The Aim-traded company turned in cash profits of £4.9m in the 12 months to end June 2014, a hefty 10 per cent ahead of broking house finnCap’s forecasts. And with cash generation strong – Netcall generated free cash flow of £1.8m from £2.5m of cash profits in the second half – the cash pile surged by £2.2m to £11.4m, or the equivalent of 8.4p a share. In turn this enabled the board to lift the dividend by 29 per cent from 0.7p to 0.9p a share, well ahead of finnCap’s estimate of 0.77p a share. It’s well covered by adjusted EPS which rose by 10 per cent to 2.81p.
In fact, the results were so strong that head of research Andrew Darley at finnCap lifted his fiscal 2015 cash profit estimate by 6 per cent to £5.3m on expectations of a 6 per cent rise in revenues to £17.9m. On this basis, expect pre-tax profits to rise almost 9 per cent to £5m. These forecasts look well underpinned as double digit increases in contract wins fuelled underlying revenue growth of 9 per cent last financial year and means that two thirds of revenues are now recurring. Around two thirds of all new business is from existing clients too, so with a customer base of over 700 companies and organisations to tap into there are ample cross selling opportunities to exploit. And that is exactly what Netcall has been doing.
For example, one FTSE 250 financial service client has signed up for Netcall’s cloud call-back service to manage peak volume of calls for its 1,500 agents. Apart from improving the customer experience, the service reduces call time and enables more calls to be taken. It’s not an isolated example either as an existing police force customer has selected the company’s software platform for its 999 service, the first contract of its kind in the country. Netcall's technology is in use at over one third of the UK’s police forces, but normally only as an automated service or for non-emergency 101 services, so this is an important contract win.
The ability to innovate – investment in products has increased by three quarters in the past three years – is helping to drive these contract wins, but not at shareholders’ expense as a very progressive dividend policy highlights: the payout has increased by 80 per cent in the past two years alone.
Moreover, with the benefit of a cash rich balance sheet, Netcall is well funded to make more selective bolt-on earnings enhancing acquisitions to boost its product offering and capitalise on even more cross selling opportunities to its existing customer base. Clearly the company is operating in a sweet spot right now which helps to explain why its shares are priced on 19.5 times earnings net of cash. But that rating looks more than justified given the robust cash generation – Netcall’s cash pile is forecast to rise to £13.7m by next June, or the equivalent of 10p a share – and a policy of returning cash to shareholders through hefty dividend hikes.
True, having set my stall out ahead of these results (‘Buy the break-out’, 22 July 2014), Netcall shares got within touching distance of my 70p target price earlier this week, so it’s hardly a surprise that some investors banked profits. But on a six month basis, I still feel that they are worth buying as the bull run which started when I initiated coverage at 13p ('Queuebusters', 17 January 2011) is built on very solid foundations. Buy.
■ Simon Thompson's new 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 £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
