In fact, no fewer than 10 of the companies I follow have now been taken over or exited the stock market in the past year. These include environmental engineer Tinci (TNCI); IT security firm Accumuli (ACM); small- and medium-sized enterprise (SME) finance company Inspired Capital; software company Anite (IAE); vehicle repair group Nationwide Accident Repair Services (NARS); and energy group Fortune Oil (FTO). To that list I can add Aim-traded Pure Wafer (PUR:185p), a leading global provider of high-quality silicon wafer reclaim services, which delisted its shares last week after shareholders voted to appoint a liquidator and receive cash distributions of 188p a share, or 159 per cent more than my advised buy-in price. Green energy company Greenko (GKO:2p) delists its shares on 19 January after selling all its assets and returning 98p a share to shareholders, albeit the exit is below my recommended buy-in price.
I can, though, take credit on Aim-traded KBC Advanced Technologies (KBC: 184p), a consultancy and leading software provider to the global hydrocarbon processing industry which has just received a recommended cash offer from Nasdaq-quoted Aspen Technology, a supplier of optimisation software for plant and process design.
The 185p a share cash offer values KBC's equity at £158m and represents a 49 per cent premium to the share price prior to the announcement, a 43 per cent premium to the price when I last advised buying the shares two months ago ('Running oily gains', 11 Nov 2015), and a 168 per cent premium my buy-in price of 69p when I initiated coverage on the company ('Fuelled for growth', 5 May 2013). It also represents a decent exit for KBC's shareholders.
When I last spoke to finance director Eric Dodd he expected KBC to end 2015 with net funds of between £13.2m and £14.7m, so stripping this sum out of the cash offer implies an exit enterprise value of £143m, or the equivalent of 17 times likely operating profit of £8.5m for the 2015 financial year. On a normalised tax basis, the exit multiple is 21 times net profit, a valuation that fully reflects the contract momentum in KBC's business, its current order book and pipeline. The cash offer is also well ahead of my target price range, which was between finnCap's target price of 160p and Equity Development's target price of 169p. And with shareholders controlling 42.6 per cent of the shares undertaking to back the bid, there is substantial shareholder backing, too.
Of course, a rival could yet emerge to top the Aspen bid, although with KBC's shares being marked up to a bid-offer spread of 183p to 184p, then the market price indicates the chances of a competing offer emerging are slim. In the circumstances, I would take the market price now rather than wait for the scheme of arrangement to become effective at the end of the first quarter. It also means that the average gain on the 10 closed takeovers mentioned above is more than 50 per cent per holding in the past 12 months, with a decent chance of adding to that if, as seems likely, the all-share offer for Plethora Solutions goes through by March.
Cloud-based profits
Maintaining the technology theme, shares in Aim-traded Sanderson (SND:75p), a software and IT services business specialising in multichannel retail and manufacturing markets in the UK and Ireland, have risen to the top of their trading range post full-year results, which delivered a mid-teens rise in both revenue and operating profit.
It's easy to see why investors are warming to the investment case given that this is a software company with its own intellectual property that generates eye-catching gross margins of 85 per cent and operating margins of 17 per cent. Furthermore, its loyal customer base accounts for more than half of sales and this covers more than two-thirds of recurring overheads; and the board has been investing heavily in digital retail both organically and through acquisition. In turn, e-commerce activities now account for 31 per cent of Sanderson's sales compared with 18 per cent three years ago and offer a compelling, not to mention fast-growing business segment to direct the company's cash generation towards.
For example, Sanderson's latest set of results reveal that One iota, a provider of mobile applications for retailers, continues to drive the company's top-line growth and profit. 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 grew underlying revenue by more than 70 per cent in the 12 months to the end of September 2015 to account for £2.9m, or 15 per cent of Sanderson's total turnover of £19.2m.
One iota's product offering includes some smart software that implements iPad-based solutions to help shop sales assistants to maximise in-store sales and to assist shoppers in buying out-of-stock products or those available in the retailer's other stores. In fact, all of Sanderson's IT solutions are designed to offer tangible business benefits to its clients and a quantifiable return on their investment. One iota has signed one deal worth £400,000, well above Sanderson's average of £75,000 to £100,000, highlighting the significant potential for major contract wins in this area.
Moreover, the growth of One iota explains why the contribution from online sales, e-commerce and catalogue markets in Sanderson's higher-margin multichannel retail division continues to grow strongly: the division accounted for almost 80 per cent of Sanderson's total operating profit of £3.3m and two-thirds of revenue last financial year. And with the benefit of a robust order book worth £2.35m, prospects look positive for another year of growth, with analysts at research firm GECR predicting that underlying pre-tax profit could rise by almost 10 per cent to a top of the range £3.46m in the current financial year to the end of September 2016. On that basis, the shares are rated on 13 times forward earnings.
