I initiated coverage on the company a year ago when the price was 83p (‘Set up for a buying opportunity’, 10 June 2013), since when you will have banked a full-year dividend of 3.5p a share if you followed that advice. You will have also locked into a progressive dividend policy and one that has been extended by the board for the next two years at least in a pre-close trading update this week. In addition, Amino’s board have declared a further 15 per cent rise in the interim dividend to 1.15p a share, in line with analysts’ full-year expectations of a 4p a share payout for the 12 months to end November 2014.
Analysts at research house Progressive Equity Research predict a dividend of 4.5p next year, slightly ahead of the 4.4p forecast from brokerage N+1 Singer. On this basis, the shares are offering prospective yields of 4.1 per cent and 4.6 per cent, respectively, for this year and next.
Importantly, those dividend payments are well covered by current year EPS which are forecast to rise by around 9 per cent to 6.9p based on a similar rise in pre-tax profits to £3.7m. It’s worth noting too that Amino’s net cash increased by a further £1.5m to £19.7m in the first half to May, and that was after the payment of £1.3m in dividends to shareholders.
To put that sum into some perspective, net cash equates to almost 36p a share and accounts for 37 per cent of Amino’s market capitalisation. Strip out the cash pile from the company’s current share price and, after adjusting profits for interest income, the shares are trading on less than nine times cash adjusted earnings for the current financial year. That’s hardly an exacting earnings multiple for a company that boasts robust cash flow and can easily generate cash profits of £6m plus each year.
Or put it another way, deduct the cash pile from Amino’s market value of £53.5m, and the company is being valued on less than five times cash profits. It’s worth noting that corporation tax is not an issue for Amino because the company hardly pays any. That’s because it has around £37m of unrecognised tax losses available to carry forward to set against future taxable profits. Amino 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. This also means that Amino’s book value of £24.9m significantly understates the true value in the company as it does not include this deferred tax asset.
Spark a re-rating
Clearly, there is value in the shares, but what is needed is a catalyst to start a rerating for the share price make headway to my target of 120p. Analyst Andrew Darley at broking house finnCap is more bullish and has a fair value of 133p, although Pia Tapley at N+1 Singer is more cautious with a 93p target.
News that Amino’s US, Latin American and Eastern European operations are all performing well is reassuring, but for the shares to re-rate we need news of contract wins on the back of the new product launches scheduled for the second half of the current financial year.
To recap, around 40 per cent of Amino’s revenues originate from North America where the focus is on small- to medium-sized operators, specifically where the roll-out of fibre to the home is creating demand for broadband delivered television services. So to capitalise on the opportunity the company has developed and just launched a new home monitoring and control product. Complementary with the 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. I will be looking for further news on this from Amino’s management when the company reports first half results next month.
It’s worth noting too that the increasing level of customer sophistication, content availability and multimedia capability means that Amino’s product-portfolio needs to be flexible to target the requirements of different markets across the globe. For instance, Latin America and Eastern Europe have been characterised by demand for lower specification, competitively priced devices. To meet these specific 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. The company has been successful as the rest of the world segment accounts for a third of annual revenues. Moreover, there should be potential to upsell more sophisticated higher margin devices into these markets as they mature.
The upshot is that although Amino’s turnover will be pretty flat this year, and revenues will have a second half bias, top-line growth of around 7 per cent is predicted in fiscal 2015 to drive up EPS at a similar rate to about 7.3p. That looks achievable to me and should lead to some decent newsflow on the sales front in the second half of this year. In the circumstances, it’s only sensible to expect the share price to react positively to such news too.
So ahead of the interim results on 14 July, and offering around 23 per cent upside to my target price, I continue to rate Amino shares a medium-term value buy on a bid-offer spread of 93.5p to 97p. My year-end target price is 120p.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
