The company has announced the one-off grant of newly created growth shares under its 2015 Value Creation Plan (VCP) for executive directors and a senior manager as adopted by the board on 24 June 2015. The growth shares have no value below the Hurdle set at £85m, representing a 20 per cent premium to the closing market capitalisation of the company at the end of June 2015. The commercial objective behind the proposed plan is to reward the participants for substantial growth in shareholder value over a three year period ending 31 December 2017. The value of the VCP will be adjusted to account for any equity placing, share buyback programme or special dividend that occurs in the period
The VCP involves the issue of a special class of shares in a new group holding company that sits between the current trading subsidiaries and the parent, Vislink. These growth shares will normally convert into a certain number of ordinary shares in Vislink at the end of the three year performance period based on the company's share price at the end of this period. The participants will be required to hold the ordinary shares for a further 12 months.
The value to be received by the participants at the end of the three year performance period will represent 15.38 per cent of the market capitalisation of Vislink above the Hurdle. To put this into perspective, Vislink’s share price would have to rise to 70p for the company to have a market value in excess of £85m, or a third more than the current share price. So if the share price hits 100p by the end of 2017, giving the company a market value of £122m, then the three directors participating in the scheme would receive a total of £5.7m of new ordinary shares.
Or put it another way, ordinary shareholder interests in the company would be diluted to the tune of 4.7 per cent in this scenario. Based on a lower closing share price of 90p at the end of 2017, the dilution would be 3.5 per cent and directors would be awarded shares worth £3.9m; and at a share price of 80p the dilution would be 2 per cent and the directors would receive shares worth £2m. The three directors participating in the scheme are executive chairman John Hawkins, finance director Ian Davies and Simon Derry, chief executive of Vislink Communication Systems. These directors will not participate in any other new share plans during the three year performance period. Existing long term share plans will be available for other key management within the company.
A lucrative arrangement
There is no doubt that this is a potentially lucrative arrangement for the aforementioned directors and is in addition to what I consider as substantial finance incentives they already receive.
According to Vislink’s 2014 annual report and accounts, Mr Hawkins took home £438,000 in the 2014 fiscal year including salary, benefits, bonus payments and pension contributions. Mr Davies had a total package of £373,000 on the same basis. In addition, both directors already have interests in two long-term incentive plans (LTIP) awarded in both 2012 and 2013 and which have vesting dates this year and next. Mr Hawkins has a total interest in 4m ordinary shares at an average award price of just shy of 39p a share, so these are over £500,000 in the money. Mr Davies has an interest in 1.154m shares awarded at 25.99p in December 2012 and November 2013 under three year plans, so these LTIPs are £300,000 in profit.
That’s worth noting because if Vislink’s share price holds steady at the current share price between now and the vesting date of Mr Davies’ LTIPs (December 2015 and November 2016), then he will in effect receive £300,000 of free equity in the company and based on a doubling of the share price while the LTIP was running. However, under the new VCP arrangement he would walk away with £1.7m of new ordinary shares if the company’s share price doubles again to 100p by December 2017. That’s quite some step-up in his remuneration in my view and although the directors of the company, other than Mr Hawkins and Mr Davies, consider that the terms of the transaction are fair and reasonable insofar as existing shareholders are concerned after consulting with nominated adviser, N+1 Singer, clearly not all investors are in agreement.
In fact, having initiated coverage last summer at 43p ('Time to make the link', 26 August 2014), and rated Vislink’s shares a buy at 55.5p at the time of my last update (‘Small cap growth stocks’, 11 June 2015), the company’s share price has fallen by 12 per cent to 53p since the VCP was adopted by the board on 24 June 2015. During this time the FTSE Aim index has only declined by 2 per cent.
A sense of perspective
Although it’s understandable why some investors may be unhappy with the VCP arrangement given the huge financial incentives on offer to the insiders – Mr Hawkins will be awarded £2.3m of new shares in his company if Vislink’s share price rises to 100p by the end of 2017 - the flip side is that existing shareholders will benefit from substantial gains too. And the only reason why the share price will re-rate is if the board deliver on their profit objectives as they have been doing so far. Indeed, from 2010 to 2014 the company's s adjusted operating profit increased from a loss of £8.4m to a profit of £7.2m.
