Small Cap Value Report (26 Mar 2014) - VLK, SSY

26th Mar '14 by Paul Scott

17 comments 18819 reads

Good morning!

Vislink (LON:VLK)

As it's a core holding of mine, I'll spend a bit of time on calendar 2013 results from this technology group, announced this morning. They make high end video equipment, serving the broadcast and security markets. The shares shot up last week on a positive market reaction to the news of a decent size and quality acquisition, funded from cash and a new debt facility, plus a relatively small number of new shares issued, which I reported on here.

Stockopedia shows normalised EPS broker forecast consensus of 2.85p for calendar 2013. The company has today reported adjusted EPS of 4.2p. However before getting too excited, that figure is flattered by a favourable tax treatment this year. So the company also helpfully highlights adjusted EPS on a normalised tax charge, which is 3.2p.

So in my opinion the 3.2p adjusted EPS figure (normalised for 20% tax) is the most appropriate figure to value the company on. That puts the shares, at the current share price of 49p on a (now historic) PER of 15.3.

The historic PER is a good starting point, but investing is all about looking into the future, and valuing companies on how they are likely to perform in the future. Or rather I should say, it's all about buying/holding shares that are currently cheap against what you think future profits are likely to be. It's also all about being right on what future profits are likely to be!

In this case broker consensus is currently 4.05p normalised EPS for 2014, so at 49p the company is on a 2014 forecast PER of 12.1, which looks good value to me. There might be upside on that earnings figure too?

In terms of outlook, the narrative today reiterates the £80m turnover and £8m adjusted operating profit target, saying the group is "wholly in line with executing our strategy". Comments on markets & current trading say;

Our markets continue to be challenging. However, the Group enters 2014 with renewed confidence buoyed by the introduction of new products and the added momentum which has come from the synergistic 'bolt on' acquisitions.

So it sounds like growth is being generated by new products & the acquisition of Amplifier Technology, and more recently Pebble Beach, whilst still up against unfavourable…

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garbetklb

26th Mar '14

Hi Paul
V minor point - dividend is being maintained at 1.25p, not 1.5p.
Garbetklb

johnrosier

Hi Paul,
Should/when they achieve their annualised target of £80m turnover and 10% operating margins, even with the dilutive effect of it issuing more shares for acquisitions, it seems to me that earnings in 2015 could be around 6.0p! Any thoughts?

Paul Scott

Hi garbetklb,

It's an important point, thank you for pointing out my mistake.
I have now corrected the divi to 1.25p, and corrected the yield too. Important to get these things 100% right, so I'm always grateful when people point out any factual errors that slip through.
My apologies - just a slip of the keyboard, I had 1.25p written down on my pad here, but somehow typed it wrong. More caffeine required methinks!

Regards, Paul.

iwright7

Paul,

I too hold Vislink (LON:VLK) and am +ve about the company. The 2014 forecast EPS of 4.05p was calculated before the Pebble acquisition, who in their last financial year (June 2013) made £1.3M PBT on sales of £5.6M. So assuming no synergy (which is unlikely), there should be a EPS upgrade from this acquisition alone and plus organic growth. I await new broker forecasts with interest which I expect will drop the the forward PE giving further scope for a SP lift.

Ian

MrContrarian

I cannot see any difference at all between a commissioned research note, and a house broker note. Both are putting the bull case, and being paid to do so by the company.

Both sources are conflicted but I'd put more weight on an established brokers who have much bigger reputations to consider. I'm sure some Jonny-come-latelys will be willing to write unctuous froth to get the fee and develop their businesses. What we need is analystAdvisor.com, or perhaps a poll.

SevenPillars

Just a few points re Vislink. Nothing wrong with the results, but it does seem to me that they've made a rod for their own back with the 80/8 promise, by the end of the financial year 2014. The Chairman restates this today but leaves off the 2014 bit, which may be an oversight, but is a red flag in that it suggests they might know that the target date is now a stretch. They still seem some way off that unless they do it by acquisition. Will the market ignore it if it isn't achieved within the set time-frame? Who knows, but the share price might be higher if they had never mentioned it as a goal in the first place. Investors should ask how will they make that leap in the next year.

The dividend has been 1.25p for years, since 2007 in fact, nothing to write home about and looks like a token payout to keep investors interested, perhaps eventually it will go up once they hit 80/8?

