Dowgate Capital (DGT) are sitting in the middle of a goldmine! This company through their sole trading arm City Financial Associates are looking to take full advantage of the "booming" AIM market this year. Dowgate provide NOMAD (NOMinated ADvisor) services to AIM companies and also have full Corporate Broker status which means that they can fund placements on behalf of the companies they represent.

Website: www.cityfin.co.uk

On first sight, the fact that Dowgate exist in the often veiled financial services sector makes you think twice about investing in company such as this because it would be impossible to understand what they were doing - however, think again! DGT bring new companies to the AIM (Alternative Investment Market). For each new company "floated" on AIM, they take arrangement fees when acting as NOMAD. After the company is launched then for a nice steady earner DGT get another healthy chunk of cash every year for looking after them (note that all AIM companies must have a nominated adviser - thereby securing a ready source of recurring income). Because DGT also act as a Corporate broker they can get a very healthy percentage for arranging placement of shares with insititutions before a new company floats. In addition, because placements come outside the sphere of yearly NOMAD work, they can also gain healthy percentages of placements which companies may need to make throughout the year when they need a quick injection of cash to speed growth. Current NOMADships: 28 companies represented (gives recurring income of approx 480,000 per year) Current on-going Brokerage agreements: 19 companies (income depends on placements) For flotations, depending on the size of a company, fees charged will be anything from 50,000 to 100,000+ For placements (the real earner), DGT get anything from 3% to around 12% of the TOTAL AMOUNT RAISED - For example a new company raising 3M though a placement will earn DGT anything from 90,000 to 360,000 ! These figures are indicative as actual deals all differ due to circumstances and DGT sometimes take payment in shares - they still have a tasty chunk of Setstone shares and when this Russian exploration company comes back to AIM, predictions are that the share price will rocket. Note that the amount that this little company can earn in fees is huge and every new deal that comes through we know will contribute another healthy chunk into the bottom line. The good news with every new floatation means that it's another chunk of recurring revenue which could go on for years, with DGT having to do very little. New clients gained in 2005 are: Mediazest (NOMAD & broker) Elite Strategies (NOMAD) Process Handling (NOMAD) Poland Investment Fund (NOMAD) Nanotech Energy (NOMAD & broker) Archimedia Ventures (NOMAD & broker) Red Leopard Holdings (NOMAD) Alba Mineral Resources (NOMAD & broker) Intandem Films (NOMAD & broker) Motive Television (NOMAD) IncaGold (NOMAD) Sportswinbet (NOMAD & Broker) Infoscreen Networks (NOMAD & Broker) Mark Kingsley (NOMAD & Broker) Croatia Ventures (NOMAD & Broker) Pantheon Leisure (NOMAD) Firenze Ventures (Ofex Advisor) FlightStore Group (NOMAD & Broker) Euro Capital Projects (NOMAD) Pearl Street Holdings (NOMAD) Worldwide Natural Resources (Ofex Advisor) Dovedale Ventures (Ofex Advisor) Other 2005 work completed:Neptune-Calculus VCT offer for subs of up to 12 million Advisory work for TGM on London Bus disposal for 20.4M Advisory work for Creightons on property disposal Advisory work for Hampton Trust on company restructuring Advisory work for Interbulk Investments on acquisition of Inbulk Advisory work for Fundamental-e Investments on two disposals Advisory work for Designer Vision re: Design Rights against Centurion Electronics Click Here for fundamentals and profit projections.

WW
Here you are, something to read!


Buy Dowgate Capital/Seymour Pierce Ellis
Free Brochures on Saving and Investing
30.10.06
Monisha Varadan

From Monisha Varadan of Allnewissues.com

These recommendations do not constitute advice, please read the risk warnings

Background

The hectic M&A activity in the corporate finance sector continues. Seymour Pierce Ellis has announced its intention to reverse into Dowgate Capital (DGT) via the issue of 392,307,692 shares at 0.65p per share. The enlarged company listed on 24 October 2006 and following the admission to AIM it will have a market capitalisation of 7.24 million. Dowgate is considering raising 2.55 million before expenses, which will be used to partly fund the acquisition of Seymour Pierce Ellis Ltd. Therefore, Seymour Pierce Ellis is being bought for 4 million in cash and shares.

Operations

Based in Poutney Hill, London, Dowgate is the holding company of City Financial. Both SPE and Dowgate seem to have a business model in place that is churning out profits - not surprising, given the climate in the IPO and corporate finance sector. Dowgate was formed in order to build a group of financial services companies, catering predominantly to small cap companies. It was first admitted to AIM in June 2001. Soon afterwards, it acquired CFA, a corporate advisory business, and Galleon, a private client stockbroker. CFA has built a significant presence in the AIM market, and Dowgate, having disposed of Galleon in 2003, realised a profit after tax for the year ended 31 December 2006 of 529,000 on a turnover of 1.72 million. For the six months to 30 June 2006 the company recorded a pre-tax profit of 485,000, and at the six-month stage Dowgate had cash of 1.68 million, valuing the business at 4.48 million.