In addition, it’s worth flagging up that the three participants will not be awarded any shares unless Vislink’s share price rises by around a third to 70p, the price at which it has a market value above £85m. Moreover, shareholders can also expect a dividend per share of 1.5p at least over the next three financial years.
It’s therefore my view that when the dust settles over the VCP then investors will again focus on the operational progress Vislink has been enjoying and the scope for positive earnings momentum to drive the share price higher for the benefit of all concerned. On this score the potential operational upside certainly outweighs the negative sentiment undermining the share price right now.
Earnings momentum to drive share price gains
For instance, analyst Tintin Stormont at brokerage N+1 Singer predicts earnings growth of 9 per cent this year to lift EPS to 4.5p based on pre-tax profits rising from £7.1m to £7.7m on revenues of £63.7m. However, N+1 Singer’s estimates are bottom of the range as consensus EPS forecast is 4.8p, implying 17 per cent earnings growth in 2015. Edison Investment Research pencil in top of the range normalised EPS of 5.3p and Equity Development predict middle of the range EPS of 4.8p, a forecast I am very comfortable with. On this basis, Vislink’s shares are priced on 11 times earnings forecasts and offer a dividend yield of 2.8 per cent based on last year’s payout of 1.5p a share. That rating is fully warranted for a company making a post tax return on equity of 10 per cent.
Moreover, buoyed by a robust showing from its surveillance division and the acquisition of Weybridge-based Pebble Beach Systems, a developer and supplier of automation, 'channel in a box' and content management services for TV broadcasters, cable and satellite operators, Vislink looks set to smash easy comparatives for the first half of this year.
That’s because in the same period last year, the company reported adjusted pre-tax profits of £1.7m on revenues of £33.3m, including a three month contribution from Pebble Beach. However, Pebble Beach subsequently reported operating profit of £3.3m on revenues of £8.3m for the nine month period under Vislink’s ownership in 2014. So factor in a full six month contribution from Pebble Beach and we can expect a significant increase on the first half profit performance when the company reports interim results in September. That’s another reason why I am comfortable with the company at least hitting consensus EPS estimates of 4.8p this year.
The first half results release and accompanying trading update can only be positive for investor sentiment in my view. Furthermore, and as unpalatable as it is to think about right now, the increase in terrorist activity in recent months is very supportive of the trading prospects for Vislink’s surveillance and public safety division. The massacre in Tunisia and Paris are all too real reminders of the heightened terrorism threat in the western world. This unit accounts for a quarter of Vislink’s turnover, so is an important source of income.
Targeting a share price recovery
Trading on a bid-offer spread of 52.5p to 53p, about 4.5 per cent below the level at the time of my last update five weeks ago but still 23 per cent ahead of where I advised buying last August, and offering 33 per cent share price upside to my target price of 70p, I see the recent decline in Vislink’s share price as a medium-term buying opportunity.
Interestingly, the share price is close to the major support level of 51.75p which acted as a glass ceiling for the best part of a year until it was broken last autumn. The 14-day relative strength indicator has an oversold reading in the mid-30s, having unwound from an extreme overbought reading of 80 in early June. This points towards a tradable share price bounce at the very least and one that should have legs if the forthcoming half year results on Wednesday, 2 September prove as robust as I anticipate. Buy.
MORE FROM SIMON THOMPSON...
