. A quick summary of its projects is as follows:
  • As part of its Paguanta project, Herencia has completed a feasibility study into its Patricia Mine (zinc, silver, lead) and is proceeding with preparation of permitting documentation with the goal of bringing the mine into production in 2015. Herencia has also acquired an exciting tenement package over a potential porphyry target immediately adjacent to Paguanta
  • At its Guamanga Project (copper-gold), Herencia has signed a term sheet with OZ Minerals, one of Australia's leading copper miners, with a view to jointly advancing this project. OZ is covering much of the financial cost of exploration here. They also recently advised that they propose to expand the footprint of the Guamanga project area due to the significant potential they see at Guamanga. 
  • Herencia has acquired an option over the producing Picachos Mine (copper), located adjacent to Teck's large Andacollo Mine (over 400m tonnes of resource). This project is looking like it has the potential to be an excellent copper prospect with over 8kms of combined strike length. There could be anywhere in the region of 10-50 million tonnes. 
Herencia have just received £1.86m, the second tranche of arranged funding, from Shining Capital Management by way of issuing 300m shares above the current share price. One of the directors has also just bought 4.5m shares in Herencia. So there is some confidence in the current share price and prospects for 2014.

Infastrata (INFA)
InfraStrata is an independent petroleum exploration and gas storage company. It demerged from Egdon Resources in 2008 and is focused on exploration in two areas in the UK - in Dorset, England and in Antrim, Northern Ireland. It aims to complete its programme to realise value from its “Islandmagee” gas storage project in Northern Ireland, albeit BP have just announced that they have decided not to continue with their involvement in the project and therefore a new partner needs to be found. The shares have fallen 40% since this news broke.

In Antrim a site for an exploration well (PL1/10) has been selected and negotiations with landowners are ongoing whilst consents are sought. In Dorset, planning permission has been granted for a “California Quarry-1” exploration well. Both these wells are hoped to start drilling towards the end of 2014.

Infastrata had 2 license successes in the 27th offshore licensing round and are looking for farm out partners for some of their prospects. Meanwhile Egdon Resources are planning to drill a well in Burton on the Wolds in which Infastrata have a small interest.

If it wasn’t for the recent news that BP are pulling out of the Islandmagee gas project and leaving Infastrata needing large amounts of funds or a new Partner to progress Infastrata would be an interesting little UK based explorer with fingers in lots of little pies, which could grow big. But for me this is a watch and see stock until it’s clearer on the funding news for Islandmagee gas project.

Crawshaw Group Plc (CRAW)
Crawshaw Group came into existence in 2008 following an acquisition by Felix Plc. It is basically a “reet gud north’n butchers” (by the way I am from Sheffield so no offence intended). The business comprises a chain of 20 butchers (currently) across Yorkshire, Lincolnshire, Nottinghamshire and Humberside and 2 processing and distribution centres in Grimsby and Rotherham.

Crawshaw prides itself on innovative meat retailing, focussing on quality and value. Their web site has a positive, confident feel about it and cuts through any drab corporate stuff to focus on the customer experience and value. I haven’t been to a shop but get the impression that I would be greated by cheery professional butchers keen to help you choose a perfect cut of meat at a good price with quality to match.

It would seem that this impression could be the reality recently as recent trading has been excellent. Like for likes at the interim stage in July were up 5% to £9.8m. Gross profit increased 6% and profit before tax increased 3 fold to £300,000 (2012 £100,000). The business generated £500,000 cash in the first half and announced an interim dividend of 0.09p. Around 64% of shares are held by ii’s or directors and the Chairman is also Chairman at which is a very impressive fast growing internet retailer.

More recently the board announced a post Christmas trading update which again showed good performance. Like for like sales for the 7 weeks to 29th December were up 21% and at a higher gross margin. With costs under control the Chairman commented that he expects the full year results to end of January to be “materially higher than current market forecast”. They have also opened a new market unit in Sheffield and have a leased property in Sheffield close to completion.

This is a very different kettle of fish (actually meat) to my usual oil and gas interests but I have to say it looks a great little company in my opinion. The shares have already risen from 17p to the high 20’s but if they continue to carefully control their expansion plans whilst driving sales at recent gross margin rates there seems to be a promising future for shareholders here.

Nostra Terra Oil and Gas (NTOG)
Most investors on twitter will know about Nostra Terra as their CEO, Matt Lofgran is an avid tweeter! That said, for those of you who have missed him, Nostra are focussed on oil and gas prospects across Kansas, Texas, Colorado and Oklahoma. A bit like Magnolia, their working interests have been generally small but have been growing recently as their production and cash flow increases. They are interested in applying new drilling and recovery techniques across shale plays and old fields that were previously not thought to be commercially viable. Using 3D seismic mapping, horizontal drilling, and multi well completions they aim to target reservoirs that were left behind when previous operators moved on following traditional vertical drilling.

