Floated on PLUS as Africa Oil, a play on oil exploration in Madagascar, IN-Solve was rescued by the current management team in December 2009 before its founders burned the last of its IPO cash. The company has since then slashed its operating costs to a minimal level and built up a solid portfolio of cash, shares and high yielding loan notes which are worth between 2.3p and 2.8p per share on a fully diluted basis. However to the surprise of all involved, on 27th July 2010 it emerged that the legacy oil interests - which had been written down to nothing - do now have a tangible value which we estimate could, on a 13% risk weighting, be worth up to107p per share. We risk weight the value of the Madagascan interests far more aggressively than the independent consultants that produced the last assessment but even so we value them at 21.5p.

The excitement in IN-Solve clearly centres around its oil interests. It owns 6.55% of Wilton Petroleum which owned 100% of block 2102 onshore Madagascar. It was the original intention of Africa Oil's founding management to increase its stake in Wilton as a result of funding the development of the block itself. However it was unable to raise the capital required. Unable to fund the costs of developing its acreage it has now reached agreement with the private London based international oil group Ophir Energy to farm out the block. This will see Ophir earning an interest of up to 80% in the block but it will fund the next phase of exploration which could prove up the large oil and gas reserves which an independent study published by Energy Resource Consultants in May 2008 indicated that the area contained a mean un risked prospective oil resource of 265 million barrels of oil or a mean un risked prospective resource of 1,416 billion cubic feet of gas. The report suggested that there was only a 13% prospect of success, and the resource becoming obtainable, with a 50% chance of discovering oil, and a 50% chance of discovering gas. The lack of well data, and the fact that at the time the petroleum system was poorly defined, accounts for the relatively high levels of risk and uncertainty.

The Madagascar play is highly speculative and the asset could be worthless. However it could also be worth, we believe, well over 100p per share to In-Solve although we have added an additional risk weighting in our assessment. However the company has now also secured tangible asset backing which comes in the form of cash, 12% loan notes issued to Plus Listed Metroelectric*, a profitable distributor of electric bicycles and ordinary shares in Metroelectric. We value the non oil assets at between 2.3p and 2.8p and this limits the downside for potential investors. Our sum of the parts valuation is therefore 23.8p to 24.3p and with the shares at 4.75p we see this as a highly attractive risk reward play and we initiate our coverage with a stance of buy.

*IN-Solve, Metroelectric and Worship Street Investments are corporate clients of RSH the ultimate owner of GE&CR. RSH also owns shares in WSI and in Metroelectric

Background

Incorporated upon 13 November 2007, IN-Solve listed on PLUS on 31st January 2008 through a private placing of 6,497,125 raising GBP1,039,540 at 16p as Africa Oil Exploration Plc. The initial stated aim was to act as an investment vehicle focusing on the upstream oil and gas sector in Africa. Africa Oil Exploration announced it's original investment in Wilton on 1st May 2008. It paid GBP755,439 for a 9.68% stake in the company with an option to acquire the remaining 90.32%. Wilton's main asset was, and still is, Block 2102, located onshore Madagascar, spanning 12,000 square kilometres.

However as equity markets retreated sharply during 2008 it became apparent that Africa Oil would be unable to raise the capital to exercise its option or to fund the development of its acreage. Thus on 8th December 2009, having written down the value of its stake Wilton to nil, a General Meeting agreed to change the name of Africa Oil to In-Solve PLC. Instrumental in making this change which also saw a new board of directors installed was PLUS investment vehicle Worship Street Investments which also invested in the company at that point and now owns just under 20% of the equity.

The new management team runs the business frugally, maintaining a total annual cost of less than GBP30,000. Its stated goal is to buy businesses in any sphere from the administrator and it has apprised a number of opportunities. However its first deal arrived quickly. Working with Worship Street it was able to purchase the electric bike producer and distributor Powabyke from the administrator and sell it on to Metroelectric PLC in a cash and shares deal. It subsequently leant Metroelectric GBP70,000 in convertible loan notes to allow it to expand its business which is growing rapidly and is now highly profitable.

