It’s a transformational deal for the small cap company as it not only takes out a direct competitor, but importantly broadens the product offering and market reach globally across IPTV, hybrid broadcast and a range of connected home solutions. It also aligns closely with Amino’s recent acquisition of cloud-TV platform provider Booxmedia to meet the needs of customers across a range of markets as they transition to cloud-based IP-driven multi-screen entertainment delivery.
For an initial cash consideration of £41.6m, and deferred cash consideration of £5.1m payable on the first and second anniversaries of completion of the deal, Amino is buying a market leader in the US IPTV market and one with over 150 global customers. Entone’s core product offerings include: hybrid TV devices that provide flexible home networking options with models ranging from media players to home servers; FusionTV applications to enable delivery of home monitoring and control services; and IP devices and applications that enable the delivery of home monitoring and control services.
It looks a sound strategic fit to me. It’s also reasonably priced as Entone made operating profit of £3.3m on revenues of £30m in the 11 months to end May 2015. So once you factor in Entone’s net cash balance of £7.7m, the initial consideration equates to around 9.5 times annualised operating profit. This is a more relevant multiple given that all the deferred consideration can be self-funded from Entone’s net profits over the next couple of years.
Margin hike to boost Entone’s profits
Moreover, there is scope to raise Entone’s operating margin of 11.3 per cent to nearer Amino’s margin of 15.8 per cent through reducing Entone’s average cost price per unit, eliminating overlapping roles, and by generating economies of scale on certain software licenses. As a result the acquisition is expected to be significantly earnings enhancing in the first full year of combined operations.
To put the likely scale of the upgrade into some perspective, housebroker finnCap has provisionally updated its estimates subject to the deal being approved by shareholders at the forthcoming general meeting. Head of research Andrew Darley believes that the combined group should be able to increase revenues from £49.5m in the current fianncial year to £79m in the 12 months to end November 2016, so after factoring in £1m of cost benefits he expects pre-tax profits to rise by two thirds to £9.5m, up from £5.7m in fiscal 2015.
In terms of financing the acquisition, Amino had net funds of £17.3m at the end of May 2015 which combined with proceeds from a £21m placing announced alongside the acquisition, and £7.7m net cash on Entone’s balance sheet, will satisfy the £41.6m initial consideration and £2.7m transaction costs. So after factoring in the 16.15m new Amino shares being issued at 130p each to take the issued share capital to 68.6m shares, finnCap expect EPS to rise from 8.5p in fiscal 2015 to 11.2p in fiscal 2016, representing a 25 per cent upgrade. On this basis, the shares trade on 13 times fiscal 2016 earnings estimates.
Rating upgrade beckons
Importantly, with Amino’s board just reporting a 55 per cent rise in underlying operating profit to £2.8m in the latest half year to end May 2015, and issuing a bullish outlook statement which confirmed the company is confident of meeting market estimates, then clearly the business is trading well before factoring in the upside from the acquisition. So having first advised buying Amino’s shares at 83p ('Set up for a buying opportunity', 10 June 2013), and last recommended running profits at 137p to target fair value of 150p (‘Riding bumper profits’, 22 February 2015), I feel the Entone deal is a game changer and one that warrants an upgrade. I am not the only one thinking this way as Mr Darley now has a target price of 205p for the shares, representing a 25 per cent upgrade.
I am a tad more cautious and feel that fair value for Amino’s equity is closer to 180p a share, or 16 times likely EPS estimates for fiscal 2016. A prospective dividend yield of 3.6 per cent based on a proposed payout of 5.5p a share this year only adds to the attraction. So with potentially 20 per cent further upside on offer, I have no hesitation rating Amino’s shares a buy on a bid-offer spread of 146p to 150p.
Arbuthnot’s profits surge
Aim-traded private banking group Arbuthnot Banking (ARBB:1,530p) and Secure Trust Bank (STB: 2,925p), an unsecured lender in which Arbuthnot owns 51.8 per cent of the issued share capital, have both reported storming sets of half-year results. I included Arbuthnot in my 2015 Bargain share portfolio when the share price was 1,459p and these latest results sent them up more than 10 per cent to 1530p. Expect the re-rating to continue.
A key take for me was the performance of Arbuthnot Latham, the company’s private banking arm, which more than doubled half-year profits to £3.7m, buoyed by the hiring of new private bankers, a substantial increase in new clients opening accounts, improved outcome from its Dubai office, which will break-even this month, having only started trading two years ago, and a contribution from the Dunfermline Building Society residential mortgage book, acquired from its administrators in December. The company is now taking on additional office space in the City and is set to embark into commercial banking. Analysts believe this unit alone should be able to make pre-tax profits of £7m in the current financial year, a view I strongly concur with.
Of course, Arbuthnot’s 51.8 per cent shareholding in Secure Trust means that the lion share of its’ reported profits come from that lender. So with Secure Trust’s underlying pre-tax profits surging 14 per cent to £17.4m then this resulted in Arbuthnot delivering a 30 per cent increase in its own pre-tax profits to £17.1m. For the full-year, analysts at Numis Securities predict adjusted pre-tax profits of £36.6m and EPS of 95.4p, up by over 60 per cent on fiscal 2014. One of the main growth drivers for Secure Trust has been SME business lines where it is now lending £25m on average each month, mainly focusing on asset finance, invoice finance and real estate finance, in particular. Aggregate lending of £312m to these three segments accounts for more than a third of the total loan book of £852m.
