Broker upgrade and outlook.

Finncap upgraded Elektron's forecasts when they issues a trading statement on 12th January.

They believe recent strong trading will flow through into the first quarter of FY11e. One of the reasons for that is because Elektron mainy manufacture to order, therefore any orders placed in December/January will see profitability flow through to next years figures. Moreover Elektron win one off orders and its likely these will be hinted at to brokers.

The main changes to forecasts on turnover and eps are:-

Year end Jan 2010...

Turnover increased from £28.45m to £29.60 a forecast increase of 4%

EBIT adj from 0.020 to 1.20p a 500% upgrade.

EPS adj 0.01 to 1.15p

The brokers have indicated that Elektron's competitors are on a pe ratio of 13 times earnings and have therefore pencilled in a price target of 15p for Elektron. It has to be said however those forecasts are based on year end Jan 2010 figures and in my view the current share price is undervalued on the current earnings forecasts for Year end Jan 2011 and 2012.

Finncap have left Year end Jan 2011 and year end Jan 2012 unchanged.

Forecasts for Jan 2011 are eps of 3.40p and Jan 2012 of 4.45p

However with current trading appearing to be significantly up on last year, I feel Finncap will have to upgrade 2011 and 2012 forecasts in due course. This is what Elektron said in their recent trading statement..." In December average daily order intake exceeded £175k per day which was a record for that month, representing a 74% increase on the prior year comparable figure."

Further evidence that things are picking up recently, Premier Farnell and Electromponents have indicated good trading of late more so in the far east, the US and China, which are growing strongly.

I am expecting a further pre close statement in due course. At that stage I expect further upgrades to 2010/2011 turnover, profitabiluty and eps.

However if we follow Finncap's methadology on EKT's competitors being placed on a multiple of 13 times earnings on 2011 eps of 3.40p that would equate to a target share price of 44.2p and for Jan year end 2012 on an eps of 4.45p would equate to a target price of 57.85p.

I think however, Elektron should be on a rating of at least 15 times earnings I base that on a strong balance sheet with low gearing, and rapid rise in eps the next 2 years with better prospects than Finncap have indicated.

Finncaps 9th July 2009 cash forecasts show :-

£0,347,000 cash for Jan year end 2010

£2,858,000 cash for Jan year end 2011

£5,908,000cash for Jan year end 2012.

Taking into account trading at year end being significantly higher than broker forecasts, I suspect the cash position will be far better than Finncap have forecast. Moreover interest charges should be lower as Elektron payed a scrip divi, which was accepted by over 50% of shareholders. This will have resulted in further cash savings.

When the company came out with their trading statement in Jan the company also announced a possible sale of their stake in Hartest. Should the Delta offer be accepted on the 22nd February 2010 Elektron will receive proceeds of approx £1.3 million.

My own Cash balance forecasts taking account of uptake in orders at year end and payment of scrip dividend are as follows ;-

For year end Jan 2010.

Previous profit forecasts EBIDTA adj 0.78 million. Upgraded to £.1.02 = an increase of 340k

Estimated saving on scrip dividend of say 200k plus an estimated savings on interest charges of say 50k = 250k

Previously Finns forecast cash balances for Jan year end 2010 £0.347,000 add on above savings of 737,000 = Cash balances at year end 2009 = £1,084,000

For Jan year end 2011 Finns had cash balances of £2,858,000. Add on 737k = £3.585,000. However should the HTH stake sale go through EKT will receive a further £1.3 million less tax which could equate to cash at year end of approx £4,485,000

Finns had cash balances of £5,903,000 for year Jan year end 2012 taking account of the above would equate to approx £7,640,000