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OPINION

In the ascent

In the ascent
February 20, 2017
In the ascent

A good example is Amino Technologies (AMO:193p), the Cambridge-based provider of digital entertainment solutions for Internet Protocol (IP) TV, internet TV and in-home multimedia distribution, which has issued its third earnings beat since last summer. In results released earlier this month, the company announced that pre-tax profit had almost doubled to £10.2m on an 80 per cent increase in revenues to £75.2m in the 12 months to end November 2016, a performance that catapulted diluted EPS up by 59 per cent to 13.5p, or 9 per cent ahead of previously upgraded expectations of analysts Oliver Knott and Tintin Stormont at brokerage N+1 Singer.

Acquisitions played a significant part, but organic revenues have been growing at a fair lick too, up 7 per cent in the 12-month trading period, reflecting the benefits of strengthening sales teams and robust demand for the company's product suite. Currency movements have also been beneficial as half of Amino's revenue is derived from North America, and 30 per cent from Europe, so sterling's sharp devaluation in since January last year is providing a strong currency tailwind for overseas earnings.

Technological change is also a key driver as the media and telecoms industry moves towards IP as the key enabler for all media and services to be delivered on-demand from the cloud to any device, anytime and anywhere to ensure consumers enjoy an 'on demand' and always available entertainment experience, while improving efficiency and streamlining service delivery. The growth in consumer take up of 'OTT' services, such as Netflix and Amazon Prime, which are delivered over the open internet, has acted as a further catalyst.

So, to tap into this growth, Amino has focused on increasing revenue and market share in IPTV, the company's traditional core market; positioned itself to exploit the migration of cable TV operators to an all-IP cloud future; targeted and scaled up its cloud TV offering to mobile network operators and content owners; and launched an 'Internet of Things' (IoT) offering, focused on home monitoring to provide cable TV and IPTV operators with a edge in order to gain customer traction.

For example, Amino secured a contract at the end of last year with North American IPTV service provider Com Net Inc to roll out its FUSION IoT solution across CNI's network of over 20 locally-focused operators. The award highlights the ability of Amino to offer tier-I level of technology and service provision to its tier II and III telco customers, thus helping them to maximise end user spend and minimise churn rates. Acting as both hosting and service provider via its fibre network, CNI is deploying FUSION to four operators and plans to offer the service across its entire operator customer base. It's not the only major contract win as Amino has been successfully migrating Cincinnati Bell's legacy IPTV devices to Amino's Enable™ TV software platform, and has won a contract with Hong Kong-based Tier 1 operator PCCW for the deployment of the Enable platform to deliver new 4K UHD services to customers.

In the circumstances, it's hardly surprising that the company has a solid sales backlog and pipeline, both of which have prompted analysts at N+1 Singer to upgrade their EPS forecasts by 9 per cent for this year and next, to 13.9p and 14.4p, respectively. And there's good news on the dividend front as the profit surge has been accompanied by a sharp improvement in free cashflow which more than trebled to £8.2m in the year just ended, way ahead of the expectations of analyst Andrew Darley at broking house finnCap. As a result Amino's closing net funds trebled to £6.2m and enabled the board to fund a 10 per cent hike in the payout to 6.05p a share, the fifth successive year it has been increased. Guidance is for "at least another 10 per cent hike this year", implying the shares offer a prospective dividend yield of 3.4 per cent.

The point is that although the holding has produced a total return of 150 per cent since I first advised buying the shares at 83p ('Set up for a buying opportunity', 10 June 2013), including total dividends per share of 15.3p but excluding the final of 4.65p which goes ex-dividend on 6 April, a cash adjusted forward PE ratio of 13.5 is still not stretched given potential for the company to continue to outperform. Indeed, analysts at N+1 Singer describe their newly upgraded forecasts as "conservative."

So, having last updated the investment case when the price was 174p ('Small cap watch', 6 December 2016), I have lifted my target price to 220p, suggesting potential for a further 16 per cent upside including the final dividend. Buy.

 

Riding an earnings upgrade cycle

Amino is not the only company on my watchlist that has posted an earnings beat. The same is true of Aim-traded shares in stockbroker and financial services outsourcer Jarvis Securities (JIM:405p). I first recommended buying the shares at 305p three months ago ('High-yielding income play with capital upside', 15 November 2016), and subsequently raised my target price to 425p ('Value opportunities', 30 January 2017) after taking into consideration the strong likelihood of improved trading prospects for both of its business units: a corporate division, which provides outsourced and partnered financial administration services to a number of third-party organisations; and a broking operation that has over 100,000 retail clients who use its ShareDeal-Active and X-O low-cost online share trading services.

