Thursday, May 26, 2011

Computer Modelling Group ( Toronto - CMG ) -- Q4 Results

Computer Modelling Group (Toronto - CMG $28.00) reported Q4 (March) results that were below our expectation.  The company prices its energy simulation software either as a perpetual license or on a year to basis.  More customers elected the annuity format which provided less upfront revenue.  Unit volume was on target.  The recurring fees will enhance future reporting periods.  Earnings were down 10% at $.28 a share (excluding non cash stock option expense).  Sales were flat at $14.4 million (Canadian).  For the entire fiscal year earnings rose 16% to $.99 a share.  Revenues improved 14% to $51.8 million.   Consulting was the fastest growing segment, although it only represented 16% of total sales.  Computer Modelling has upgraded its technology substantially over the past two years, adding functionality that many users need help with to implement.  Those engagements usually lead to license sales.  License sales also are benefiting as different divisions within large companies adopt the technology. 

Long term growth promises to remain vibrant.  Almost all new energy discoveries are difficult to develop, and candidates for Computer Modelling's technology.  Halliburton and Schlumberger continue to offer simulators for conventional fields but have been unable to catch up in the high end segment.  Worldwide energy demand continues to rise, fueled by emerging economies.  And even at current price levels oil and natural gas provide far superior price performance compared to alternative sources.  A second line will be introduced later this year, focused on above ground facilities.  Those simulators will enable customers to maximize productivity for their entire projects.  The company is partnering with Petrobas and Shell.  Computer Modelling will retain all rights to the technology even though it only paid a third of the development cost.  Petrobas and Shell will get first crack at putting it to use.  Substantial leverage is possible by selling the new line to existing customers and bundling it with existing products when making new sales.

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Friday, May 13, 2011

3S Bio ( Nasdaq - SSRX ) -- Follow-up Report

3S Bio (SSRX $18.00) reported excellent on target Q1 results.  Sales advanced 28% to $18.1 million.  The rising Chinese currency accounted for 5% of that increase.  If the RMB keeps advancing against the U.S. Dollar further translation benefits will accrue.  Earnings dipped to $.15 a share.  Higher depreciation charges on the company's new manufacturing facility impacted profit margins.  That plant quadrupled 3S Bio's capacity, of which 30%-35% currently is being used.  The company also increased wages, hired more sales people, and lifted R&D spending on new drugs.  3S Bio additionally laid the groundwork to increase export operations, targeting emerging markets like Malaysia, Turkey, South Africa, and Egypt.  The company will take on Western pharmaceutical makers with lower cost alternatives.  3S Bio is one of the few companies in China that already has the ability to compete head to head with Western corporations on the world stage.  The combination of top notch science and low costs promise to fuel growth even after the government protections that help run of the mill Chinese companies fade over time.

Our 2011 estimates are unchanged.  Earnings could reach $.75 a share on sales of $80 million.  Margins should improve in upcoming periods as volume increases and costs stabilize.

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