Good evening! I apologise for today's report being very late, there have just been too many late nights & early mornings lately, and I just couldn't get out of bed this morning. Feeble excuse I know, but there we go. Anyway, there are some important results today, so to keep the sequence of reports intact, I'm catching up now.
Vislink (LON:VLK 42.88p) is a share that I've written about enthusiastically before, and hold in my personal portfolio (and is also held in a small caps Fund which I provide research for). It first caught my attention, and I bought shares at 30.5p on 25 Mar 2013, see my article here. This was really a prime example of the type of small cap investment I like, where risk/reward is skewed heavily in the investor's favour - there was limited downside risk, and a low likelihood of the downside scenario playing out. The cash on their Balance Sheet was more than 25% of the market cap when I bought in, and it had a 4.1% dividend yield at the time, plus it had just reported a return to profit, and a PER of 12. Equally important was the underlying reason for this - a turnaround strategy under new management, with a proven track record elsewhere, was gaining traction.
Furthermore, VLK is market leader globally in its niche of specialist broadcast equipment, and spends a lot on R&D, which means that it's market position is most likely to improve over time, if the R&D budget is spent wisely. There was also good growth potential from its small security products division. I met management twice, read the Annual Report & broker notes thoroughly, and generally put a lot of time & effort into researching it, all of which reinforced my view that there was a high likelihood of making a 50-100% gain on these shares from my buy in price of 30.5p, with a likely timescale of 6-24 months at a guess.
Anyway, that sets the background as to why I bought Vislink shares in the first place, and it was clearly a good decision, because they have today announced strong interim results for the six months to 30 Jun 2013.
Turnover was up 1.8%, at £28.0m for H1, but an improved gross margin of 41.6% (versus 40.5% last year H1), and good cost control meant that operating profit almost doubled from £720k to £1,407k. Furthermore, adjusted operating profit was higher, at £2.0m, which adds back £656k of goodwill amortisation.
I've checked the method of calculation, and am happy with their adjusted profit figures, so that gives 1.8p adjusted EPS. Double that for the full year, and you're at 3.6p. That's probably conservative, as the order book is strongly up, with them having taken £33.6m orders in H1, versus £25.4m in the comparable period last year. So it looks like the company is on a roll, and I wouldn't be surprised to see them surpass 4.0p adj EPS for calendar 2013.
Broker consensus forecast of 2.85p EPS now looks far too low, in my opinion, and hence is likely to rise as brokers factor in the strong H1, and much better order book. Therefore even though the shares have risen 13% today to just under 43p, they really don't look expensive at all to me, that's only about a PER of just under 11, if my estimate for EPS is correct.
The key part of the Outlook section says (my boldings):
We believe that the Group is capable of exploiting the continuing growth of video content contribution both in our traditional broadcast market and also in other vertical markets including defence and security. Our three year objective of reaching £80m of sales and £8m adjusted operating profit remains realistic, achievable and on track; developing recurring revenues within our business remains a priority.
We have a strong order book which underpins our third quarter revenue. The Group has net cash of £7.2m. The Board therefore remains confident about the future prospects for the Group and have concluded that it is appropriate to prepare the Group financial statements on a going concern basis.
I don't know why they included a reference to going concern in the last sentence, as their Balance Sheet is bullet-proof, so that's completely superfluous. To my mind, as they are on track to achieving the plan to reach £80m turnover and £8 profit, then the business would probably deserve a PSR of about 1, hence market cap of £80m (70p per share). That compares favourably with the market cap after today's rise of £48.8m (at 42.88p per share).
In the back of my mind, I was thinking in terms of probably selling some of these once they got to 60p, and that looks achievable, maybe a bit more, with a say 18 month time horizon perhaps?
Anyway, suffice it to say that I'm very pleased with progress so far, and am happy to continue holding for the foreseeable future. I should add that in the past, the capitalised R&D spending roughly equalled the P&L amortisation charge, however they have diverged this time, and the amortisation charge of £1,149k in H1 this year is significantly lower than the amount capitalised in the same period of £2,010k. So if you took a conservative view of the accounts, and write off all R&D as it is incurred, then profits would not have risen. On balance though I am happy with the company's accounting treatment.
There is no interim dividend, as in prior years, but the forecast 1.3p full year dividend looks fine, which would now yield 3.0%.
Separately, Vislink also today announced a strategic relationship with C-Com Satellite Systems Inc., which seems to be a cross-selling agreement. No financial details are given.
Further, they announced today what seems to be a remarkably shrewd acquisiton of Amplifier Technology for just £2m in cash, and up to £2m more in earn-outs. The earn out is payable in full if Amplifier Technology achieves £3m EBITDA for year-ending 31 Dec 2014. That looks pretty astonishing to me, as on the face of it, adding £3m EBITDA to Vislink's figures would add a helluva lot more than £2m to Vislink's market cap! Although I suppose it depends how much Amplifier Tech spends on capitalised R&D? From the little information given though, it looks an excellent deal.
Interim results to 30 Jun 2013 have been released by Pilat Media Global (LON:PGB). This is the Anglo-Israeli software company specialising in software modules for television companies, with an impressive international client list.
I did very well on these shares earlier this year, but recently banked my near-100% gain, and moved on, as I think they're probably close to a fair price at the current 61.5p, which with just under 62.4m shares in issue translates into a market cap of £38.4m. They have a striking £12.2m in net cash, or close to a third of the market cap. The narrative to today's statement says:
In parallel the Board is examining the best uses for the Company's healthy cash reserves including looking for suitable opportunities to invest these reserves and take advantage of the good momentum the Company is experiencing.
It strikes me as odd that such a cash rich company does not pay a dividend each year, which they could easily afford. If I still held shares, I would be nagging management to pay out a 4-5% dividend yield. Why hoard up cash, when it produces a negligible return in interest from the Bank?
The trouble with Pilat is that it generates almost all its profit in Q4, which is dependent on licence renewals if my memory serves me correctly. There has been a steady stream of positive contract wins, which has driven the re-rating of the shares this year. But at the half way stage, the company is only slightly ahead of breakeven, with £136k profit from operations.
I shall watch with interest how the company progresses, but looking at these figures I think I made the right decision in selling out in dribs & drabs in the mid to high 50s, and early 60s.
The opportunity to buy PGB shares cheap at 37p was flagged up here on 16 Apr 2013, where I said:
"It was flagged up to me by a friend, who bellieves (and I agree with him) that the market cap of £23m is seriously cheap".
So I hope some readers made a nice profit on these shares too, after having done your own research of course.
Right, that's it for today. Sorry for my poor time-keeping today, it won't happen again! So see you at 8am tomorrow morning, all bright-eyed & bushy tailed!
(of the shares mentioned today, Paul holds a long position in VLK, as too does a small caps Fund to which Paul provides research services).