The company is now aiming to increase annual revenues by at least 50 per cent by the 2016/17 fiscal year, implying a turnover figure north of £20m. You certainly wouldn’t bet against it as Tristel’s revenue increased by 27 per cent in the financial year to end June 2014, and the latest interim results show it has maintained double-digit growth across all aspects of the business. This has been mainly driven by Tristel’s chlorine dioxide technology healthcare products. In fact, the company’s high-margin consumables patent protected product, Tristel Wipes, is the most widely used decontamination method in ear, nose and throat, cardiology and ultrasound departments of UK hospital.
Importantly, there are no signs whatsoever of the cash constrained NHS reining back spending on Tristel’s products. That’s hardly surprising given that MRSA and Clostridium difficile still affect one in every 16 patients in NHS hospitals. The company’s technology is also proving increasingly popular abroad where revenues increased by over a quarter to £2.4m in the latest six month period, accounting for almost a third of the total. Sales generated from human health products overseas jumped by 21 per cent on like-for-like basis with notable growth seen in Germany, China, Hong Kong and Australasia.
Strong cash returns
And this robust performance is delivering strong cash returns for shareholders. Before working capital movements, the company generated an operating cash inflow of £1.5m, up 25 per cent year-on-year. So even after paying out £512,000 in dividends in the six month period, and earmarking £425,000 for capital expenditure, net funds still increased by around £300,000 to just shy of £3m, or the equivalent of 7p a share.
In turn, this robust cash flow performance enabled the board to declare a 63 per cent hike in the interim dividend to 0.585p a share. Furthermore, given that the dividend policy is to pay a final dividend equating to three times the interim, then this implies a full-year payout of 2.34p a share, up from 1.6p in fiscal 2014. It’s well covered too as having posted half-year EPS of 1.9p, up from 1.03p at the same stage of 2013, then the company is bang on course to hit analysts’ EPS estimates of 4.2p for the full-year to end June 2015. It wouldn’t surprise me at all if these forecasts are exceeded.
It’s also worth pointing out that the company’s operating margin is on track to hit the board’s 15 per cent medium-term target in the current financial year, well ahead of schedule, and looks set to increase further as sales pick up. Analysts Paul Hill and Gilbert Ellacombe at research firm Equity Development expect revenues to hit £17.6m in the 12 months to end June 2016, up from £15.3m in the year to June 2015, to propel operating profit up by a further 20 per cent to £2.75m based on a margin of 15.6 per cent. And as the non-cash depreciation and amortisation charge is around £910,000 a year, then expect cash profits of around £3.66m to be generated to lift that bumper cash pile up to around £4.7m, or 11.5p a share.
In other words, Tristel is not only generating strong reported profit growth, but its business is throwing off chunks of cash, some of which is being recycled back to shareholders through sharply higher dividends. Analysts at Equity Development predict that the payout will be increased to 2.8p a share in the 2016 fiscal year, implying a prospective dividend yield of 3.4 per cent.
Target price
Having advised buying Tristel shares at 60p (‘Clean up on superbugs’, 6 May 2014), they duly rose to my upgraded target price of 90p, but I strongly feel a return to 90p and beyond is on the cards if Tristel’s management team continues to deliver on its targeted growth profile. Analyst Keith Redpath at brokerage finnCap has a target price of 85p but views the “risk here to the upside”. Equity Development maintains a fair value target of 100p, and I am inclined to agree with them.
Needless to say, I continue to rate Tristel’s shares a buy on a bid-offer spread of 78p to 80p, and have raised my own target price to 100p. If achieved, the cash adjusted PE ratio would still only be 15 for the financial year ending June 2017 based on Tristel delivering EPS of 5.8p and a cash pile of £5.94m, or the equivalent of 14.5p. Buy.
Please note that I last rated the shares a buy at 74p (‘Small cap trading updates’, 22 December 2014).
32Red cleans up
Aim-traded shares in online gaming company 32Red (TTR: 60p) have regained territory above my recommended buy in price of 51.75p (‘Game on’, 7 July 2013), but it has been an incredibly volatile ride to say the least as the sector was sold down heavily last year on concerns over the introduction of a point of consumption tax.
However, an upbeat trading statement from the company in late January indicated that the business is adapting to the new regulatory regime far better than many had anticipated. In fact, in the first 22 days of the new financial year revenues had raced ahead by 31 per cent on the corresponding period in 2014. True, analyst Ivor Jones at broking house Numis Securities rightly points out that “it’s too early to conclude that the new regime is favouring 32Red as it may be that the company is mopping up the market share left by companies which chose not to get licensed in the UK”. However, it’s also worth noting that 32Red’s chief executive Ed Ware believes that “our marketing and operations have never been in better shape”. He has a point as a drill down through the revenue figures for last year shows that the company posted 33 per cent growth in the second half of 2014, and clearly this strong momentum has continued into the new fiscal year.
