This technological change resulting from lightening fast broadband connections and equally fast moving product innovation should be good news for the companies providing the hardware that makes it all happen. With this in mind I have been taking a look at Aim-traded Amino Technologies (AMO: 97p), the Cambridge-based set-top box designer of digital entertainment systems for IPTV, home multimedia and products that deliver content over the open internet such as video on demand.
Clients include Vodafone in Iceland and Tele2 in Holland, but Amino’s product suite is not a ‘one size fits all’ offering. The increasing level of customer sophistication, content availability and multimedia capability means that the company’s product-portfolio needs to be flexible to target the requirements of different markets across the globe. For instance, emerging markets, such as Latin America and Eastern Europe, have been characterised by demand for lower specification, competitively priced devices. To meet these end markets, Amino offers a lower price point product pitched at key functionality rather than the high-end offerings demanded by consumers in Western Europe and North America. It has been successful too, winning a number of important contracts in both regions, including its first order in Argentina towards the end of last year. The benefit of gaining a foothold in these territories now is that as they mature over time, there should be potential to upsell more sophisticated higher margin devices into these markets. The rest of the world segment accounted for a third of Amino’s annual revenues of £35.8m last year.
Another 40 per cent plus of revenues originate from North America. The focus here on small to medium sized operators is paying off for Amino, specifically where the roll-out of fibre to the home has stimulated demand for broadband delivered television services. To capitalise on the opportunity here the company has developed a new home monitoring and control product that will be launched in the first half of this year in the United States. Complementary with the current product offering, existing Amino set-top boxes can be used to control and manage a portfolio of products including Wi-fi cameras, motion detectors and door sensors with alerts and live footage delivered to smartphones and tablets via a dedicated Amino app. This highlights how Amino is adapting its product portfolio to meet the demands of consumers on the back of technological advances. Last year the company invested a total of £6.5m on research and development, mainly on new products. The good news is that the investment programme is paying off.
Bumper profits, cashflow and dividends
Amino’s full-year results for the financial year to end November 2013 were pretty impressive. Buoyed by a three percentage point increase in gross profit margins to just over 45 per cent, and strict cost control which led to a 10 per cent cut in operating costs, underlying operating profits increased by 17 per cent to £3.3m. Cashflow was equally robust as, net of exceptional credits which boosted the reported figures and adjusting for working capital flows, cash generated from operating activities was bang in line with the company’s annual cash profits of £6m.
The difference between operating profits and cash profits is accounted by a £2.7m charge for depreciation and amortisation, but these are non-cash items. That’s worth noting because this impressive cash generation has enabled the board to lift the full-year dividend by 15 per cent to 3.45p a share. Guidance is for at least the same percentage increase this year too.
As a result analyst Andrew Darley at broking house finnCap is forecasting a payout of 4p a share in the current financial year to November 2014, rising to 4.6p the year after. On this basis, the prospective yields are 4.1 per cent, rising to 4.7 per cent, respectively. The dividend increase could be even greater as Amino’s net cash pile rose by 14 per cent from £17.1m to £19.5m last year, and that was after paying out £2.1m in dividends. The current cash pile is the equivalent of 37p a share.
It’s worth noting that corporation tax is not an issue because Amino hardly pays any. That’s because the company has around £37m of unrecognised tax losses available to carry forward to set against future taxable profits. It also has losses of £2.8m recognised by a deferred tax asset of £560,000 on its balance sheet. At the current corporation tax rate, the unrecognised tax losses equate to a deferred tax asset of £7.8m. That’s worth almost 15p a share alone.
It also means that Amino’s net asset value of £24.9m significantly understates the true value in the company as it does not include this deferred tax asset. Or put it another way, the shares are actually only rated on 1.56 times adjusted book value if you factor in the value of the unrecognised tax losses as a deferred tax asset.
There is value in the shares on an earnings basis too. Based on finnCap’s pre-tax profit estimate of £3.6m for the current financial year, and applying a nil tax charge on these earnings, Amino’s adjusted EPS are forecast to rise from 6.5p to 6.9p. On this basis, the forecast dividend of 4p a share is covered 1.75 times, but equally important it means that once you strip out the 37p a share cash pile from the current share price, Amino’s shares are priced on a modest 8.5 times current year earnings estimates.
True, don’t expect much in the way of top-line growth in 2014. But with new product launches scheduled for the second half of the current financial year following the hefty investment in R&D, it’s only reasonable to expect news of contract wins on the back of these new offerings. In turn, that should underpin finnCap’s expectation of an 8 per cent rise in revenues and pre-tax profits in fiscal 2015 to drive up EPS at a similar rate to around 7.4p. That looks achievable to me and should result in some decent newsflow on the sales momentum in the business. It’s also realistic to expect the company’s share price to react positively given that the shares are being rated on a miserly eight times next year’s cash adjusted earnings.
Target prices
Interestingly, following a side-ways move Amino's share price is now sitting on its rising 200-day moving average. So, unless you believe the bull-run in Amino’s shares is over, then this should be the time to buy. With the 14-day relative strength indicator (RSI) showing a reading around 60, the shares are not overbought yet which means any upmove from here should have legs to run. From my lens, a move in the share price above 98p, the top of the current trading range, would signal that the consolidation is over and a move back to last August’s high of 108p, and beyond, is firmly on the cards.
It’s one fully warranted on valuation grounds too. For instance, if finnCap’s upgraded price target of 133p is achieved (up from 120p before the full-year results), the company would have a market capitalisation of £70m. Strip out its £19.5m cash pile, and even at this level the company would still only be valued on 7.5 times current year cash profit estimates to its enterprise value (market value less net cash). On a cash adjusted basis, the rating would be 14 times earnings. That price target may indeed be achieved, but I am going to be more conservative and believe on a six month timescale a target price of 120p is quite feasible assuming the positive newsflow from product launches comes through in the second half as I anticipate.
So priced on a bid-offer spread of 92p to 97p, and offering around 23 per cent to my target price, I am upgrading my recommendation on Amino shares to a buy. Please note that an analysis of historic trades shows that investors have been able to deal well within the official spreads, so the actual spread is much tighter than it first appears.
Please note that having already published seven columns this week I am still working my way through a large number of announcements from companies on my watchlist and which I plan to update. These include: LMS Capital (LMS), BP Marsh Partners (BPM), Eros (NYSE: EROS), First Property (FPO), Trading Emissions (TRE), and Polo Resources (POL). My next column will appear at 12pm on Monday 17 March.
