I first covered Vislink (LON:VLK) back in April, and they've been in my portfolio since mid-May, when I freed up some cash by selling some of the other constituents and decided to take the plunge with the broadcast & surveillance tech company. That's proven to be one of my better decisions; they're up about 60% in that roughly 4 month timespan, a rather generous return. Clearly, they now deserve at least a second look, both to catch up with the company post their results and consider whether a significant jump in price sees the shares still looking attractive.
As I mentioned above, the company operates broadly in two segments - broadcast and surveillance. Broadcast mostly relates to the capture and wireless transmission of video and audio. Surveillance operates in a similar area - the technology is basically the same gist, transmitting data from A to B, but the focuses are different. It's a niche, sure, but it's a wide market - and that's an attractive feature. They do one part of an important and growing service, and do it well.
While the share price has been meandering upwards since July, the big spike came with the announcement of their half-year results at the end of last month. Put simply, they look good for the future - while revenue is only up slightly, order intake - a more important indicator of what they're likely to do in the next few years - was up 32%. Adjusted operating profit was up 43%, at £2m, and there's a cherry on that cake, too - management have included a £0.5m charge to this half's operating profit since they expect to be paying management bonuses if/when they meet market expectations for the full year. Well; cake/cherry wise is entirely a matter of perspective, really, since that's money not going to shareholders - but the positive slant is that if this is a non-recurring 'turnaround' bonus, this year's operating profit further understates intrinsic earnings potential.
Sadly for us, as far as I can tell, it isn't really non-recurring - it's just their performance related bonus agreed last year -so managements' specific pointing out is probably a hint at something else. What's that something? Well, the 2012 annual report states that 'no performance related cash bonus can be earned unless the Group has achieved an adjusted operating profit of £4.2m'. I suspect it is just being suggested that management are comfortable that they'll meet that target. On the bonus itself, though, what the specific criteria are over and above that objective, if there are any, doesn't seem to be stated. The remuneration report lists 'weightings' on which metrics are considered for bonuses, but I don't consider the weightings particularly useful given they don't actually give us detail about what the target level for the metrics are. It's like me saying I'll pay my gardener based on criteria X, Y and Z, and then not telling him a) how much the total amount is or b) what level of X, Y or Z qualifies as bonus-worthy. Since I'm tapping away all the negativity here, I might also say that bonuses based on adjusted operating profit are always a bit dubious anyway. Adjustment basically means you can make it say anything if you dump enough stuff in the non-recurring section.
If I sound like I'm being overly harsh and making a mountain out of a molehill, I probably am, but your opinion of management is important - they're completing acquisitions and want to complete more. This naturally means their judgement is extra important - they're spending your, the shareholders' funds, on businesses in which we are not privy to the same information about. Leaving managers to manage a company you already understand is one thing - them spending large chunks of money on other business at their discretion is another. The results of their previous acquisitions are impossible to judge at the moment, but the restructuring of the business seems unambiguously positive in hindsight. Sadly for us, any readthrough about management is probably limited given that the CEO in charge of that period - Duncan Lewis - left shortly afterwards.
We make do we what we have, then, and what we have is a business which appears to be performing well - at least one green tick - and has what I think are pretty favourable economic prospects. There's a good degree of discretion involved in Vislink; the way the business works means that a large amount of operating expense is on research, and in the amortisation of previously capitalised development. This opens up questions as to what degree the accounting figures present the economic reality - because what we really want to know is how much this business can make, in a given year, from its existing asset base. That, of course, depends on how much of their development is 'treadmill'-esque; spending to stand still and to avoid getting overtaken.
My impression of the accounting representation is that it presents a conservative account of these costs, though we'll need quite a few more years of experience to be able to say that reasonably - the real acid test is whether, over a reasonable time period, the group is continuously generating profits consistently above what its fixed asset base suggests is should (hinting at residual value in all that development - economic goodwill). It is, as I've probably said before, a tediously cyclical argument.
That model, though - where a lot of the costs are in development and research - means that variable costs are low, and that means growth is particularly valuable; growth, you might remember, which is coming in thick and fast. Vislink have a market-leading 20% share in the broadcast market, according to their annual report, and have a number of impressive statistics within that umbrella - they also say that 50% of all 'outside broadcast video', which as far as I know and Google tells me, is non-studio, on-the-road video (cunningly named, then), comes via Vislink products.
My interpretation is the same as before. This is a clearly synergistic company with a strong position in a growing niche. The restructuring in 2010 muddied the waters - probably leading to the underpricing - but I still think the market cap understates the potential for the business; and they've still got £7m lying around in net cash, which they'll presumably use for further acquisitions. I haven't done a great job in the past of identifying good companies with good economic characteristics - I've leant towards companies which look cheap regardless of quality. Hopefully I'm right in my understanding here.