Vectura and SQS Give Positive Updates

It's always nice to start the day with a couple of very good updates from your holdings. In this case it SQS Software's trading statement and a seemingly innocuous presentation from Vectura which actually, I believe, contains some potentially very good news.



Vectura VR315 US Licensing Deal?

Last year, after Novartis' Sandoz decided to hand over US deployment for VR315 (believed to be generic Advair) the share price immediately slumped over 20%  In addition, analysts called into question the commercial potential of VR315 in the US and, the possibility that it had been dumped in regulatory concerns. Whilst Novartis (Sandoz) continued to work with Vectura in VR315 for Europe, this update to the States effectively led to the market writing off VR315 in the US.

All of which, lead me to be optimistic over the statements made yesterday in a Vectura presentation at the 29th JP Morgan Healthcare Conference in San Francisco. You will find them at around 10:30 in the broadcast. I have replicated them here...

315 is not just a European asset, it's an asset that is going to be of value in both the rest of the World and US territories. We are currently negotiating and a late stage negotiations for  rest of the world with several players, with several players, and in the United States we have a great deal of interest and our advanced stage discussions, and deep into due diligence with a lead company, a lead company with whom, we feel very confident we can take this product forward

So it seems that a US deal is close! I hadn't heard anything about this -in such candour-before and think that we are headed higher when/if a deal gets done.



SQS Software Systems AG Trading Update

A very strong update. Adjusted profit before taxes is expected to be broadly in line with consensus. This is ok, however consider that

• there is a deferral of E500k of budgeted high margin software sales into 2011
• revenues for 2010 are expected to be ahead, due to winning Managed Services contracts

This means that the 2011 revenue and profit forecasts will probably need to be upgraded by analysts due to the E500k deferral of sales. Moreover, the managed services contracts won in 2010 tend to be low margin at the outset. This means that in 2010 they have seen a slight shift of high margin work (software sales) in to 2011 and taken on some initially lower margin work, yet they have hit consensus profit estimates.

I suspect this means that margins are caeteris parabus ahead of estimates. The managed services contracts give greater visibility and long term earnings and I would expect a re-rating after this statement.

I hold both these stocks.

Nichols Update Sees Vimto Sales Expanding

Nichols plc gave a strong trading update today. It is a stock that we featured with an article in the following link found here    This update will be based on that write-up so please refer to it.

Nichols is an attractive stock to buy principally because they are ;extracting the full value from the Vimto brand, achieving margin expansion within distribution, and finally Vimto overseas sales will be strong over the next ten years because Ramadan will take place in the summer in that period.


Nichols Trading Statement

Today's trading statement can be found here and brokers have been keen to upgrade them recently. Nichols reported

Full year 2010 revenues are once again well ahead of our internal plans, with operating margins that will be in line with plan.  The Group's balance sheet has been strengthened and underlying cash generation will also be ahead of expectations.

In overall terms we expect the Group's profitability for the year to 31 December 2010 to be significantly ahead of last year and ahead of current market expectations.

I've run some rudimentary numbers based on the interim results and the previous article in Earnings View, to which I linked into in the first paragraph. Given 16% sales growth (which their broker predicts) it looks like 2010  revenues will come in at 83.9m as against the previous consensus of 80.4m

The stock currently trades at 480p with a market cap of 176m. Assuming margins are the same as in H2 of 2009 this will give operating profits of 15.3m and net profits of 10.7m and this gives full year EPS of 10.7m/36.52m=29.2p This would put them on a PE ratio of 480/29.2=16.4

In terms of free cash flow, I would assume ramped up capex for next few years of 600k and cash flow conversion of 100% and this would give 10.1 or a free cash flow yield of 10.1/176=5.7%

Assuming 5% revenue growth for 2011 (possibly conservative) and similar metrics gives 2011 EPS=30.9 and free cash flow of 10.66m

Nichols a Stock to Buy?

For this kind of business I would like to pay around 5.5% forward free cash flow yield. There is upside potential from Cherry Vimto and international sales, but also downside potential from competition and rising food costs. Nevertheless, I think 10.66/.055=193m or around 528p is a fair price for this stock.