Small Cap Value Report (2 Sep 2014) - VLK, JSG

2nd Sep '14 by Paul Scott

39 comments 24444 reads

Good morning!

EDIT: Apologies, I had technical problems with today's article, and some of it vanished, so I've recreated the lost bits as best I can remember!

Vislink (LON:VLK)

Share price: 45.25p
No. shares: 118.6m
Market Cap: £53.7m

There are two announcements today from Vislink, which is a maker of microwave cameras for outside broadcasting, and surveillance equipment. It has also expanded through acquisition into other related areas, such as broadcast software.

Strategic partnership - is announced today with Harmonic Inc. (NASDAQ:HLIT) which appears to have two elements - an order for £2m for product from Vislink, and a £2m injection of new share capital into Vislink, priced at 50p per share. I particularly like the second element, since it suggests the partnership is meaningful because the larger company is prepared to stump up equity funding, and of course it helps Vislink's balance sheet. Maybe it could even be a precursor to a takeover bid for Vislink at a later date, if the two companies work well together? Harmonic has a market cap of $602m, and a strong Balance Sheet.

Interim results - a complicating factor here is that Simon Thompson of Investors Chronicle wrote an article last week which caused a significant but short-lived spike in the share price, in which he seemed to suggest that the company was about to publish strong interim results. As it turns out, the results published today are not particularly good, so it's all rather perplexing. It's never a good idea to try to second guess what results will be like, as you usually end up with egg on your face, as has happened in this case.

Profitability - adjusted operating profit fell from £2.0m in H1 last year, to £1.7m in H1 this year (the six months to 30 Jun 2014), although the company says that currency movements are to blame, without with profit would have been up 3.4%.

Reading the narrative, it sounds as if the core broadcasting part of the group (which makes specialist cameras such as the ones fitted to Formula One cars) has struggled in H1, but has been bailed out by a good performance from the software part of the group. That's encouraging to my mind, as it suggests that the acquisition of Pebble Beach has been a success, and increases the predictability of earnings in future -…

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evoh_1

2nd Sep '14

Interesting to see the picture painted tomorrow by management.

I for one want to know specific goals and dates and how they plan to get there.

bsharman

The Finance Director of Vislink (LON:VLK) has picked up 50,000 shares at 45p

johnrosier

Have I been too hasty? I sold out of my Vislink this morning booking a 36% gain on purchase price, as I was pretty underwhelmed by the interim results. If it had not been for Pebble Beach it looks like the first half would have been pretty poor; the management must be given credit for the Pebble Beach acquisition which has improved both the profitability and visibility of the overall business. I also note the purchases of 95,000 and 50,000 shares by the Executive Chairman and Finance Director today. Have I been to hasty? I was starting to think yes but then I thought the shares were 40p only a few weeks ago and more importantly had I been fortuitous enough to have sold yesterday would I have bought back today? The answer to that is definitely no. I do not think there was enough in the outlook statement to suggest that they are in anything but a tough environment. I look forward to the conference call tomorrow, with an open mind to be convinced that my sale was premature!

shanklin100

Paul

The company has basically stated that they missed their H1 targets but will now (magically?) meet FY forecasts by becoming H2 weighted. Normally you would view this negatively. I am really not sure what is different here.

Cheers, Martin

DLG12

Interesting piece from interactive investor http://www.iii.co.uk/articles/189854/us-techies-take-stake-undervalued-vislink

Paul Scott

Hi Martin,

The article surely made it very clear that I wasn't impressed with the interim results from Vislink (LON:VLK).

However, the company also specifically reaffirmed that it is on track to meet full year market expectations, and in evidence explained that they had taken cost cutting measures, and that the order book had picked up in Q2.

So I'm taking that at face value, although any company that misses its H1 numbers is more likely to warn on profit in H2.

Regards, Paul.

Hi billytk,

I agree that the situation with Spaceandpeople (LON:SAL) is very frustrating - there's been a complete lack of information on trading since April, so it's terribly difficult to decide whether to make a leap of faith and buy more (I tried to buy some more today in my trading account, but found that IG are only taking closing bets now).

I remain of the view that management should recover from the setbacks earlier this year, but inevitably the market will take a cautious view in the absence of any further information. The market cap is only about £ 10m now, so given the good 5-year track record (prior to April this year), that does seem to already be discounting a lot of bad news.

I think we probably need to be braced for another profit warning, just in case.

Regards, Paul.

