Good morning!
Netcall (LON:NET)
This is a good company, demonstrating growth, and with high quality, recurring revenues constituting 63% of total revenues - which is good because recurring revenues greatly reduce investing risk - after all, if your clients are on long-term contracts, then all being well most turnover is in the bag before a financial year has even started. Sales efforts are then mainly focussed on additional revenues, which will build the recurring revenues again for the following year, etc. So that's why investors like companies with strong recurring revenues, and are prepared to pay more.
That said, on first glance at Netcall's interim results for the six months ended 31 Dec 2013, I'm wondering if the growth is strong enough to support the elevated share price? At 56p per share the market cap is about £69m.
The company achieved sales of £8.43m for the six month interim period, up only 3%. They quote the horrible "adjusted EBITDA" as their first performance measure, which is an inflated number as it ignores capitalised costs (mainly software development) of £390k, with adjusted EBITDA coming in at just under £2.5m.
I'm surprised at the size of share based payments, which are also identified as being an adjusting factor (i.e. they want us to ignore the cost) of £462k, which seems high for just six months (coming on top of £505k from the previous year). So some pretty generous share options being issued by the looks of it?
So basic EPS drops out at1.04p, with fairly heavy dilution that reduces to 0.94p. Annualise that, as there doesn't seem to be much seasonality to the business, and we're at just under 2p EPS for a full year. So at 56p you're looking at a very rich price of 28 times! That's too high a valuation in my view. That's based on my estimate of current year figures, calculated on a conservative basis.
That conservative diluted EPS figure is massaged from 0.94p up to 1.47p through the various adjustments, so I guess the company and its advisers are hoping that the market will value the company on nearer 3p adjusted EPS for a full year, which brings the valuation down to a PER of 18.7 times, still not cheap.
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