Unwarranted discount to peers
It's also worth flagging up that the company has net cash of 8.5p a share, which means that the cash-adjusted forward PE ratio is only 12, a 50 per cent ratings discount to small-cap software companies in the same universe, Tracsis (TRCS:525p) and Craneware (CRW:812p), both of which are valued on 24 times cash-adjusted earnings estimates (July and June 2016 period ends, respectively). In addition, having just declared a better than expected 40 per cent hike in the dividend per share to 2.1p, analysts predict that Sanderson's payout will be raised by a further 10 per cent to 2.3p this year, implying the shares offer an attractive prospective dividend yield of 3.1 per cent. A price-to-book value of 1.5 times is hardly stretched, either.
It's only fair to flag up that Sanderson is a company I know rather well, having initiated coverage when the price was 33.5p ('A valuable stock check', 18 Jul 2011), and the price has risen by 5 per cent since my last update in a down market ('Break-outs looming', 4 Aug 2015). I have no reason to alter my long-term positive stance and feel that fair value lies somewhere between 85p and 90p. Buy.
Profit from monkey business
It's fair to say that the tech companies I follow have done rather well in the past year, albeit the stock market exits of Accumuli, Anite, Pure Wafer and KBC Advanced Technologies have brought windfall gains. My best performer is telematics and data provider Trakm8 (TRAK:300p). I recommended buying the shares at 92p just under 11 months ago ('Zoning in on a profitable price move', 16 Feb 2015) and last recommended running profits at 360p after the company announced an extension to its current relationship with the AA (AA.:270p) ('On a roll', 15 Dec 2015).
Since then the company has made the earnings-enhancing bolt-on acquisition of Route Monkey, a software provider specialising in solutions that optimise fleet route planning, for both conventional and electric vehicles. Its software generates savings and efficiencies for organisations that include Shell, BMW, Yodel and Iceland by optimising their fleet, resources and infrastructure. The acquisition offers several strategic benefits for Trakm8.
For example, Route Monkey adds new and complementary technology capability to Trakm8 in the field of fleet route planning and it has a strong capability for electric vehicles; the company will integrate Route Monkey's algorithms and related software into Trakm8's telematics and camera solutions to provide an enhanced service offering; and Trakm8 provides Route Monkey with access to its larger customer base and sales force. It makes financial sense, too, because analysts at house broker finnCap believe that the acquisition will contribute revenue of £3m in the financial year to the end of March 2017 and with the benefit of high margins this should add £1m to profit estimates. In the 2014 calendar year Route Monkey posted pre-tax profit of £700,000 on revenue of £1.7m, so it's a fast-growing business.
Upgraded estimates
On that basis, finnCap now expect Trakm8 to grow its revenue from £17.9m last financial year, to £26.5m in the 12 months to the end of March 2016, rising to £34m the year after. In turn, this robust revenue growth profile is forecast to more than double current year pre-tax profit to £3.8m, rising to £6.4m in the 2017 financial year, to generate EPS of 11.5p and 17p, respectively. In order to fund the initial consideration of £7.1m, Trakm8 placed £6m of new shares with investors at 333p each, issued £600,000 of shares to the vendor, and made a £500,000 drawdown on a new £10m bank facility. Up to £2m of deferred conditional cash consideration is payable in April 2017 based on performance in the year to 31 December 2016. The new equity issued equates to 6.6 per cent of Trakm8's previous share capital of 30m shares, so dilution to existing shareholders is more than offset by the profit uplift Route Monkey is expected to give the company, hence the near 7 per cent EPS upgrade to finnCap's 2017 estimates.
And I feel those upgrades are not being fully factored into Trakm8's valuation as the shares are rated on a forward PE ratio of 17.5 times even though EPS are expected to grow by almost half in the 2017 financial year (March year-end) and the risk to earnings looks significantly to the upside given analysts have yet to factor in the benefit from the recent AA contract win. In fact, in a note to clients, technology analyst Lorne Daniel of finnCap states that "although we have little detail on the date and pricing, the AA deal suggests significant upside in future forecasts". In other words, the earnings upgrade cycle I have been riding for the past 11 months has yet to fully run its course.
The shares are also rated on a discount to larger peers, which include the likes of TomTom International (NL:TOM2), Trimble Navigation (US:TRMB), and Fleetmatics (US:FLTX). Broker fnnCap estimates that Trakm8's peer group is rated on an average forward PE ratio of 28, or 59 per cent higher than the company's current rating.
So, with strong organic growth and complementary earnings accretive bolt-on acquisitions set to drive Trakm8's earnings even higher than analysts predict, I am upgrading my recommendation back to a buy at 300p and have a new target price of 400p. Buy.
Finally, it's worth noting that I have published articles on 26 small-cap companies on my watchlist since the start of last week, all of which are available on our website for subscribers with a magazine and internet combined subscription.
MORE FROM SIMON THOMPSON...
I have written articles on the following companies this week:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ 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