Confidence in the markets and clear synergies have resulted in the purchase of Seymour Pierce Ellis. It is a private client stockbroking firm that is regulated by FSA to conduct investment business and has the authority to deal as an agent, and also as a principal. It was founded in 1990 and has a long record of profitability. For the year to 30 September 2005, Seymour Pierce realised a profit after tax of 666,000 on a turnover of 5.56 million. For the six months to 31 March 2006, the company realised a profit after tax of 299,000 on a turnover of 2.26 million. SPE's performance in the first half has been effected by client transfers from SPE to Seymour Pierce, and turnover was reported to be down by 5% on the same period last year. However, the group continues to be profitable on a month-on-month basis. CFA is adviser to 39 AIM companies and six Plus-quoted companies. As at 30 June, Seymour Pierce Ellis was broker to 49 companies, 42 of which are listed on AIM.

Business development

The acquisition will be completed on 24 October 2006, following shareholders' approval. A significant aspect of this acquisition is based on the fact that this cooperation is already tried and tested. Seymour Pierce was appointed as the broker to Dowgate in 2001, and since then Seymour Pierce and CFA have completed a number of projects together and held advisory and consultancy positions to nine AIM companies and four Plus companies with success (admittedly, most of them Stephen Dean and Griffin-related ventures). They both operate in the small capitalisation market and have a successful track record. We believe that the trading outlook for these two companies looks very good, since they both have strong earnings power and are very cash-generative. Barclays has chosen to back this acquisition by providing a credit facility of 1 million. As the results for the two companies for the last six months show, they have made significant improvements since 2005. The directors have announced that the results for the second half of the current year will be lower than those for 2005, but the company will still be very profitable. It is expected that the competitive advantage that this acquisition creates will help Dowgate Capital to grow substantially in the future.

Management

The chairman of the group will be Tony Rawlinson, current head of Dowgate. He is a qualified chartered accountant from Ernst & Young, and after a long career in corporate advice he joined CFA in 2001 as managing director and head of corporate finance. Ian Buckley will serve the board as non-executive director. He has extensive experience in holding senior management positions in stockbroking and corporate advisory firms. The executive director of stockbroking is Neil Badger, who qualified as a stockbroker in 1989 and joined Seymour Pierce in 1998 as a research analyst. He was promoted in May 2004 to chief executive. Clive Mattock brings 40 years' experience in stockbroking. He has many admirers, but not, perhaps, the FSA, which fined SPE a number of years ago because of Mattock's undeclared share interests and conflicts of interest.

Conclusion

According to the pro-forma statements, the net assets for the enlarged group include cash of 2.9 million and a working capital position of 1.74 million. According to the interim results for Dowgate to 30 June 2006, it realised earnings per share of 0.064p. Readers must note that this includes only profits from Dowgate, without taking into account Seymour Pierce's profitability. Forecasts suggest that the combined entity could bring in earnings of 0.185p in the year to December 2007. We are aware that a target price of 2.82p has been set for this stock. Of course, the market for small companies is very dependent on general economic conditions, and the future of the company is very much dependent on the contacts and the experience of its key staff members. Therefore, if there is a general markets downturn, or managers decide to leave, the progress will be hard to predict. However, traded at such low multiples and backed by cash, we accept that Mattock and colleagues know the smaller companies game better than anyone and will deliver. Investors should buy.

kim

ww - still very much here and added 75% as much again to my holding last week, regrettably before the price fell, so overpaid considerably. However, what will 0.06p matter in a year's time.

No way I can keep up tracking individual transactions anymore - too busy on the day job and both CFA adn SPE too many to track. Still have every confidence in the management and the new ombined operation. Monisha V. is always an interesting read and seems to have some track record of knowing her stuff. See my post above where I went through the combined numbers - suggesting a PE of about 6 (or 4 v. enterprise value). Surely we should be at PE of 10 for fair value, which gives an SP of 1.24p - at that point I'll probably take my original cost off the table and still be left with ~15% of my portfolio in.

There won't be much movement here until run up to finals in January/February, I suspect. We will all need to trust that the H2 numbers (although predicted by TR to be less than 2H2005) will be good enough to sustain and even enhance the rating of the SP.

