Good morning! Utilitywise (LON:UTW) issues results today for the year ended 31 Jul 2013. It's a utility cost management consultancy, so it sits between commercial customers, and the utility companies, and negotiates a more competitive tariff for its customers, and is paid a commission by the utility companies. I've written about Utilitywise five times this year so far, and although flagging up the value in the shares at 102.7p on 7 Feb 2013 on "Paul's Picks", have had nagging doubts which prevented me from buying any shares in it personally. That's a pity because these shares have had a good year (but so have most things!), although they have risen so much since the summer that it's difficult to see much more immediate upside. Here is the three year chart:
At 155p the market cap is £108m.
Strong growth has been delivered from a mixture of acquisitions, and organically, with turnover up 73% to £24.8m. Adjusted profit before tax of £7.0m shows both a very strong profit margin, and a remarkable 81% increase against last year. Difficult to argue with that!
As promised yesterday, from now on I'm looking closely at the widely abused adjustments made to reported figures, to ensure they are reasonable. In this case it looks OK. They have treated £800k of costs related to acquisitions as exceptional (which looks reasonable to me), and £0.2m of share based payment expenses (questionable, but it's not a huge amount) by-pass the P&L by being charged direct to reserves (the share premium a/c). It's just another form of remuneration for senior staff/Directors, so I don't really see why share based payments should by-pass the P&L, but that seems to be an accepted accounting method at the moment.
Another £0.2m of amortisation of acquired intangibles is excluded from adjusted profit, but that looks OK to me - it relates to intangibles (described as customer-related, so presumably values put on existing customer contracts & lists at the time the acquisitions were made?) acquired with the three acquisitions totalling £21.4m made during the year, as set out in note 6 to the accounts issued today.
So overall, I'm happy that the 7.9p diluted, adjusted EPS for the year ended 31 Jul 2013 looks OK. So turning to valuation, that puts them on a PER of a pretty racy 19.6 times. Actual is a bit ahead of 7.65p broker consensus, which is a positive. At that type of rating, you need a strong outlook statement, and the key sentences from today's announcement seem to me to be those copied below:
The new financial year has started in line with expectations with the value of secured contracts waiting to go live increasing to £18.2 million at 30 September compared to £16.6 million at 31 July. We look forward to another period of strong growth.
The general tone of the narrative all sounds pretty positive too, which it needs to be at this rating.
Although it should be noted that broker consensus is for another big jump in EPS to 11.2p for the current year ending 31 Jul 2014, so that puts the shares on a current year PER of 13.8, which again looks pretty fully priced to me. A bull market might take it a bit higher, but I suspect the big gains have been made on these shares for the time being. Longer term, who knows?
Their Balance Sheet is not the strongest I've seen - if you strip out the intangibles, net assets come down to only £4.3m, and there are quite a lot of unusual items relating to long term contracts, such as £6.3m in accrued revenue in fixed assets (i.e. where revenue has been booked, but relating to future periods more than 12 months ahead - which makes me nervous, so I would want to check their revenue recognition policy to make sure it is reasonable). I suspect there would be a fair bit of deferred income within trade creditors too (both £12.6m current, and unusually £4.7m in long-term creditors), which suggests that the cash balance of £9m has had a boost from those items possibly?
There is also a £5m long term loan that was partially used to finance acquistions.
Dividends are fairly small at the moment, but rapidly rising, so a couple more years growth like this could see the divis becoming quite useful.
The market has given a resounding thumbs up to Utilitywise's results, with the shares now up 14.5p (11%) to 168p. I see that FinnCap has raised its price target to 200p this morning, in expectation of further strong growth this year & next year. So things certainly seem to be on a roll there.
Interim results to 30 Sep 2013 from Lombard Risk Management (LON:LRM) are not good. This is a risk reporting software company to the banking sector. Turnover for the six months is down 5% to £7.3m, and the most realistic performance measure, which is profit before tax after "fully expensing" all development costs drops out at a loss of £0.9m. Trouble is, even that doesn't tell the full picture. They capitalised £2.4m of development costs in the six months, which means that if you deduct that from EBITDA of £0.1m, then the business really burned £2.3m in cash during the period on an underlying basis.
To my mind that means that despite raising £2.6m in a Placing in Jul 2013, there seems to me to be a clear requirement for another fundraising soon. Current assets are only 64% of current liabilities, although long term creditors are only £333k. Bear in mind I normally like to see a ratio of 120-150% here to be comfortable, and this falls a long way short. So I suspect another fundraising is very likely, and until they sort out the Balance Sheet with more cash, this share has to be seen as high risk.
