Shares digital

Melorio (MLO:AIM) – 107p, stop loss 86p

SHARES SUMMARY

A sound investment in training, a sector flush with cash thanks to government largesse. Profits at its recently bought construction company are growing faster than expected and the outlook is rosy.

Business:

To build a UK vocational training business through acquisition

Vital stats:

Market value: £34 million

Historic PE August 2007: n/a

Prospective PE August 2008: 11.1

prospective PE August 2009: 8.1

Sector PE: 13.3

1-month relative strength: -0.7%

1-year relative strength: n/a

Yield: n/a

NMS: 3,000

Spread: 2.8%

The upbeat trading statement seven weeks ago lifted the shares to a peak of 115p but they have fallen back making them excellent value.

Melorio floated at 100p last October having raised £25 million to finance its first purchase, of Construction Learning World (CLW). The company confidently predicts that profits to the end of March will be ‘materially ahead of current market expectations’, and the three month tally to end December showed turnover of £3.4 million, producing EBITDA profits of £1.2 million.

In the year to March 2007 CLW achieved EBITDA profits of £2.6 million on sales of £7.5 million.

The government has committed to spending more than £2 billion increasing vocational training in the UK by 2012 from the current £10.5 billion.

Melorio aims to be a leading consolidator in the sector buying up privately owned businesses over the next couple of years.

Executive chairman Adrian Carey has plenty of experience in the government-funded training sector. He is looking to buy profitable training providers in sectors promoted by the government that will continue to grow rapidly.

Extra value will accrue by retaining management and helping it improve performance and operational excellence. The next stage will be to integrate the businesses over time to implement best practice across the group.

CLW is a leading player in on-site assessment and training in the UK construction industry. There are around 400,000 construction workers needing training to NVQ level 2 by 2010. The company has over 500 clients including big groups like Laing O’Rourke.

Competition is limited to small providers such as colleges of further education and Carter & Carter which went bust. CLW aims to boost its market share from 11% to over 20% within a few years.

Melorio is looking to buy more companies in construction training but also in the care and utilities sectors. Carey could not find a logistics company that matched his criteria so £150,000 has been invested in a start-up operation that will launch shortly.

This surprised some shareholders but if the company achieves its target of making a profit within a year it will be a resounding achievement and probably better value than buying an unsuitable acquisition.

A handful of directors recently spent around £60,000 buying 55,000 shares at 109p. Maiden profits of around £4.4 million are forecast by house broker Kaupthing Singer & Friedlander rising to £5.9 million next year.

This would slash the PE to just over eight, which looks excellent value for a well run company in a fast growing sector.

by: Timon Day