Motor finance, personal unsecured lending and retail point of sale finance all delivered strong double digit growth too and contributed to the 90 per cent increase in Secure Trust’s loan book. But this is not at the expense of credit quality as the impairment charge was only £11.2m, or 1.3 per cent of the book. And the company has had no problem funding this robust lending growth through customer deposits which almost entirely cover its loan balances.
Sound strategy
The strategy is to take advantage of the low interest rate environment by offering market leading fixed interest rate products and recycle the cash into higher margin personal unsecured lending and commercial asset backed finance. It certainly pays to do so as Secure Trust is generating a bumper 25 per cent annualised post tax return on shareholder’s equity. Moreover, with the company looking to enter the £185bn cash-ISA market, notably larger than the fixed bond market which is worth £145bn, then there is scope to boost returns further given that rates on cash ISAs are around 25 per cent lower than on non-ISA products. It is even looking at entering the UK mortgage market.
It’s certainly a good news story that has yet to be factored into Arbuthnot’s share price. That’s because its 9.48m shares in Secure Trust have a market value of £277m, or 20 per cent more than Arbuthnot’s own market value of £230m. And Secure Trust looks fairly priced on 17 times earnings estimates for 2015. This means that we are also getting Arbuthnot’s private banking arm in the price for free, a business that has to be worth at least £55m using a multiple of 10 times current year likely net profits.
Or put it another way, after factoring in the value of the shareholding in Secure Trust and the interest in Arbuthnot Latham, I reckon Arbuthnot has a sum-of-the-parts value closer to 2200p a share, or more than 2.5 times its reported book value. Add to that a prospective dividend yield of 2 per cent and the shares continue to rate a bargain buy on a bid-offer spread of 1,501p to 1,530p.
Globo dials the right numbers
Investors’ concerns with the non-event of a Grexit has taken its toll on the shares of Aim-traded Greek mobile software provider Globo (GBO: 49p). However, an earnings beat from the company yesterday clearly indicates the sell-off is completely out of sync with the operational progress being made. I explained in an article a couple of weeks ago why the Greek crisis is only likely to have a limited impact on the company’s operations (‘A quartet of small cap buys’, 8 July 2015). I would go one stage further to say that it has been pretty much immaterial.
In fact, the company grew revenues by more than half to €72.4m (£50.6m) in the first half to end June 2015, a thumping 17 per cent ahead of the forecasts of analyst Andrew Dunn at brokerage RBC Capital Markets. The performance was buoyed by a €25m rise in turnover to just shy of €45m from Globo’s Go!Enterprise enterprise mobility management (EMM) business. This unit offers customers products that enable employees to securely access their corporate intranet and any other internal web application through the secure mobile browser of GO!Enterprise Office, and access enterprise information such as email, files, contacts, and notes from any mobile device. It’s not only proving popular with new customers, but churn is virtually non-existent for existing clients, highlighting a sustainable recurring income stream.
Cash generative, cash rich and lowly rated
The other main eye-catching news was the company’s improving cashflow and cash profit performance: the 55 per cent rise in first half cash profits to €34.2m beat analyst forecasts by over 10 per cent. In turn, this meant that free cashflow of €7.2m also beat estimates by quite some margin and led to a half-year end closing net cash balance of €47.4m, up from €40.4m at the end of December 2014, or a sum equivalent to almost 9p a share. Only €100,000 of these cash balances are held in Greek banks.
Moreover, with contracts being won since the half-year end, and US growth on track, Globo’s board has confirmed that it’s actually trading ahead of analysts’ earnings estimates for this year. Analysts had previously predicted Globo's EPS could hit 8.7p a share in 2015, up from 6.7p in 2014, rising to almost 10p a share in 2016. This means the shares are rated on a cash adjusted prospective PE ratio of 4.5 for 2015! It’s a crazy valuation in my view and one that fails to recognise the company’s growing international bias and intention to make complimentary acquisitions stateside to further develop its business in the region. Globo also revealed that a U.S. Fortune 100 company has renewed 50,000 GO!Enterprise EMM licences and placed an incremental purchase order worth US$1.2m (£800,000).
So although Globo’s shares are trading marginally above the level of my conditional buy recommendation ('Going global', 2 February 2015), I feel that once the Greek crisis blows over and investors focus on the operational performance of the company, then the shares could re-rate sharply. On a bid-offer spread of 48p to 49p, I rate Globo's shares a very decent buy offering more than 40 per cent upside to my target price of 69.5p.
Finally, I have noted today's announcement from SPARK Ventures (SPK: 5p), the company I discussed in my column on Monday ('Exploiting a valuation anomaly', 20 July 2015). I will be publishing an update in tomorrow's column once I have fully assessed the implications of the change in investing policy, asset swap, share placing, open offer to shareholders and share consolidation.
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, ('Exploiting a valuation anomaly', 20 July 2015)target 90p; Marwyn Value Investors: Buy at 244p, target 275p (‘Acquisitions drive earnings upgrades’, 15 July 2015)
■ Vislink: Buy at 53p, target 70p ('Awarding success', 16 July 2015)
■ SPARK Ventures: Buy at 4.5p
■ W.H. Ireland: Run profits at 120p, target 140p; Safestyle: Run profits at 235p; Charlemagne Capital: Sell at 11p (‘Cash rich small-caps’, 21 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'
