It has also proved incredibly rewarding over the past 12 months during which time I have written articles on over 100 listed companies out of my watchlist of 200 quoted shares on the Alternative Investment Market (Aim) and the main board of the London Stock Exchange. As a result there is a continual news flow from companies I follow to report on.
Call-busting numbers
Netcall (NET: 40.5p), a small-cap business offering software to make telephone call-handling more efficient, issued a bumper set of full-year results last week as I predicted a few months back (‘Small cap winners’, 1 July 2013).
The company continues to experience strong demand across its product portfolio, driven principally by the "private sector and orders for business process management and software-as-a-service (SaaS) solutions," according to chief executive Henrik Bang. The client base of over 700 organisations includes two thirds of the NHS Acute Health Trusts, telecoms companies BT and Orange, financial institutions Lloyds TSB and Prudential, cinema operator Cineworld and utility Thames Water.
It's hardly surprising either that business is robust for Netcall as companies are increasingly facing the balancing act of having to improve the quality of their customer engagement while at the same time improving operational efficiencies and reducing costs. Moreover, businesses have to deal with customers across a growing number of channels including the internet, mobile networks, social media, web-chat, telephone and text messages.
So, to capitalise on the opportunity, Netcall has developed a platform of products to provide a suite of software solutions which support organisations' end-to-end customer engagement strategies with the aim of also improving customer service, retention and acquisition.
For instance, the company’s Liberty platform includes multi-channel contact handling that has been designed to improve customer interactions and workflow capabilities. It has been well received by customers who have been choosing to acquire or upgrade to the platform. New customer wins include Oxford City Council and King’s College, London. The benefits to customers have been immediate with service desk interaction rates up 50 per cent at King’s College and email response times reduced to minutes.
Moreover, the acquisition of Serengeti Systems, acquired just under a year ago, has been successfully reorganised and is creating cross selling opportunities from the company's wide customer base. This helps explains why Netcall's revenues increased by 10 per cent to £16.1m in the financial year to June 2013, of which recurring revenue accounts for two-thirds of the total.
Bumper cash generation
It's good news for profits too: cash profits shot up by almost 25 per cent to £4.2m in the 12-month period, to lift adjusted EPS by 25 per cent to 2.56p. And with cash generation strong - cash generated from operations increased 25 per cent to £4.9m - the company’s cash pile increased by 9 per cent to £9.1m, or the equivalent of 7.55p a share. That was a mightily impressive performance considering Netcall invested £1.5m in research and development and spent a net £1.95m acquiring Serengeti. It also explains why the board lifted the dividend by 40 per cent from 0.5p to 0.7p a share, rather than the 0.55p analysts had been expecting.
Importantly, there is little reason to expect this awesome cash generation to stop any time soon. Analyst Andrew Darley at broking house finnCap expects Netcall's cash profits to rise from £4.2m to £4.5m on revenues of £17.1m in the current financial year to end June 2014, to generate free cash flow of £3.1m. That will not only underpin another hike in the dividend - finnCap is pencilling in a pay-out of 0.8p a share - but it is also expected to swell the cash pile even further to £11.4m, or 9.5p a share. In other words, even if Netcall's earnings flatlined, as seems highly unlikely, the shares are only trading on 12 times earnings net of cash. And as that cash pile grows the earnings multiple drops further.
Or put it another way, strip out the current cash pile of £9.1m from Netcall's market value of £48m, and the company is in effect being valued on a modest 9.3 times historic cash profits, falling to 8 times forecasts for the year to June 2014. For a business producing double-digit earnings growth, and one that is conservatively expected by analysts to grow EPS by around 10 per cent in the current financial year, that valuation is hardly exacting.
For good measure, and as I have pointed out in previous articles, by using the burgeoning and low yielding cash pile to make smart bolt-on acquisitions, Netcall can create further cross-selling opportunities to tap into its client base as well boost profits and earnings per share.
In my opinion, Netcall shares are easily worth 48p. On a bid-offer spread of 39.75p to 40.5p, I have no hesitation in reiterating my previous buy advice.
The land of opportunity
As I anticipate in my column a few weeks ago (Buy ahead of the IPO, 11 September 2013), Bollywood film producer, Eros (EROS: 252p) has announced that it will be cancelling its listing on Aim and will be transferring trading in its shares to the New York Stock Exchange (NYSE). As a result of the US listing, the Aim-traded shares of UK shareholders will be exchanged for US shares in the NYSE-listed company
In my opinion, a US-listing will give Eros a strategic advantage, access to additional equity capital and liquidity, as well as trading with a more comparable peer group with broader analyst coverage.
