It's an easy call to make as I firmly believe the re-rating of Aim-traded software company Sanderson (SND: 68p), a specialist in multichannel retail and manufacturing markets in the UK, has yet to run its course. It's a company I know rather well, having initiated coverage when the price was 33.5p ('A valuable stock check', 18 July 2011) and last updated the investment case three months ago (‘Small-cap trading updates’, 26 November 2014). The share price is unchanged on that recommendation, but I feel that investors are missing a trick here.
That's because the board revealed at its annual meeting yesterday that the company has made a good start to the new financial year, following a bumper trading performance in the fiscal year to end-September 2014. Sales order intake is ahead of the same period last year and the order book is higher than at the September year-end.
Cloud-based technology driving sales
In particular, the smart acquisition of One iota, a provider of mobile applications for retailers, continues to drive the company's top-line growth and profits. One iota's MESH technology is a cloud-based technology that integrates existing back-office systems to optimise a retailer's applications. It's proving very popular with Sanderson's clients as the business has made more profit in the first four months of the new financial year than in the whole of the 12-month period prior to acquisition in October 2013 when it reported £193,000 of profit and £660,000 of revenues.
To put the latest financial performance into some perspective, One iota more than doubled operating profits to £420,000 in the fiscal year to end-September 2014, so by my reckoning monthly profits are up by at least 50 per cent year on year since the September year-end, helped in part by a record order worth over £400,000. This particular contract is with a major retailer and involves implementing an iPad-based solution to help the client's sales assistants maximise in-store sales and to assist shoppers in buying out-of-stock products or those available in the retailer's other stores.
It's worth pointing out that if One iota continues to grow at this heady rate then a sizeable chunk of the £3.1m initial consideration Sanderson paid for the business in October 2013 will be recouped by the time an earn-out of £2m - based on profit targets being achieved in the three years to end-September 2016 – kicks in. In the meantime, Sanderson is paying a deferred consideration of £50,000 every six months, a sum easily covered by the cash generated from the business. The growth of One iota also explains why the contribution from online sales, e-commerce and catalogue markets in Sanderson's multichannel retail division continues to grow strongly: the division accounted for two-thirds of Sanderson's total operating profit of £2.84m and almost three-fifths of revenues of £16.4m last financial year.
The acquisition of Birmingham-based warehouse management software provider Proteus Software, at the end of December 2014 for an initial payment of £1m (after adjusting for cash on Proteus' balance sheet) and deferred consideration of £500,000 (payable in 2016), has potential too. This is a complementary bolt-on deal offering cross-selling opportunities to Sanderson's customers within its multichannel retail and manufacturing businesses, as well as one offering scope to cut costs to further drive profits. That's because Proteus operated at break-even last financial year on revenues of £2m, but its gross margin is around the same level as Sanderson's (85 per cent last year), so if Sanderson can reduce the cost base by removing duplicated overheads, and lift revenues through cross-selling to its own clients, then Proteus could prove a shrewd buy.
Furthermore, the board continues to look at selective acquisitions to supplement organic growth. That's because after factoring in the cash outlay for the Proteus deal, I reckon Sanderson still had at least net funds of £5.2m, or almost 10p a share, on its balance sheet at the start of January.
Another year of strong growth
But even without any more acquisitions, analysts still expect another year of strong profit growth. Analysts at research firm GECR predict that the company will increase revenues by almost 13 per cent to £18.5m to lift operating profits by more than 20 per cent to £3.43m in the financial year to end-September 2015. Deduct pro-forma net funds from the company's market capitalisation of £37m, and this means that the company has an enterprise value of only £31.8m, equating to nine times operating profit estimates, or a modest 12 times post-tax profits based on a normal tax charge. That's hardly a punchy valuation for a company that increased its operating profits by more than 20 per cent last financial year, and is forecast to do the same this year. In fact, that rating represents a huge discount to other small-cap software companies in this universe, which are all rated on 20 times post-tax earnings or above: Tracsis (TRCS:382p), Craneware (CRW:520p) and Netcall (NET:59.5p).
Moreover, the board is rewarding shareholders with a decent income, having declared a 1.8p-a-share annual dividend at a cash cost of £934,000. The cash cost of that payout was covered three times over by last year's operating profit and 2.5 times by post-tax profits, so dividend cover is comfortable. In turn, this offers scope for the board to lift the payout as profits grow further: the consensus is for a dividend per share of 1.9p this year, rising to 2p in fiscal 2016. This means the shares offer a prospective dividend yield of around 2.8 per cent, or five times greater than the average dividend yield for the FTSE Aim technology index.