Hi Paul

Maybe I am being overly cynical with VLK but:
- I always disliked their use of adventurous targets for revenue and profits growth as a way IMHO of pumping up the SP
- I don't like software companies capitalising development spend as there is massive potential for using this to help overstate earnings
- It seems very fortunate that they miss H1 targets but find everything will be great for the FY.

All IMHO DYOR . Apologies for the poor way this is written but I am using an iPad and have already lost by first more eloquent version at this post.

Regards, Martin

JollyBiologist

4th Sep '14

Did anyone manage to see the Webinar? Did they manage to reassure on how they will turn things around in H2?

I listened to the webinar and was impressed with a) the cash flow in the first half and b) by how quickly they have reacted to the slowdown in hardware by cutting costs. I think that along with a Q2 improvement in orders is what gives them the confidence on H2. The acquisition of Pebble Beach Systems was clearly an inspired move given its margin characteristics and visibility of earnings. I asked whether we could extrapolate the results from Pebble Beach for the 3.5 months they owned it in H1 over the year as whole but was told not; it is a seasonal business with a slowdown over the summer months. So do I regret selling on Tuesday? A little but I did book a nice profit; I will be looking to get back in at some stage - hopefully in the low 40's.

PJBY

5th Sep '14

Back from Holiday. If I was a Director of VLK then I would be extremely Bullish, especially with the vast amount of earnings that are spent on my remuneration (can they justify it?).
I was deeply sceptical with tHE move to AIM and the following change of communication strategy from CEO (i.e. it stopped). Before he had been eager to speak with PI's.
Lack of quarterly updates also was a worry, hence why I bailed at the time.
IMO the published targets were an indicator VLK is up for Sale. It is still up for Sale IMO.
Sat on the fence!

Anne Noble

9th Sep '14

Intrigued to discover my sell order for VLK is not going through. As a novice investor I'm not used to trading small cap/AIM stock. Is there a specific reason why these shares are not shifting on LSE even though I can see trade volume? (You can assume my order is correctly placed, this is a question about whether some shares trade differently to others)

garbetklb

Hi Anne
Don't know what platform you are using - is it one that gives you a quote open for 10/20 seconds? If so, can't think of any reason for it not going through if you accept the quote within the time it's open.
Otherwise, are you specifying a sell price which is too high? Some small caps have appallingly wide bid/offer spreads. Have just got quotes via Share Centre for 5,000 shares :
Buy 48.770p
Sell 48.265p
In my experience, it can be difficult to buy/sell some small caps - and spreads can be v high. But would not expect this of VLK.

Many thanks for responding to my question, garbetklb.
I've not got to the bottom of what is going on today. The spread was pretty narrow and, as you describe the bid was actually higher than the ask price at one point! I only had 3000 shares to sell, so I'm wondering if there was a minimum order size in effect. I use Interactive Brokers for my dealing and was able to shift the shares eventually.

I'll carry on reading about the AIM market and see if there is some specific sell criteria that I'm not aware of.

cig

IB is unusual for UK small caps in that it does on-exchange trades. If you put VLK.L in the Fragulator you'll see that the bulk of VLK trading is off market (probably mostly UK retail quote-based system) so you need one of those retail market makers to wake up and match your LSE on-exchange order.

Brilliant - thanks cig!

Pabster

2nd Dec '14

Another example of how smallcaps have fallen out of favour this year. Decent company with good prospects and a management team that have turned things around but has taken part in the big derating of smallcaps.
Trading on 9x p/e, no debt, pays a dividend and has earnings growth - what am I missing?

I don't think you are missing anything. Bought back into the stock today. Valuation looks attractive, although first half results were a little disappointing, cash flow was strong and its new acquisition Pebble Beach performed well in the two months that they owned it in the first half. Currency was also a factor but sterling has weakened significantly since then against the $; was about $1.70 in June, now 1.56. As you point out the dividend yield of 3.0% is not to be sniffed at.

Sully8786

Ahah, that's whats moved the price today :)

There isn't much news about this one other than ED producing a piece at the start of the week....that seemed to move the price down. I topped up after the results and am at my target holding. I think patience will be needed....in buckets :|

Regards,

Sully.

3rd Dec '14

Thanks for the replies guys.

Felt a bit like one of my other holdings, NTG LN where someone seemed to be selling them regardless of fundamentals/newsflow. Patience finally rewarded yesterday and today. It feels like a lot of these stocks have departed from normality on the back of forced selling/lack of appetite.

Small Cap Value Report (2 Sep 2014) - VLK, JSG

Vislink (LON:VLK)

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Paul Scott

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