Small Cap Value Report (29 Dec 2015) - IND

Good morning.

I trust that you had a pleasant break over Christmas. I'm afraid that for me, glad tidings of comfort and joy have already been eradicated by bad tidings of discomfort and rage - a profit warning from Indigovision (LON:IND), so let's have a look at that first.

Indigovision (LON:IND)

Share price: 200p (down 8.7% today)
No. shares: 7.6m
Market cap: £15.2m

(at the time of writing, I have a long position in this share)

Profit warning - this Scottish digital CCTV company had a poor H1, making a loss before tax of $1.3m for the 6 months to 30 Jun 2015, but the outlook statement at the time was much more upbeat about H2 prospects, saying on 17 Sep 2015;

After a disappointing start to 2015, the Group experienced an improving trend in financial results as the first half progressed. The pipeline of large projects for the second half is significantly stronger than the first half and, as a consequence of this and management actions taken to reduce costs, profitability in the second half is expected comfortably to exceed first half losses.

So H2 profit was expected to "comfortably exceed" $1.3m.

Roll forward to today, and we are updated as follows;

As expected, IndigoVision returned to profit for the second half of 2015. Operating profits for the six months to 31 December are expected to exceed $0.5m after a first half operating loss of $1.3m.

The year on year sales decline of 29% reported for the first half slowed, and is expected to be approximately 18% in the second half.  Sales in the second half were lower than anticipated, principally due to a delay to a project in the Middle East. The action taken in the first half in relation to operating costs meant that operating profitability was restored in the second half notwithstanding lower sales. Focused working capital management is expected to result in net cash balances exceeding $2m at 31 December 2015, a material improvement over the net debt of $0.5m reported at the half year end.

To quantify the miss, it looks to be about a $1m profit shortfall in H2. The reason for this profit shortfall is mainly down to a project delay in the M.East.

My opinion - it's yet another disappointment I'm afraid. The company's Achilles Heel is that it relies on a handful of major projects each year to make the difference between poor results, and good results.

The overall loss for calendar 2015 therefore looks to be about -$0.8m, which is clearly a poor outcome, and very disappointing for a company which has generally produced reasonable profits, in 5 out of the last 6 years. Although no discernible sales or growth trend has emerged.

With sales down 29% in H1, and 18% in H2, at least the rate of decline is slowing, but sales shouldn't be slowing at all - they should be growing.

The cash position has improved markedly since the interim results, moving from $0.5m net debt 6 months ago, to $2m net cash now, and the balance sheet overall is strong, so the company is pretty safe for the time being. Bear in mind also that most costs are variable, so the company can scale up or down its overheads to suit.

Overall, I expect that other shareholders are, like me, just punch drunk after the seemingly endless cycle of good progress being made, followed by profit warnings. The company doesn't really have much visibility on profitability, because it is so dependent on a relatively small number of high value contracts each year.

So far the company hasn't achieved adequate scale, so I hope that a trade sale will be the exit route. A competitor was recently sold on a fairly high multiple (2x sales), which would imply good possible upside here, if a similar deal could be achieved. So for me personally, this isn't the right time to sell, but I'd certainly like to be put out of my misery by a trade buyer at some point.

A bit of mince pie might have got stuck in the computers at investegate, as the news feed wasn't working this morning, but it seems to be up & running now. As a backup, you can always look at news announcements on the Stock Exchange's own website, here, although it's not very user-friendly in my view.

There's nothing else of any interest to me today, so I'll sign off for today (unless there are any more profit warnings of interest issued later today).

Regards, Paul.

(I have a long position in IND. A fund management company with which I am associated also holds a position in IND.

These reports are my personal opinions only, which are subject to change without notice. They are never recommendations or advice. Please DYOR)