I would also flag up that Sanderson's management team, led by chairman and 21.7 per cent shareholder Christopher Winn, are also quite conservative and are more likely to under-promise and over-deliver, so I feel there is upside to the aforementioned profit estimates. This is also the view of analyst Peter McNally at Charles Stanley Stockbrokers, who sees potential for his fiscal 2015 profit estimates, in line with those of GECR, to be beaten as the financial year progresses. Mr McNally has an 86p target price, slightly above that of Eric Burns at broking house WH Ireland (83p), but below that of analyst Emanuil Manos Halicioglu at GECR (87p). I don't think those estimates are out of line at all and have a target price fair value range of between 80p and 85p, which would still only see the company's anomalous valuation partly correct itself with rivals.
Positive technical indicators
Interestingly, the technical set-up offers encouragement that the valuation discount is set to unwind in the coming months. Having tested the key 60p support level late last month, a price point that marked a turning point in the autumn and also a year ago, the shares have rebounded and now trade on a bid-offer spread of 66p-68p. It's worth noting that the 14-day relative strength indicator (RSI) still only has a reading in the early-60s, so is not yet overextended, thus offering potential for the rally to continue back to last April's highs of 80p and beyond.
And the share price has regained territory above both its 20-day and 50-day exponential moving averages, a positive sign. For good measure the moving average convergence-divergence (MACD) momentum oscillator is positive and above its signal line, having given a buy signal at the start of last week. In my view, that signal is worth following, and with the fundamentals highly supportive too, I rate Sanderson shares a solid buy at 68p ahead of a pre-close trading statement at the end of April.
Making the right link
Aim-traded shares in Vislink (VLK: 48.p), a global technology business specialising in the collection and delivery of high-quality video and data from the field to the point of usage, have made steady progress since I updated the investment case when the price was 41p ('Punching above its weight', 27 January 2015).
That's hardly surprising as investors can look forward to the release of a bumper set of full-year results in three weeks' time. In fact, the company has just announced this morning that its full-year pre-tax profits will exceed market expectations. Broking house N+1 Singer had expected Vislink's fiscal 2014 adjusted pre-tax profit to surge by 50 per cent to £6.6m, but now expects outperformance of around 5-10 per cent on this estimate. To put this into some perspective, this implies second-half pre-tax profits of between £5.2m and £5.5m, or three times greater than in the first half - an outperformance underpinned by a robust contribution from the acquisition of Pebble Beach Systems and from the strategic partnerships with Nasdaq-quoted Harmonic Inc (US: HLIT), a worldwide leader in video delivery infrastructure for emerging television and video services.
Moreover, the company has since signed a strategic agreement with Nasdaq-quoted GoPro (US: GPRO), the world's number one manufacturer of high-performance and rugged cameras which will help underpin another step change in profitability in the 2015 fiscal year. Ahead of likely updates when Vislink issues its full-year results on Tuesday, 24 March 2015, N+1 Singer pencils in pre-tax profit of £7.4m on revenue of £71.1m in fiscal 2015. On this basis, the prospective PE ratio is only 11. The robust earnings growth story aside, Vislink's shares offer a dividend of 1.25p, with the payout covered more than three times over by forecast net earnings. It looks rock solid, too, as Vislink has the benefit of an ungeared balance sheet. On this basis, the shares offer a historic dividend yield of 2.6 per cent
It's worth flagging up that the share price has taken out the early February intraday high of 47.2p this morning, having moved sideways for the past few weeks in a consolidation pattern. With the 14-day RSI showing a reading of 60, and the share price marginally above its rising 20-day EMA, then this morning's breakout opens up the door to a realistic and fully warranted return to last September's high of 51.75p, and beyond. My fair value target price is 60p.
So trading on a bid-offer spread of 47.5p-48.5p, and with earnings upgrades likely, I firmly believe buying ahead of the forthcoming results announcement is the way to play this and continue to rate Vislink's shares a strong buy.
MORE FROM SIMON THOMPSON...
Please note that since the start of February I have written articles on a total of 62 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.
■ 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 breakout’, 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)
■ BP 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)
■ Amino Technologies: Run profits at 137p, target 150p ('Riding bumper profits', 26 February 2015)
■ Tristel: Buy at 80p, target 100p ('Riding bumper profits', 26 February 2015)
■ 32 Red: Buy at 60p, target 75p to 80p ('Riding bumper profits', 26 February 2015)
■ Non-Standard Finance: Buy at 103p ('A non-standard investment, 2 March 2015)
■ W.H. Ireland: Buy at 92p, target 140p ('A non-standard investment, 2 March 2015)
■ Software Radio Technology: Buy at 31.25p, target range 40p to 43p ('On the radar', 3 March 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'