A focus on gaming on mobile devices is critical to maintaining this growth as this segment now accounts for a third of all casino revenues, up from only a fifth at the end of 2013. Strict cost control is important too, something that 32Red is keeping an eye on. For instance, active gaming players shot up 15 per cent to over 82,000 over the course of 2014, but the added cost per acquisition of the new players was covered by the corresponding increase in gaming yield per customer.
Of course, the new tax regime will have an impact which is why Numis forecasts pre-tax profits of £4.7m on revenues of £34.8m in 2015 compared to profits of £5.5m on revenue of £32.1m in fiscal 2014. On this basis, expect adjusted EPS of 5.9p this year, down from 7p forecast in 2014. Still, this only means that the shares are priced on a modest 10 times likely earnings for this year, and on only 8.5 times once you strip out net cash worth 8p a share. Moreover, with cash generation strong, expect a dividend of 2.2p to be declared in next week’s full-year results on Thursday, 5 March. Mr Jones at Numis predicts a payout of 2.5p this year, implying a prospective yield in excess of 4 per cent.
So with the trading outlook much improved, and investor caution toward gaming companies overdone prior to the implementation of the new tax regime, then I see the bounce back in 32Red’s share price from last autumn’s lows continuing in the months ahead. Trading on a bid-offer spread of 59p to 60p, slightly above the price when I last updated the investment case (‘Gamble on recovery’, 25 September 2014), I rate 32Red’s shares a buy and have a six month target price range of 75p to 80p.
Amino boosts its ammunition
Shares in Aim-traded Amino Technologies (AMO: 137p), a Cambridge-based set-top box designer of digital entertainment systems for IPTV, home multimedia and products that deliver content over the open internet, have passed through a nine-year high of 132p and appear heading towards finnCap’s fair value target price of 150p. Trading on a bid-offer spread of 133p to137p, the shares have risen 10 per cent since my update a month ago when I recommended running profits at 122p (‘Small cap tech wonders’, 19 January 2015). I first advised buying at 83p ('Set up for a buying opportunity', 10 June 2013), so the shares are now up around 60 per cent on that recommendation.
The latest rally has been helped by news of a £700,000 duty rebate on historic international sales which will be recognised as an exceptional profit in Amino’s 2015 accounts. At the end of November 2014, Amino had net funds of £20.8m, so after factoring in the duty rebate pro-forma net cash is now around 41.5p a share. It also makes bolt-on earnings enhancing acquisitions even more likely given net funds account for 30 per cent of the share price. But even without any corporate activity, the shares are still attractively priced and the valuation is underpinned by the potential for more earnings upgrades.
Analyst David Johnson at brokerage Northland Capital predicts Amino will report adjusted pre-tax profits of £4.4m in the financial year to end November 2015 and deliver EPS of 8.2p, up from £4.2m and 7.9p, respectively, in the year just ended. That looks conservative to me even after taking into consideration the substantial profit uplift in the year just ended.
Hefty cash returns
Moreover, with forecast annual cash profits of £7.5m around £3.1m higher than reported pre-tax profits, then this offers ample scope for the payout to be lifted again from the 5p a share declared in this month’s results, up from 3.5p a year earlier. Please note the final dividend of 3.85p a share is payable on 24 April 2015 and the ex-dividend date is 2 April 2015.
In fact, Amino’s board are committed to raising the dividend to at least 5.5p a share this year and 6.1p in fiscal 2016. Based on 51.8m shares in issue, then the £2.8m cost of this year’s dividend is little more than the non-cash depreciation and amortisation charge in last year’s accounts. In turn, this enables the company to use a chunk of its reported pre-tax profits to invest in new products and additional sales and marketing resources without eating into its cash pile.
In my view, the combination of decent contract momentum, robust cash generation, earnings enhancing share buy backs, and a progressive dividend policy all make for an appealing investment case and one which should drive further upside in the shares. Adjusting for net cash on the balance sheet and the prospective PE ratio would still only be 13 at a share price of 150p. That seems a fair valuation target and if you followed my advice previously I would continue running your healthy profits to try to capture an additional 10 per cent share price upside.
Please note that since the start of February I have written articles on a total of 56 companies all of which are available on my IC homepage... and are detailed in chronological below with the relevant web links for ease of reference.
MORE FROM SIMON THOMPSON...