At the end of April, I published an article with all of the share recommendations I have made this year. Since then I have published articles on the following companies:
■ Marwyn Value Investors: Buy at 220p, target price 260p ('Exploiting a value play', 5 May 2015)
■ Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p ('Repeat buy signals', 11 May 2015)
■ Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p ('Breakout looms for mobile wonder', 12 May 2015)
■ Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p ('Overseas property plays', 13 May 2015)
■ Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p ('Smashing target prices', 14 May 2015)
■ Bilby: Buy at 75p, target 100p ('Buy to build' growth play, 18 May 2015)
■ Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)
■ Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p ('Renewing old acquaintances', 20 May 2015)
■ Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)
■ Anite: Buy at 91.5p, target 110p ('Testing a breakout', 26 May 2015)
■ Character Group: Buy at 415p, target 525p ('Playtime', 1 Jun 2015)
■ Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p ('Hitting target prices', 2 Jun 2015)
■ B.P. Marsh &Partners: Buy at 150p, target range 170p to 180p; Moss Bros: Buy at 110p, target range 120p to 130p; SeaEnergy: Sell at 15p ('Exploiting a valuation anomaly', 3 Jun 2015)
■ Globo: Buy at 59p, target 69.5p; London & Associated Properties: Buy at 38.5p; Greenko: Hold at 44p ('Catalysts for share price moves', 4 Jun 2015)
■ Burford Capital: Buy at 148p, target 190p ('Legal eagles', 8 Jun 2015)
■ Market strategy ('Financial Market Watch', 9 Jun 2015)
■ Software Radio Technology: Buy at 29.5p, target 40p to 43p; Tristel: Run profits at 92p; Creston: Buy at 136p, target 150p; Sanderson: Buy at 69p, target range 80p to 85p ('Blue sky potential', 10 June 2015)
■ 1pm: Buy at 67p, target 80p; Vislink: Buy at 58p, target 70p ('Small-cap growth stocks', 11 Jun 2015)
■ Elegant Hotels: Buy at 105p, target 135p to 140p ('Checking into an elegant investment', 15 Jun 2015)
■ First Property: Run profits at 45p; AB Dynamics: Run profits at 225p and target 250p; Inspired Capital: Sit tight at 20p (Bargain shares updates', 16 Jun 2015)
■ Trakm8: Run profits at 159p, new target 180p; Anite: Sit tight at 126.75p; Trifast: Run profits at 129p, target 140p; Record: Buy at 37p ('Small cap wonders', 17 Jun 2015)
■ Inland: Run profits at 71p, target 80p; KBC Advanced Technologies: Buy at 110p, target 165p; Caretech: Buy at 237p, target 300p ('Riding an earnings upgrade cycle', 18 Jun 2015)
■ Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 Jun 2015)
■ GLI Finance: Buy at 54p, target 80p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('A triple play of small cap picks', 23 Jun 2015)
■ Bilby: Run profits at 97p; Safestyle: Run profits at 220p; Epwin: Run profits at 134p ('Soaring small caps', 24 Jun 2015)
■ Faroe Petroleum: Buy at 86p, target 100p; Greenko: Hold at 65p; Communisis: Buy at 48p ('A slick investment', 25 Jun 2015)
■ Mountview Estates: Buy at 12,250p; Inland: Run profits at 71p, conservative price target ('Running bumper profits', 29 Jun 2015)
■ Redde: Run profits at 138p, target range 150p to 155p; Trakm8: Buy at 175p, target 200p; Cohort: Buy at 312p, target 365p; Burford Capital: Buy at 175p, target 190p; Flowtech Fluidpower: Buy at 135p, target 155p ('Riding earnings upgrade cycles', 7 Jul 2015)
■ Crystal Amber: Buy at 161p; Stanley Gibbons: Buy at 258p; Somero Enterprises: Buy at 150p, target 185p; Globo: Buy at 49p, target 69.5p ('A quartet of small-cap buys', 8 Jul 2015)
■ H&T: Buy at 200p; STM: Buy at 47p, target 60p; Stadium: Buy at 113p, target 140p ('Exploiting upgrades', 9 Jul 2015)
■ Cambria Automobiles: Buy at 57.5p, target 75p ('Driving a re-rating', 13 Jul 2015)
■ Walker Crips: Buy at 47p, target 60p; 600 Group: Buy at 18p, target 24p; Henry Boot: Buy at 235p, target 260p ('A trio of small cap value plays', 14 Jul 2015)
■ Bilby: Buy at 90p, target 120p; 32Red: Buy at 67.5p, target 90p; Marwyn Value Investors: Buy at 244p, target 275p (‘Acquisitions drive earnings upgrades’, 15 July 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