It's a company I like, but I'd like to read more about how they expect to meet the goal it has set itself, when the numbers suggest that it is lagging behind meeting those goals, especially when in it's own statement it uses the word"challenging" markets. There is room for disappointment here.

cycle

Hi Paul,
Any thoughts on the change in Vislink's way of reporting R&D. Seems like they are moving to capitalising a good part of their development costs - perhaps to flatter the results a little?

Delpher

To add to SevenPillars' point , Petrofac, whilst not a smallcap and by no means a comparable company, made a similar forecast and repeated it in a number of consecutive Reports only to have to withdraw it on a downturn with a dramatic fall in the SP which is only just recovering after 5 months.

bsharman

The Vislink results were very good however I agree that what leaped out from the page was the fact that 2014 had mysteriously disappeared from the 80/8 target.... I think that this target is now very difficult to achieve in 2014. Delays will probably be due to finding the right businesses to purchase and at the right price. As a holder I wouldn't want them to make bad decisions at this stage just to meet a specified target. I'll be tuning in at 1pm!

intuitive6191

I cannot see any difference at all between a commissioned research note and a house broker note

Very true.

The only difference with Vislink is that the house broker (Singer N+1) doesn't seem to publish any publicly available research. There is no broker consensus recomendation on the Stockopedia stock sheet and the eps forecast has been stuck on 2.85 for nearly a year.

The Vislink website has a few Edison reports but little else.

Obviously the whole concept of the Stockopedia stocksheet forecasts relies upon brokers producing regular research and Stockopedia using this research to update the stocksheet accordingly. If this doesn't happen then the stocksheet is of very little use.

jjis

See the followng link for 10 rules of forecasting and the perils of it, they obviously forgot Rule No. 6. - When forecasting give a number or a date but never both!

Damian Cannon

SCISYS (£SSY) look interesting although I see that they claim to have "a strong balance sheet" and so I did wonder if Scott's law might come into play. However with all liabilities covered by current assets the company does look pretty solid.

However it's a bit disappointing not to see a breakdown of the exceptional costs so that we can judge whether they are truly exceptional or actually a recurring cost. Given that the eps without these costs is 9.3p, and so double the basic eps of 4.6p, this seems like a pretty material question. i.e. is the company cheap or not?

NB I've just looked at the interim results but there the exceptional cost was both broken down and only came to 248K for restructuring costs (218K in the previous year). So if the exceptional costs for the full year are just for restructuring then we're looking at an extra 950K in H2 and a good sign that they do recur.

Damian

SP, I watched the Webinar at lunchtime and the 80/8 target by end of 2014 was repeated by their chairman. He was also confident of making it, which if they do would be a great achievement, but no one can foresee the future and even if they fall a little short it would still be a great result.

Well, good to have that feedback and I wouldn't disagree with what you are saying that even if they don't achieve it but get close it would still be a good result. The market however might think differently, which is unfair, but at times a failure to hit expectations will be punished. What is good about Vislink is that the fundamentals are not stretched, it isn't one of those growth/momentum companies on a P/E of 150 where the share price is one bad announcement from a 50%+ fall. Failing to meet 80/8 shouldn't cause too much damage unless between now and then the share price runs up on expectations which aren't met. We will know over the next 9 months or so.

28th Mar '14

One of the investment mags today reported that N+1 Singer have upgraded its VLK EPS forecast for 2014 by 8% to 3.9p and adjusted operating profit to 6.8M, . The chairman is reported as saying: “They’re the analyst’s forecast, not ours, We’re still on track financially, and have a group capable of growth well beyond the targets set out in 2011.". So do we believe the caution of the broker, or the optimism of the chairman?

Vislink's Chairman seems to be putting a lot of faith in making that great leap forward if the goal is still 80/8 by the end of this financial year. They've been saying that since 2011 and the numbers, while good have only been steady. Why's he so positive that they will leap up this year to hit the 80/8 goal? It may well be that a takeover or two will do it, but I would assume that may impact elsewhere as in the cash position or carrying debt, maybe even coming back to the market with a share placing? If they are just relying on the current business to jump up to 80/8 in the next year then that will take some doing based on recent results. The broker figures are still good, but the Chairman has to be optimistic as it was the company that set the goal.

deucetoace

29th Mar '14

cycle,
I agree they have capitalised more than twice the amount they amortised this year which makes a significant difference to profits

Small Cap Value Report (26 Mar 2014) - VLK, SSY

Vislink (LON:VLK)

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Paul Scott

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