■ Flowtech Fluidpower: Buy at 130p, target 165p (‘A fluid performance’, 2 February 2015)
■ Inland: Buy at 57.5p, target 70p (‘A fluid performance’, 2 February 2015)
■ UK housebuilding sector: Run profits (‘A fluid performance’, 2 February 2015)
■ Globo: Conditional buy at 47p, target 60p (‘Going Global’, 3 February 2015)
■ Epwin: Buy at 92p, target 140p (‘Going Global’, 3 February 2015)
■ SeaEnergy: Buy at 21p, target 60p (‘Going Global’, 3 February 2015)
■ Fairpoint: Buy at 119p, target 190p (‘A valuable point to make’, 4 February 2015)
■ Greenko: Buy at 123.5p, target 225p to 230p (‘A valuable point to make’, 4 February 2015)
■ Safestyle: Buy at 165p (‘A valuable point to make’, 4 February 2015)
■ 600 Group: Buy at 15.5p, target 24p (‘Engineering growth’, 5 February 2015)
■ Global Energy Development: Speculative buy at 42p (‘Engineering growth’, 5 February 2015)
■ Pure Wafer: Hold at 42p (‘Engineering growth’, 5 February 2015)
■ Faroe Petroleum: Buy at 75.5p, target 94p (‘A slick operator’, 6 February 2015)
■ 2014 Bargain share portfolio updates:
Barratt Developments: Run profits at 458p; Taylor Wimpey: Run profits at 135p; 1pm: Buy at 67p; Bloomsbury Publishing: Hold at 148p; Camkids: Hold at 21p; Fortune Oil: Sit tight at 10p; Charlemagne Capital: Hold at 11p; Arden Partners: Hold at 47p; PV Crystalox Solar: Hold at 10.5p (‘How the 2014 Bargain share portfolio fared’, 6 February 2015).
■ 2015 Bargain share portfolio buy recommendations:
Mountview Estates, Crystal Amber, H&T, Pittards, Inspired Capital, Record, Netplay TV, Arbuthnot Banking, AB Dynamics and Stanley Gibbons (‘Bargain share portfolio 2015’, 6 February 2015).
■ Oil price (‘Profiting from the oil price slump’, 9 February 2015)
■ Getech: Buy at 45p, target 67p (‘Exploit a chart break-out’, 10 February 2015)
■ Moss Bros: Buy at 93p, target 120p-130p (‘A triple play of chart break outs’, 11 February 2015)
■ Manx Telecom: Buy at 189p, target 210p (‘A triple play of chart break outs’, 11 February 2015)
■ Oakley Capital: Buy at 155p, target 180p (‘A triple play of chart break outs’, 11 February 2015)
■ Walker Crips: Buy at 45p, target 54p (‘Delivering on a plan’, 12 February 2015)
■ Trakm8: Buy at 92p, target 120p (‘Zoming in on a profitable price move’, 16 February 2015)
■ Trifast: Buy at 111p, target 140p (‘Earnings upgrades to drive re-ratings’, 17 February 2015)
■ 600 Group: Buy at 16.5p, target 24p (‘Earnings upgrades to drive re-ratings’, 17 February 2015)
■ Pittards: Buy at 135p (‘Earnings upgrades to drive re-ratings’, 17 February 2015)
■ GLI Finance: Buy at 62.5p, target 80p (‘Income plays with capital upside’, 18 February 2015)
■ B.P. Marsh: Buy at 135p, target 170p (‘Income plays with capital upside’, 18 February 2015)
■ Henry Boot: Buy at 205.5p, target 249p (‘A bootiful investment’, 19 February 2015)
■ Jarvis Securities: Take profits at 435p (‘Decision time’, 23 February 2015)
■ Avation: Buy at 142p, target 200p (‘Decision time’, 23 February 2015)
■ Inland: Buy at 63p, conservative target 70p (‘Decision time’, 23 February 2015)
■ Globo: Buy at 49.25p, target 60p (‘Catalysts for re-ratings’, 24 February 2015)
■ Communisis: Buy at 56p, target 85p (‘Catalysts for re-ratings’, 24 February 2015)
■ SeaEnergy: Buy at 25p, target 60p (‘Catalysts for re-ratings’, 24 February 2015)
■ Netcall: Take profits at 71p (‘Taking profits’, 25 February 2015)
■ Eurovestech: Hold at 8p, target 10p (‘Taking profits’, 25 February 2015)
■ GLI Finance: Buy at 62.5p, target 80p (‘Taking profits’, 25 February 2015)
■ Simon Thompson's 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 stockpicking'
