Small Cap Report (23 Apr) - VLK, NFC, ECK, RGO, ODX

23rd Apr '13 by Paul Scott

6 comments 15227 reads

Pre 8 a.m. comments

Good morning! The most important announcement for me this morning, and hence the one I shall cover before 8 a.m. (in case it warrants some immediate action in either buying more, or selling) is Vislink (LON:VLK), who have just issued an Interim Management Statement (IMS).

I bought some shares in Vislink on 25 Mar 2013, and explained why here.

Their IMS today sounds OK. It covers the period from 1 Jan to 23 Apr. Q1 order intake is slightly down at £13.3m (vs £13.4m last year). It also mentions a number of contract wins, including for Moto GP - Vislink make the special cameras that are used to show the driver's view from a racing car. They are the world leader in this type of broadcast equipment.

What I like best is that Vislink once again reiterate their financial goal of achieving annualised turnover of £80m and a 10% operating profit margin by the end of 2014. That is highly significant, because last reported turnover and adjusted operating profit for calendar 2012 were £57.2m and £3.1m respectively. So they are targeting almost a tripling of profit in 20 months!

That would suggest a market cap of around £80m, or a share price of 70p. That's more than double the current share price of 30.5p (a current market cap of £34.7m). Bear in mind that VLK is sitting on net cash of £8.1m, and the valuation starts to look ridiculously cheap - we're only really paying £26.6m for the business itself. They can use the surplus cash to make acquisitions - i.e. buy in additional earnings.

Therefore, if they deliver against plan, I am pretty confident that we'll be looking at a much higher share price, hence I'll certainly be buying the dips here from now on - I could see Vislink becoming a much larger holding in my portfolio. Buyers now are also locking in a generous 4.1% dividend yield.

I particularly like businesses that spend a lot on R&D, because if the money is spent wisely, then today's R&D spending will be tomorrow's srtong growth. Vislink spent £5.1m on R&D last year, or 9% of turnover.

The balance sheet looks fantastic, with net current assets of £16.1m, being a ratio of 2.4 to 1 (i.e. current…

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bobdouglas

23rd Apr '13

Paul,
If the claims of the management of profitable growth to 80M by the end of 2014 were ignored - the bare facts are that, last year's fourth quarter was 5% down and this years first quarter on a constant currency basis is 2% down - also as pointed out in their results last year they had benefited from the Olympics and Diamond Jubilee. They are maintaining the dividend rather than increasing it although I see dividend cover is 2 so probably wise to do so. Hope the management are right but so far it ain't happening - why not?

SevenPillars

According to the IMS, Vislink state they are holding a Capital Market event today in London where they will set out how they aim to achieve that £80million figure, so it will be interesting to hear what they come up with and how the market responds. They've held these events before and you can find details by a web search. Not sure if they are open to the public or just industry and market insiders, but judging by their presentations in the past it gives the company an opportunity to impress. By the way, they did mention that £80 million figure goal at last year's presentation (25th April 2012, pdf download is available), so it looks like they need to step up a little to achieve it.

The price has fallen a little on what looks like a slightly uninspiring IMS, but the presentations today may well save the day, especially if they've got something new to say.

johnrosier

Hi Paul, Just bought a holding! See comments at www.JohnsInvestmentChronicle.com You have been accredited with bringing it to my attention through Stockopedia!

Crusty

Hi, Agreed there is much to like here, but I wonder how wide the moat is fir competition to cross. In-car cameras are a commodity item these days, and even if Vislink's products are in a different league their hoped for margin increase may not be easy to achieve.

Paul Scott

Hi chaps,

Good points, which I accept. The upside case with VLK is very much that you believe management's assurances on their growth plans & think they can achieve it. But with £5m being spent on R&D each year, I think that looks achievable, hopefully. I'm looking at it with a 1-2 year view.

As a friend pointed out, the target they talk about is annualised turnover & profit targets by Dec 2014, so we're really talking about forecasts for 2015 being £80m turnover & £8m profit. But as mentioned in the article above, I think that would justify a PSR of 1, which equates to about 70p a share. So there's more than 100% upside here in my view, providing nothing goes badly wrong.

Cheers, Paul.

24th Apr '13

Vislink looks to be showing a more positive reaction today. I assume their presentation yesterday must have gone well. Cannot yet find a copy online so difficult to know how it went, accept that if they hadn't put a convincing case it's probably safe to assume that this would be going the other way today.

Small Cap Report (23 Apr) - VLK, NFC, ECK, RGO, ODX

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Paul Scott

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