I was therefore intrigued by a series of announcements from Pilat Media Global (www.pilatmedia.com), a small-cap company with a £25m market value that is dual listed on London's Alternative Investment Market and the Tel Aviv stock market. The business develops, markets and supports business management software for content and service providers in the media industry. Designed with the direct involvement of top-tier broadcasters, Pilat Media's main product, IBMS - a business-management system for large broadcasters - manages workflows, channel scheduling, airtime pricing and billings. This not only streamlines the running of TV businesses, from small single-channel operations to large multi-channel and on-demand platforms, but can be used throughout the entire broadcast cycle right through to post-production processing, transmission, reconciliation and finance.
The company also has an advertising sales product MediaPro which provides real-time information to both buyers and sellers of airtime, optimises the best revenue yield for a channel's available inventory and can be used to develop and implement the best pricing strategies. Pilat's client list of more than 50 blue-chip media companies around the world is pretty impressive, including FOX, AT&T, CTV, Virgin Media, Discovery, BBC, Sky Italia, ESPN Star Sports, Network Ten and Foxtel.
It's also a business that is firmly in recovery mode, having increased first-half revenues by 25 per cent to £10.4m and posted underlying operating profits of £1.39m. To put that into perspective, for the whole of 2009 the company made operating profits of £1.24m on revenues of £19.3m. And with the second half historically stronger than the first half, and given the high backlog of work from clients, there is every reason to believe that Pilat will exceed the £10m of revenues it generated in the second half last year. We don't have long to find out as the company is due to report its third-quarter results at the end of November.
Broker Shore Capital is clearly bullish, targeting full-year revenues of £23m and, with operating margins improving, this would equate to adjusted pre-tax profits of around £2.6m and EPS of 3.1p. Moreover, a recent contract win with a major US telecoms company for the licensing, implementation and maintenance of IBMS can only help underpin the profit momentum. This is worth $11.2m (£7.1m) in fees over the next two to three years.
Share registrar watch
Clearly, the directors can see value in the shares, with chief executive Avi Angel and non-executive director Samuel Sattah both buying 75,000 shares each at prices ranging from 35p to 36p in the past fortnight alone. This takes their shareholdings to 2.94 per cent and 4.99 per cent, respectively. They are not alone in topping up their holdings as Eurocom Investments acquired 316,000 shares over the summer and now has a 21.27 per cent stake. Alex Rabinovitch, a non-executive director of Pilat, is also a 49.99 per cent shareholder in Eurocom.
And the buying spree doesn't end there as SintecMedia, a private company which is also engaged in the development and marketing of business management software for broadcasters, bought another 70,000 shares in September, having previously purchased 743,000 shares in January, to take its stake in Pilat to 19.08 per cent. In fact, this is the sixth major purchase of shares by SintecMedia since the company failed in its attempt to acquire Pilat in May last year.
It's worth noting, too, that Michael Zucherman - who has a 5.99 per cent shareholding - entered into a shareholder agreement in August 2009 with Mr Angel, Mr Sattah and two other shareholders, Benjamin Moneta and Ronnie Erlichman. Between them these five investors control just over 16 per cent of the share capital. Interestingly, when SintecMedia first tabled its offer in March last year, Mr Zucherman was a willing seller at the time. The only other major shareholder is Dash Apex Holdings, which owns a 5.99 per cent stake.
In other words, over 62 per cent of the shares are in effect controlled by four parties and, apart from Dash Apex, each has been raising its shareholding. It's easy to understand why.
Sound financials
Firstly, Pilat's balance sheet looks rock solid, with shareholder funds of £17.9m equating to 30p a share. And with the benefit of strong cash flow, rising profits and tight control of working capital, the company was sitting on £3.8m of net cash - equating to 6.5p a share - at the end of June, up by a hefty £2.4m since the end of last year. Moreover, cash is set to rise strongly over the coming years as the business has passed the peak investment stage in its product platform and so requires less additional capital.
So, with the shares trading at 42p, Pilat is being valued on a conservative-looking 1.4 times net asset value and 14 times calendar 2010 earnings estimates. However, with analysts seeing scope for profits to grow in double digits for the next couple of years, that earnings multiple could fall quite dramatically. And with both SintecMedia and Eurocom increasing their shareholdings, there is also the possibility of another bid approach.
Director buying, stake building and a strong profit recovery are an appetising combination and one that we can profit from. I rate the shares a medium-term buy, placing a six-month target price of 60p. Please note that the shares normally trade on a bid-offer spread of between 2p to 3p, which I have considered when making this recommendation.