The company has not disappointed and has just reported that second-half profits surged by 16 per cent year-on-year, buoyed by increased trading activity amongst retail clients with transactions well above the 900 to 1,000 per day volumes seen in the latter part of 2015. This positive trend has continued into the new financial year, hardly surprising given that equity markets have been posting record highs. Interestingly, analyst Nick Spoliar at house broker WH Ireland points out that management "is at pains to highlight current excellent market conditions and a strong pipeline of opportunities in its custodian activities." So, with EPS rising 8.5 per cent to 26.9p last year, well ahead of market expectations, Mr Spoliar has upgraded his current year ESP forecast by 9 per cent to 27.9p.

The good news gets even better because with net cash building, up more than 20 per cent to £3.4m at the December year-end (net of customer deposits) even though the company has paid out 17.5p a share of dividends, the board "may flex their policy of paying out at least two thirds of net earnings as dividends." WH Ireland is pencilling in a total payout of 18.1p a share this year, paid in quarterly instalments, implying the shares offer a prospective dividend yield of 4.5 per cent, and are rated on 14.5 times earnings estimates.

The other key take for me is the increasingly likely prospect of a rise in UK interest rates given that: employment levels are at record levels; wage inflation is proving resilient; consumer price inflation could well exceed the Bank of England's 2 per cent target by quite some margin later this year as the impact of sterling's devaluation feeds through; and the housing market continues to prove resilient, reflecting the ultra low interest rates being offered by lenders. Any move in bank base rate is significant for Jarvis which has more than 25 institutional clients, including asset management group Franklin Templeton and Goldman Sachs.

These financial institutions are attracted by the convenience of outsourcing time-consuming and laborious back-office/administration functions, so much so that Jarvis' cash under administration is well in excess of £150m all of which is placed on short-term deposit of less than one year with triple-A-rated banks. This means that a small rise in interest rates has a disproportionately positive impact on the company's profitability. That's worth taking considering because Andrew Grant, managing director and chairman of Jarvis, has primed investors for this possibility by stating that: "Even modest increases in interest rates, which now seem as though they may materialise in the shorter term, will significantly increase profitability."

So, with cash generation strong, both business units firing on all cylinders, dividends and earnings estimates on the rise, and a rise in Bank of England base rate looking increasingly likely, then I have reassessed my previous fair value target price of 425p which was hit post last week's results. In the circumstances, I have upgraded my target to 475p, in-line with that of WH Ireland. Buy.

Flying high

Main market-listed shares in aircraft leasing company Avation (AVAP:205p) hit an all-time intraday high of 217p post interim results at the end of last week and with good reason.

The company has ramped up its fleet from 29 to 40 planes in the past 18 months, the financial upside of which was evident in results which delivered a 43 per cent hike in lease revenue to US$45.1m, a 54 per cent increase in operating profit to US$27.6m, and a two-thirds rise in operating cashflow to US$31.1m. With an average weighted cost of debt of 4.9 per cent well below the yield generated on the leases, Avation's operating profit covered the interest charge 1.5 times over and meant that pre-tax profits surged by half to US$8.4m. A loan-to-value ratio of 76 per cent on the fleet looks sensible given that 96 per cent of all debt is fixed interest and both lease and borrowing maturities are matched.

In my view, full year predictions of a 16 per cent rise in pre-tax profits to US$21.5m look well founded to produce EPS of 32.6 cents, around 26p at current exchange rates, and offer potential for a hike in last year's payout of 3.25¢ a share. A forward PE ratio of just under 8 is low compared with the rating of rivals, suggesting a further re-rating of the shares which I first advised buying at 159p ('Get on board for blue sky gains', 11 September 2014).

I would also flag up that Avation has received eight bids for its wholly-owned portfolio of 22 ATR72 turboprop aircraft, having appointed financial advisers to engage with the wider investor market to determine the open market value of the portfolio after the company received an unsolicited approach from a buyer a few months ago. There is no certainty that a deal will be done, but I understand from the directors that if it happens then "the transaction will need to deliver shareholders a significant premium above book value."

Bearing this in mind, the aircraft have an average remaining lease term of around six years and unexpired revenue of US$305m. Analyst John Cummins at house broker WH Ireland has estimated the net asset value of the 22 ATR72 aircraft is around 118p a share, or just under half Avation's latest book value of 249p. The balance of the fleet comprises Fokker 100s, Airbus A321s and A320s, and two ATR72s subject to finance leases. The point being that any sale will bring into focus the undervaluation of the shares, and potential for the board to create shareholders value by recycling the cash proceeds from any sale into building up a new fleet through exercising some valuable options it holds on new aircraft orders with the major aircraft manufacturers.

So, ahead of the next update on the bidding process, and having last advised buying at 195p ('Targeting record highs', 21 November 2016), I continue to rate Avation's shares a buy and have upgraded my target price to 250p, inline with the latest book value. Buy.

MORE FROM SIMON THOMPSON...

A comprehensive list of all the investment columns I have written in 2017 is available here.

The archive of all the share recommendations I made in 2016 is available here

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