All our attentions should be turned to next year now, to see whether the synergy and underlying trading combine to make an even greater success of the numbers. Haven't herad anything to change my mind, but as ever am watching the macro-climate for a downturn in new business and general city confidence.

sd

Hi folk. Sorry to be off the radar. Real reason is that demand for funds has taken me out of the market for a while. Hence I'm not keen on giving views that just could (given my burgeoning reputation!) help the sp up. Should be back in by Xmas which I think should be early enough. I have been surprised that the price has not progressed with the merger. Monisha's comments imply, presumably clear from the offer documentation, what the sale by SPE is somewhat defensive; not that there appear to be real problems but they clearly feel that more progress will be made with CFA. TR is also cautious re the second half and that makes sense given that there must be a lot of effort involved in making sense of the merger. Can't see any downside unless the AIM market has problems; presumably SPEs client business is a steady earner in bad times. There doesn't seem to be any real growth written into the current figures. sd is right to top up but I would set my target higher, not necessarily for the next results but once the benefits of merger are seen to be coming through.

Sorry Westie not to respond to your enquiry re Tess! She is going great guns and must be the fastes Westie outside the highlands; she can beat Honey our Lab over 100m any time.

Eric

This one's getting a little tedious !

sd I know that you are a very busy woggie but it would be good to summarise the H2 figures. The AIM market appears generally out of favour so that would explain the cautious TR note but significant whether they are holding their market share.
Good bone hunting!

Eric

Eric - as I mentioned above, I can no longer devote time to tracking individual transactions. However, I am looking for pro forma (i.e. as if SPE had been part of the group for a full year) full year combined profits after tax of about 1.25m, about 100k less than my thoughts around the first announcement of the acquisition of SPE.

With market cap fully diluted for options and warrants of 0.68p X 1,120,655,000 = 7,620,454, this would be a PE of 6. Net of EOY cash an enterprise PE would be nearer 4.5.

If we can get growth next year and beyond running at 15%, that would justify a PE of at least 10 (for a PEG of 0.66), so shares are due a 66% re-rating to 1.13.

Doesn't seem too high a target. Meanwhile, I admit to being totally perplexed by the recent fall from 0.80p post acquisition to 0.68p today - especially having loaded up with a largish purchase at 0.82p recently.

I can understand that there is no ready mechanism to realise full value yet with no institutions on board, but a fall of this magnitude seems more than just slippage whilst waiting for the tide tp turn. Any ideas why?

sd

sd: Looking at the charts there doesn't appear to be anything sinister. I think it is probably just the OOSOOM syndrome; you would have thought that the acquisition would have moved DGT onto a larger scale and onto new radar's. The evidence is that this is not the case. Yet the company now has a much larger base on which to grow, including providing a fuller service to clients. My other thought above was about the AIM market itslef. So many of the AIM shares are depressed and fashion has turned back to the big beasts. I think this is a temporary phenomenon because in the end of the day it is a matter of value - and opportunity. If a company is beyond a certain size it has to work harder foir a % growth. DGT must have a terrific five-year growth potential. But the fact that the cap is still belw 10M means that institutions themselves will not yet be attracted. Those of us who know the company well, realise that risk is negligible and opportunities very significant and thus get the exciting breakthrough growth. But the AIM market problem, I think, is epitomised by the fact that the sp is still below the offer price despite the fact that the company is now a proven player.

Eric

Keep monitoring this one from time to time..... down by 35% over the past 9 months. Graph not looking good either. Not a stock to trade in the short term but must admit to being very suprised by its descendancy?

Plans for 2007 and beyond.....?

Markus, a punt just before the results could be profitable, if they continue to drift down, imo. -same thing occurred last year!

Do you know when are the results likely to be out, Rod?

Mark, last years results were on 1st March 06 I believe.

Thanks, Rod. Doesn't bode well though if Uncle Eric has sold lots of his holding - EWR was trying to persuade me to "hold indefinitely" when they reached 0.90p earlier this year. Sorry, Eric - just had to mention this!

Markusantonius............Never, and I really mean NEVER, rely on a Bulletin Board for accurate information! AIM has been under somewhat of a cloud recently as I am sure you are aware: there has been a not un-significant threat from Nasdaq recently of a takeover of the LSE, which could well put AIM under threat from an over-zelous American 'I am holier than thou' syndrome, which quite frankly is laughable and totally derisory given the history of US of A!!!! Today it looks like a defeat for Nasdaq which can, possibly, only mean that AIM will go from strength to strength and company's such as Dowgate can flourish.

Interesting post, Kimo. I never knew about the Nasdaq bid - been away from News Action apart from today.
Presume you are a holder of Dowgate?

Yes I am, 760k - not a huge amount, I have been tempted to dump them on many occasions but now I will hold on,probably indefinitely but maybe take a bit of profit if the opportunity arises.
kim

You need to look at the reason for selling: taking profits? moving elsewhere? spreading the risk? (in my case) needing the cash! I agree with Kim's warning re Bulletin Boards but DGT has been particularly good - forecasts by SD and others of potential results. Such posts are missed and it is a little difficult to read trading performance of CFA. But many AIM stocks have not performed well and I suspect this is a short-term matter. Why would NASDAQ want to take over LSE - access to trading without the same level of over-control must be part of it so why wouldn't that be bullish for AIM? I do expect positive action in DGT but possibly not until well into the new year.

