That said, there is still value to be had as I am finding out to good effect at the moment as I research my 2013 Bargain Share Portfolio. That portfolio will be published on Friday 8 February and, given the decent track record of my prior portfolios, perhaps it may be one for the diary. There is also value in a company I have been following for the past couple of years even though the share price has more than doubled in that time.
Moreover, with a pre-close trading statement due before the end of this month, I believe this is an ideal time to buy in before the update, which is highly likely to be another dose of the good news story we have been enjoying here. The company is Netcall (NET: 31p), a small-cap business offering software to make telephone call-handling more efficient. When it last reported financial results there was only one word to describe them: stunning. On an underlying basis, adjusted pre-tax profits rose by almost a third to £3.3m on 7 per cent higher revenues of £14.6m in the financial year to end June 2012. The pipeline from new and existing customers was as strong as ever and over two-thirds of sales were recurring. Importantly, recurring revenues exceeded Netcall's cash operating costs and capitalised research & developments, which offers scope for the company's performance to exceed expectations if business remains as buoyant as it has been for the past few years.
It's also worth pointing out that at the time of the company's annual meeting on 19 November, chairman Michael Jackson noted that: "The first half of the new financial year (to 31 December) has begun well with trading in line with market expectations. The double-digit sales growth reported in each of our key markets at the time of the final results has continued into the new financial year. This is the result of both new customer wins in sectors such as Retail and Financial Services and the cross-sale of the enlarged product set into our existing customers." In other words, assuming that this momentum has been maintained in the past eight weeks, and there is little to suggest otherwise, then we could be in for another positive trading update when Netcall issues a pre-close trading update in the next few weeks.
Positive sales momentum
Analyst Andrew Darley at broker finnCap certainly thinks the momentum will be maintained as he is forecasting a 15 per cent rise in pre-tax profits to £3.8m in the 12 months to June 2013 based on an 11 per cent rise in revenues to £16.4m. Even that could be conservative as Netcall has been making rather good use of its cash-rich balance sheet by splashing out to buy Serengeti, a supplier of enterprise content management to over 40 major public sector organisations, in the second half of last year.
It was a smart-looking deal as Serengeti's made profit before tax of £300,000 in its last financial year and the £2.9m cash consideration included a £0.9m earn-out based on the performance of the business this year and next. It also means that the total consideration is less than the £3.2m of free cash flow that Netcall generates from its operations, so the company is in effect recycling its cash to boost profits and EPS. To illustrate Netcall's impressive cash generation, the company's net cash pile only dipped from £8.4m to £7.7m between the end of June and end of October even though the company splashed out £2m on the initial cash consideration for the Serengeti acquisition. And there could be other benefits from the acquisition, too, because at the time of the annual meeting Mr Jackson said: "The integration of Serengeti's product suite is progressing as planned and we see this as an opportunity to drive further cross selling across the company's 700 strong client portfolio".
It would be no surprise to see further deals being made, but even without them the shares are attractively priced. That's because finnCap's conservative looking forecasts imply adjusted EPS will rise 15 per cent to 2.3p in the financial year to June 2013, so net of the cash pile the shares - priced on a spread of 29.5p to 31p - are trading on a modest 10.5 times earnings estimates. But since £300,000 of the £500,000 profit uplift in finnCap's current profit forecast comes from Serengeti alone, from my lens the risk to estimates is on the upside, especially if Netcall is able to generate cross-selling opportunities from the acquisition.
Upside target price
So, although Netcall's shares have more than doubled since I first advised buying at 13p ('Queuebusters', 17 Jan 2011), and are up over 50 per cent since I reiterated that advice at 19.5p a year ago ('Three undervalued small caps', 30 Jan 2012), I can still see significant upside. Income seekers are being placated, too, since last year's dividend was raised by a quarter to 0.5p a share, so there is a 1.7 per cent yield on offer.
My current fair value estimate is 36p a share - a valuation that would be in line with Netcall's peer group and one that is more than warranted. In fact, if January's trading update is as positive as I expect, then I may have to upgrade that target price again. Interestingly, having consolidated gains for the past four months since those full-year results in September, investors appear to be nibbling at Netcall's shares once more. That is understandable as the share price now looks poised to play catch up, having traded sideways since I updated the investment case in the autumn ('Small cap wonders', 1 Oct 2012).
Needless to say, I expect Netcall's forthcoming trading statement to act as the catalyst for the price to make headway towards my target price and rate the Aim-traded shares a low-risk value buy at around 31p. Buy.