They have a good story to tell though, so a fundraising might be fairly straightforward to arrange, who knows? Although personally I wouldn't want to hold the shares, just in case there proved to be little appetite, and a deep discount is needed to get it away.
The story is that EU rules are driving Banks into spending more on their risk management software, and that LRM is in a sweet spot to provide that software, with a strong pipeline of new products. The key sentence from their outlook statement today says:
For all the reasons mentioned earlier, the Board is optimistic about the second half of the year owing to the record contractual order book and other contracts awarded or where our software has been selected. We have good recurrent revenues and further predictable revenues from fixed-term licence renewals and contracted orders as well as new business won. The Board remains optimistic about the prospects for the Company in the medium term especially given the macro effect of a continuing level of regulatory change all over the world...
So if they can demonstrate improving trading in H2, then all should be fine. If not, they are potentially in a pretty tight spot. Therefore at 12.5p per share this morning (down 8%) and with 261.3m shares in issue, the market cap of about £32.7m looks far too high to me. Broker forecasts seem to be based on ignoring the capitalised development spend, which is ridiculous, as that's a core part of their overheads. Companies that keep reporting profits, but keep having to raise cash, are best avoided in my experience.
Next I've been looking at results from email software company dotDigital (LON:DOTD) for the year ended 30 Jun 2013. The results look good, with turnover up 16% to £13.8m, and profit before tax up 18% to £3.3m. I am ignoring EBITDA, because they capitalise some development spend, so EBITDA is therefore meaningless - you must either account for the cash cost of development (deducting it off EBITDA), or focus on profit after the amortisation charge on previous development spending. At the risk of sounding like a broken record, to ignore both is simply wrong.
The profits here are real though, so overall it's fine. Cashflow is good, with £3.6m generated, and the net cash pile reached £6.1m by year end. That's what should happen - i.e. when companies report profits, the bank balance should go up!
The market clearly likes these results, with the shares up 8% to 19.75p, which with 277.5m in issue gives a market cap of about £54.8m. There is a hefty exceptional charge of £3.0m for discontinued activities, but that has been flagged before, and therefore I think is fine to treat as exceptional. Also, it's just a goodwill write-off, so is non-cash.
A maiden dividend of 0.1p is announced, which gives a yield of 0.5%, hardly exciting, but at least it's a start. After looking at acquisitions, nothing suitable was found at the right price, so they are instead allocating up to £3m of their existing cash into driving organic sales growth. Sounds sensible to me, although that will clearly be likely to impact short term results. As long as it's a planned move, which is explained in advance, then I don't see that as a problem.
The outlook sounds good, with this sentence summing it up:
As economic sentiment in the UK improves we are starting to see customers investing in new initiatives and for the first time in some years actually talking about increasing marketing budgets. This should translate into increased spending from our existing customers over the coming years and combined with continued new client wins with higher average spending patterns than the past years gives rise to confidence about the year ahead.
Overall I think this is an interesting company, but feel that on balance I've probably missed the boat.
Adjusted EPS was 1.07p, so the price is now a PER of 18.5 is looking pretty full, and it's always worth bearing in mind that technology changes fast - will email still be as prevalent in 5 years' time as it is now? I sincerely hope not, as it already takes up a ridiculous amount of my time every day, and yours too I'm sure! Hence personally I am increasingly opting out of email lists from companies, preferring to narrow it down to a person to person method of communicating, with people that I want to talk to, not companies that want to sell me stuff. Otherwise there just aren't enough hours in the day.
Well there's another profit warning today, with them now saying a loss is now expected in the current year. I can't see any reason to get involved in this.
Reported basic EPS is up 32% to 32p and the total dividends for the year are noteworthy, being increased 15% to 18p. So at today's share price of 502p, I make that a PER of 15.7, which is starting to look a bit warm, and a dividend yield of 3.6%, which is pretty good.
Even though there is £10.5m in net debt, the Balance Sheet overall looks sound, with current assets being a healthy 174% of current liabilities, and no significant long-term creditors. So in this case I would be happy to ignore the net debt, since it's just needed to finance a big debtor book, and as long as you account for the interest cost in earnings, then it can fairly safely be ignored in my opinion.
Overall, the price looks up with events, so it doesn't interest me from this point onwards.
That's it for today. See you from 8 am tomorrow!
(of the companies mentioned today, Paul holds no long or short positions)