Eric

Eric, glad to see that you still maintain an interest in DGT, if not shares! I have to say that there has been more factual reporting on this board than on most of the others and I am grateful for the contributions.

Whilst I sometimes agree that AIM is a little "loose" with it's regulations, this is nevertheless one of the reasons why the market is more exciting. The US regulations are stricter: I am posting an article from the Telegraph which explains my fears more eloquently than I! :-

"LSE fears Nasdaq will 'strangle' Aim

By James Quinn, Business Correspondent
(Filed: 16/10/2006)

The London Stock Exchange's highly successful Alternative Investment Market (Aim) could be at risk should Nasdaq make a successful bid to takeover the British bourse.
The Daily Telegraph has learned that senior officials inside the LSE fear Aim's position as the world's leading market for growth companies could be under threat because of the junior market's "light-touch" to regulation.
The fears are understood to run right to the top within the LSE's senior management team, which includes chief executive Clara Furse, in addition to its well-connected court of advisers.
It is feared that although Nasdaq is unlikely to shut down Aim altogether, it could easily choose not to support it and could scrap LSE's investment plans for the future.
Although no figures on the amount the LSE spends investing on Aim are available, it is one of the most high-profile parts of the LSE, with recent marketing trips to China and Vancouver.
According to the latest statistics, it was home to 1,590 companies at the end of September, and companies listing on it have raised 34.3bn since its launch in June 1995.
The market offers growing companies, and an increasing amount of international companies, the chance to list on a regulated exchange with less stringent regulation than those applied on the LSE's Official List.
But the LSE is understood to be increasingly fearful that were Nasdaq to successfully make a bid for the LSE, Aim's "light touch" could well turn out to be its downfall. Of particular concern are recent comments made by Nasdaq chief executive Bob Greifeld, in which he appears to disparage junior markets in general.
Speaking last month at the Boston College Chief Executives' Club, he said Nasdaq's efforts to encourage foreign companies to list had been hampered by the onerous Sarbanes-Oxley regulations.
"One of the unintended consequences of Sarbanes-Oxley is that we see a global race to the bottom with respect to regulatory standards," he said.
In the speech, he said he was aware of the appeal of exchanges like Aim but said the answer was to maintain high standards to avoid blunt new regulations. Those comments, mixed with earlier ones made by the Nasdaq chief, have sparked the current fears.
One LSE insider said: "He [Greifeld] appears to suggest the success of Aim is part of a 'race to the bottom' that he doesn't like, and that is the basis of concern."
Others within the exchange and its wider community believe Nasdaq may strangle Aim, by keeping it as it is but diverting all new business to Nasdaq. An LSE spokesman declined to comment.
The whole issue remains hypothetical until Nasdaq, which owns a 25.3pc stake in the LSE, tables a bid for the British exchange. Its initial 950p-a-share approach was rejected in March, and Mr Greifeld is understood to be more than willing to wait until early next year rather than launching a rushed bid now.

A Nasdaq spokesman declined to comment."

The threat from Nasdaq may not be over and the above comments may not, in the event of a takeover, be relevant, perhaps Nasdaq would be happy for AIM to continue as it is but I feel that companies like DGT may be suffering at present, because of the uncertainty.
kim

Kim; that's a very relevant article. But it may be a case of IYCBTJT (if you can't...). If someone is attracted to AIM because of lighter regulation then they are hightly likely to be switch-sold to NASDAQ. Second, AIM must be quite a significant part of LSE revenues so therefore part of the justification of the bid. OK, could be to snuff out competition but I would have thought you could view the lighter regulation arena as a separate market. NASDAQ promoting AIM could be a way of shedding the US shackles for the International market. Third, I could see that a successful bid would remove the threat and growth could be restored.

So, if DGT price is held back by these concerns, their resolution could be very positive. I remain in need of more comfort, though as to how DGT is actually doing.

Eric

A trading update before the end of the year would be very acceptable!
kim

Interesting to see the sp back to the placing price. Should be a support level, particularly as the issue was large related to the existing shares. Would be some relatiely loose holders, perhaps including Seymour Pierce holders - don't know if there would be any restrictions on their sales.

Seems to be some caution re the second half results. Rawlinson described second half prospects as 'good' which means very good in his cautious-speak. Trading at Seymour Pierce was down but still profitable. Firsst half pbt was 1.1m (combined). You would have to deduct tax and bonuses but this suggests a profit of 1.5m. I haven't looked back at sd's figures but this would imply a pe of 5 which is faintly ridiculous. I am still wondering whether anyone has, or would undertake, an analysis of business from the website.

Eric