A pre-close trading update for the six months to end May 2016 highlighted a record order intake, a strong backlog to take into the second half, and a sales performance that suggests the company should be capable of lifting revenues by two thirds to £69m, as analyst Andrew Darley at brokerage finnCap predicts, after factoring in last summer's earnings accretive acquisition of California-based Entone, a pioneer in IPTV and home video distribution ('Primed for major re-ratings', 22 July 2015). That was a transformational deal for the small-cap company as it broadened Amino's product offering and market reach across IPTV, hybrid broadcast and a range of connected home solutions. It also represented a close fit with Amino's acquisition of cloud-TV platform provider Booxmedia in May last year. The integration of the two acquisitions is now complete and cost savings are expected to be around £2m a year, or more than double the original estimate of analyst Oliver Knott at brokerage N+1 Singer.
Moreover, the management changes put in place last autumn, and specifically the appointment of Steve McKay to head up a new integrated sales operation across the Amino and Entone businesses, are clearly reaping benefits. He had previously been responsible for Entone's international expansion and successfully secured a number of Tier 2 customers, including Cincinnati Bell, in his former role as chief executive of Entone. I understand that a number of new customer wins have since been secured, good progress is being made on migrating legacy Cincinnati Bell IPTV devices to Amino’s Enable TV software platform, and the sales performance in Latin America has been particularly strong from both existing and new operators transitioning to IPTV deployment as part of fibre network roll-outs. In addition, Booxmedia’s contract wins with Belgian broadcaster RTL and Dutch utilities company DELTA are supportive of the rationale for making that acquisition.
I would also point out that the profit warning almost eight months ago stemmed from poor sales execution in Amino’s existing business and had nothing to do with Entone and Booxmedia. Bearing this in mind, it’s reassuring to see Vodafone has extended its existing collaboration with Amino and systems integration partner, Divitel, for the continued roll-out of enhanced IPTV devices for Vodafone's fibre and DSL-based TV services across Holland. The aim is to deliver a range of advanced television services, including pause live TV (PLTV), DVR, restart TV and an extensive video on demand library from several broadcasters.
It’s also reassuring to see the company’s cash performance exceed expectations: net funds increased by £1m to £3.1m in the latest six month period and that was after accounting for a £3m record outflow for dividends and £1.2m of acquisition-related costs. The board have reiterated guidance for a 10 per cent hike in the full year dividend to 6.1p, implying the shares offer a prospective dividend yield of 5.8 per cent. The payout is comfortably covered 1.6 times by likely EPS of 9.6p after factoring in 12 per cent growth in earnings. Please note that adjusted pre-tax profits for the 12 months to end November 2016 are forecast to rise by over 60 per cent to £8.2m based on revenue expectations of £69m, but EPS will rise more slowly due to the 16.1m shares issued at 130p each to part fund the £46.7m consideration of the Entone acquisition.
Still, if Amino achieves those forecasts, then its shares are only trading on 11 times earnings estimates, hardly a punchy rating for a company targeting a post-tax return on equity of 14.5 per cent in the current financial year and 10 per cent-plus annual earnings growth over the next three financial years. The equity is modestly valued on 1.6 times book value too.
So, although Amino's shares are modestly down on my last buy advice at 111p (‘Amino ripe for a re-rating’, 19 April 2016), albeit they are ahead of the 83p level at which I first advised buying in ('Set up for a buying opportunity', 10 June 2013), I feel investors are being too cautious in their valuation given that the issues that led to last October’s warning have been successfully addressed. In fact, my 155p calculation of fair value implies 50 per cent share price upside. Ahead of the interim results on Monday,11 July 2016, I continue to rate Amino’s shares a buy on a bid-offer spread of 105p to 107p. Buy.