The strategy is working and production and cash flow are growing, albeit from a relatively small base at this stage. Their last quarterly report (13th January) contained the following highlights:
  • 150% increase to production (Jan to Nov 2013 versus whole of 2012)
  • Net production for October at 60boepd (80% oil/liquids)
  • Participating in 5 new wells since previous update
  • Cash flow positive on an operational basis. 
  • Successful progress on recovery of debts owed to Nostra by Richfield.
There are multiple wells being planned by Nostra and its operators across their prospects. Some of them, like the upcoming Hunter well in the Chisholm Trail, will see Nostra take its highest working interests to date.

Nostra are following a steady business growth strategy and have plenty of prospects to progress. For those who like extreme risk/reward prospects this might be too safe for some, although I’m not sure you could ever describe oil and gas as anything other than risky! Nice growth and future prospects here in my opinion.

Xtract Resources Plc (XTR)
Xtract Resources, formally Xtract Energy, underwent a complete change of strategy and board recently. After the appointment of a new CEO, Jan Nelson, the board started a strategic review which saw them dispose of their licenses in Denmark and entire holdings in Equus Mining. They cut operational costs significantly, and are now focussed on establishing a portfolio of early stage precious and base metal projects with growth potential.

The boards stated plan is to “work with management teams to ensure project delivery…help finance early and development phase business activity…. and look to crystalise value at an appropriate exit point”. Xtract own 6million shares in Global Oil Shale Group Ltd, with a further 1.5m shares due in the event that the company lists. The board is actively reviewing other opportunities.

At the half way point last year they made a tiny net profit of £10k against an £8m loss the year before. Operating expenses had been cut significantly, but cash stood at just £600,000 and net assets were £1.26million.

Since then Xtract have signed a heads of agreement on a proposed joint venture with Polar Star Mining for a Phosphate prospect in Chile. The Executive Chairman announced at the time that the company had been successfully reorganised and that second half of the year should see more progress on its stated mission. Since then we have heard nothing more, suggesting either imminent news flow or that the stated mission is going to take a while longer to realise.

Not one for me on the basis of no revenue, and small prospects at this stage, with the challenging market conditions for tiny caps raising funds not going to help, but that’s only my risk preference and others may be very comfortable taking a stake in a company at what could be the start of a growth journey.

Reach 4 Entertainment enterprises plc (R4E)
Reach4enterprises describe themselves as “the premier in entertainment and brand building”. They operate in the theatrical, film and live entertainment advertising, marketing and merchandising industry, through their four divisions and strategic partnerships.

They have four companies in the group, Dewynters who are a global leader in marketing and branding campaigns, Spotco an arts and live entertainment advertising agency, Newman Displays the UK’s leading outdoor signage, marquee display and installation company, and finally who provide in theatre merchandising operations for leading theatres.

The last year has seen performance in line with expectations at every stage, and a set of results which they have described as stabilised and confident. Revenues at the half way mark were just over £35m which was +2%, and a tiny profit of £23k was made after tax. Since then trading performance has been consistent and the board are confident of meeting market expectations for the full year. Costs are down on last year and their loan facility has been restructured. Trading updates in November and January reiterated the stable nature of trade and the expectations to meet expectations for the full year. The full year results will be announced before the end of April 2014.

Motive Television (MTV)
Motive television provides advanced software and services to the broadcast industry. They are at the cutting edge of cloud based smart phone and tablet television type services, satellite broadcasting, video on demand and catch up TV. They were established in 2005 and have offices across the world. Their products and services allow us, the consumer, to watch TV and video anywhere, any time, on any device and they have patented this technology which they call Television Anytime Anywhere™. They operate a business to business sales model, selling to satellite and terrestrial broadcasters, enabling the public to watch TV on their devices anywhere.

Their sales are modest to date, with revenue for the 6 months ending June 2013 of £573k, up 16% on the prior year. Gross profit was also up to £208k, with a loss on continuing activities of £984k down 20%. Cash at hand was only £566k at this point.

Clearly operating in the cloud based Tablet TV sector means operating in an industry which is seeing transformational and disruptive changes to technology and possibilities opening up meaning there will be some massive winners. But to be honest I couldn’t really get to grips with the potential of MTV, as my attention was distracted by the ongoing and significant dilution of shares at regular intervals. There are currently over 29 billion shares in issue, with the price seeming to fluctuate around 0.02p which makes small percentage gains pretty meaningless, and every few months there seems to be another few hundred million or in some cases few billion shares issued by way of loan conversions or equity fund raising. For me this detracted from their business model and potential that they may or may not have and I couldn’t get past this issue. But once again I would encourage you to do your own research as there are plenty of technology shares which have literally exploded in value after many years of floundering in the pennies.

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