If the company realises value from its Wilton shares and when it has its loan notes repaid by Metroelectric we would expect it to make further similar investments.

Investments and Operations

Wilton Petroleum Limited - Africa Oil Exploration announced it's original investment within Wilton on 1st May 2008. Africa Oil Exploration paid GBP755,439 for a 9.68% stake with an option to buy the remaining 90.32%. Wilton's main asset was, and still is, Block 2102, located onshore Madagascar, spanning 12,000 square kilometres. Situated in the centre of the Majunga Basin in the North West coastal area of the country, from a petroleum prospective this area is completely undrilled.

The traditional focus in the area has been the abundant tar sands and heavy oil located within the Morondava Basin to the south. However, Royal Dutch Shell explored the Block between 1989 - 1993. The basin also stretches offshore into acreage where Exxon Mobile is active. Large reputable firms maintaining an interest in the location is an interesting illustration of the potential of the area. Historically, coal exploration has taken place in the northern section of the block, but the porous sands in the area became so heavily impregnated with Bitumen that drilling had to be abandoned.

Wilton's management and technical team comprises Chairman, Ian Williams, who has spent over 27 years in numerous positions with Royal Dutch Shell. Technical Advisor John M Scott, who has more than 30 years experience in a variety of oil field management and operation roles, and Dr Nigel Banks, who has had a 30 year career in petroleum exploration and production enjoying notable success with Cairn . Having identified the potential in the area, Wilton won the bid for two exploration blocks in the respective government licensing round in June 2006. In October 2006, Wilton was awarded a 100% interest in Block 2102.

On 28th May 2008 Energy Resources Consultants Limited was commissioned to review Block 2102. A mean unrisked prospective oil resource of 265 million barrels of oil or a mean unrisked prospective resource of 1,416 billion cubic feet of gas was subsequently identified. It was also detailed that there was a 13% prospect of success, and the resource becoming obtainable, with a 50% chance of discovering oil, and a 50% chance of discovering gas. The lack of well data, and the fact that at the time the petroleum system was poorly defined, accounts for the relatively high levels of risk and uncertainty.

Although an appealing prospect, a revaluation of the Wilton interest, illustrated within the final results for the period 13th November 2007 to 30th November 2008, determined that a write down of GBP746,305 was appropriate as a reflection of the severe difficulty that Wilton had experienced whilst attempting to secure adequate finance for the development of the Block.

However, on 13th July 2010 the London based international oil company Ophir Energy announced that it had agreed with Wilton Petroleum to farm into the Marovoay Block 2102. Ophir will acquire an 80% interest and operatorship of the block but will reimburse some of Wilton's historic costs. Ophir will conduct 3,600 square kilometres of high resolution gravity gradiometry and aeromagnetic studies to test out the 2008 study of the block and if this validates the prior results it will pay all the costs of drilling two wells on the acreage. Since IN-Solve now holds a 6.55% stake in Wilton ( which has had to undertake a small fund raising to cover its costs which IN-Solve declined not to participate in) and thus on a fully diluted basis its interest in block 2012 is equivalent to 1.31%.

Metroelectric Plc - On December 22nd 2009 IN-Solve received a fee of GBP100,000 worth of shares in Metroelectric at 0.8p as a result of the part it played in rescuing Powabyke from the administrators and selling it onto Metroelectric. IN-Solve thus gained a 3.49% stake in Metroelectric. On 16th March 2010, IN-Solve subscribed for GBP70,000 worth of 12% loan notes convertible at 1.55p. This capital is being used for working capital to growth the Powabyke business.

Metroelectric was until this transaction a company aiming to distribute electric cars in the UK. It still has ambitions in this area but its main focus is the sale and distribution of the wholly owned Powabyke range of electrical bicycles.