It is also one that I expect US investors to warm to given that the shares are hardly being overvalued on a forward PE ratio of 11 for the financial year to March 2014. Moreover, the company is currently only being valued on an enterprise value (market value plus debt) of 9 times this year's cash profits. This compares favourably with US content providers.
As I pointed in my analysis a fortnight ago, I feel that US investors will be attracted by Eros's game-changing joint venture with US premium network operator HBO which significantly increases the appeal of the company's shares to US fund managers. This landmark agreement not only brings the best of Hollywood and Bollywood together, but means that Eros is ideally placed to tap into the rapid growth forecast in the digital pay-tv (direct-to-home satellite and cable) markets in India. It is likely to prove highly profitable too.
For instance, analyst Patrick Yau at broking house Peel Hunt predicts that net profits from the venture could ramp up from $3m (£1.85m) on a net subscriber base of 800,000 in the financial year to March 2014, to $16.5m the year after (net subscriber base of 2.2m), and $43.3m in the year to March 2016 assuming net subscribers of 3.6m out of a total pay-tv market of 169m in India that year.
I still believe that an earnings multiple around 15 times earnings estimates is fair value for the company, implying Eros' equity is worth upto 350p a share. So with the shares being offered in the London market at 252p, I feel there is enough upside on offer to justify reiterating my buy recommendation. However, it’s worth noting how the New York Stock Exchange listing on Friday 18 October, and the accompanying delisting of the Aim-traded shares, will work in practise.
Mechanics of US listing
Following the Aim delisting, there will be no market facility in the UK for dealing in 'A' ordinary shares and shareholders wishing to deal will either have to these shares privately or through a broker on the NYSE in compliance with US securities laws.
So, if you hold the 'A' ordinary shares in certificated form or in uncertificated form in the CREST system, and you wish to sell them on the NYSE, you will need to use an eligible US brokerage firm. Eros strongly recommends that, after 'A' ordinary shares have listed on the NYSE, shareholders transfer their 'A' ordinary shares to a brokerage account that is able to hold securities administered through the DTC (Depository Trust Company, the US equivalent of CREST) prior to attempting to sell the shares on the NYSE.
Shareholders, or their brokerage firms, can contact the company's registrar who will either take possession of the share certificate (s) or remove the 'A' ordinary shares from the CREST system and, in turn, convert them to certificated form in the name of Cede & Co, as nominee for DTC. I would strongly recommend this be done prior to trading the shares on the NYSE as this transfer mechanism may exceed the three day trading settlement period mandated by US equities exchanges, which may in turn force a broker to 'break' a trade.
Please note also that as part of the US listing, Eros shares will be consolidated on a three-for-one basis prior to the commencement of trading in New York. Also, as part of the initial public offering (IPO) of its shares on the US market, there will be an offering to US investors to raise funds for Eros and to broaden the shareholder base. The number of shares to be offered, and the price range for the offering, will be announced prior to the commencement of trading in New York on Friday, 18 October. Finally, the NYSE is open for trading from 9.30 a.m. to 4.00 p.m. US Eastern time on Monday to Friday, excluding public holidays. Eros has also published a document in connection with the US-listing to answer shareholder questions. It can be viewed on the following link.
Since the start of last week, I have published eight other articles last week on the following companies:
■ Global Energy Developments ('Waiting for pay dirt', 23 September 2013)
■ IQE ('IQE profit-taking presents buying opportunity', 23 September 2013)
■ 32Red ('IQE profit-taking presents buying opportunity', 23 September 2013)
■ Spark Ventures ('Banking on more cash returns', 24 September 2013)
■ Macau Property Opportunities ('Blue sky territory', 24 September 2013)
■ KBC Advanced Technologies ('Riding an earnings upgrade cycle', 24 September 2013)
■ Inland ('Buying opportunity ahead of results', 25 September 2013)
■ US Dog share portfolio ('Easy as pie', 27 September 2013)
■ Conygar ('Shrewd insider buying at a property play', 30 September 2013)
Finally, in response to requests from dozens of readers, I have published an article outlining the content of my new book, Stock Picking for Profit: 'Secrets to successful stock picking'