Metroelectric announced on 23rd April 2010 that it was trading profitably, and we expect it to generate GBP550,000 of revenue in the year to end June 30th 2010. The main source of revenue at present is UK sales of the Powabyke range of electrical bikes but the company plans to expand not only its range of bikes sold but also its distribution into Europe, Asia and the US. A link up with 10% shareholder China Wonder Ltd, an associate of the NASQAD entity Wonder Auto Technology Group, offers it the potential to reduce its production costs and so boost margins.

We forecast that Metro electric will generate revenues of GBP550,000 in the year to June 30th 2010 and a pre-tax profit of GBP165,000. This year we expect sales to increase to GBP2.23 million and profits to advance to GBP675,000 (earnings per share of 0.14p) while revenues for next year are forecast to hit GBP3.15 million which should translate into a pre-tax profit of GBP945,000 and earnings per share of 0.19p.

Management

There are two Non Executive Directors who both joined as part of the rescue of IN-Solve in December 2008:

Russell Darvill is the Chief Financial Officer of Rivington Street Holdings, the ultimate owner of GE&CR.

Paul Rewrie has been a Chartered Management Accountant for 20+ years, and formed Oxford and Cambridge Independent Advisers Limited in 1992. He has been a Finance Director and Company Secretary of a number of companies, notably Caspian Homes Limited and Peel Homes and his expertise is in company restructurings and often from the post administration phase. Rewrie is also a director of Metroelectric.

Opportunities

Having recorded two consecutive final year losses, Metroelectric shares trading at an all time low of 1p but we believe that the company is now gaining real traction in the electric bike market. A GE&CR note published on 26th August 2010 valued the shares at 1.5p and there is clear upside potential in the value of IN-Solve's stake.

When IN-Solve is able to realise cash from Metroelectric or from Wilton the management team now has a proven track record of buying assets cheaply and adding value.

Clearly the biggest opportunity lies in the Wilton stake. If Ophir elects to drill a well the risk weighting on the implied reserves would fall and the tangible value of that asset would increase sharply. Any exploration success would add to that process.

Weaknesses

Assuming that WSI exercises its remaining options in IN-Solve, which for the purposes of this note we do, the company has net cash of only GBP40,000. That - with the interest on the Metroelectric loan note will cover two years of running costs but unless value is extracted from one of its investments In-Solve has limited scope to acquire additional assets.

The company is dependent on a small management team and its investments are in just two companies. This is not a diversified portfolio.

Forecasts and Valuation

The company will record a small profit for the year just ended as a result of the GBP100,000 fee it earned in Metroelectric shares in the December 2009 transaction which is treated as revenue. Going forward we do not expect any revenues to be booked in the current year but with interest income of GBP7,000 due on the Metroelectric loan notes we would expect the pre-tax loss to be no more than GBP20,000. This is not an earnings based investment case. We value IN-Solve on a sum of the parts basis.

Using the most recent resource study, undertaken by Energy Resources Consultants Ltd, commissioned on 28th May 2008, the estimated mean resource base consists of 485 million barrels of oil equivalent. Valuing each barrel at $10, the mean estimate resource base of the Block, risk weighted by 13%, is GBP372 million. IN-Solve currently holds a 6.55% interest in Wilton Petroleum, Wilton's interest in Block 2102 is 20%, which subsequently leaves IN-Solve's interest in Block 2102 at 1.31% which would on the basis of the mean estimate of reserves be worth GBP5,247,292 or - on a fully diluted basis - 56p per IN-Solve share. It should however be noted that on the upper end of the 2008 reserve estimate (still risk weighted at 13%) the value of the Wilton stake increases to 107p per share. We have added an additional risk weighting to that offered by Energy Resource Consultants and using the mean estimate of reserves value IN-Solve's interest at 21.5p per share.

*IN-Solve, Metroelectric and Worship Street Investments are corporate clients of RSH the ultimate owner of GE&CR. RSH also owns shares in WSI and in Metroelectric.