BULL POINTS:
■ Strong demand for set-top boxes
■ Improving competitive position
■ Increasing geographic presence
■ Profit margins widening
BEAR POINTS:
■ Patchy history
■ Currency fluctuations
April was an exceptional month for set-top-box maker Pace. After what analysts called a "stunning" trading statement in the first week of the month, 51m of its shares, which had been held by the Dutch electronics giant Philips, were gobbled up. For good measure, Pace then won a Queen's Award for Enterprise in Innovation for its high definition set-top-box technology. Quite a reversal in fortunes - and investor sentiment - for a company that was plagued by faulty products and contract delays not so long ago.
Happily for Pace, the market for set-top boxes is being propelled by the switch to high-definition television, and the continued convergence of computing, television and telephony. Media-industry analyst Screen Digest expects 201m set-top boxes to be shipped globally in 2012, from just over 181m in 2008. Screen Digest also estimates that just 3.7 per cent of households worldwide watch TV in high definition.
Pace should also be a key beneficiary of the financial distress of its nearest competitor Thomson SA, which is the world's largest set-top-box supplier. After posting losses of €1.2bn (£1.07bn) for 2008, Thomson, which has debts totalling €2.1bn and a stock-market capitalisation of just €126m, breached its banking covenants in March. Not that Thomson's problems reflects disappointing demand for its set-top boxes. On the contrary, in the fourth quarter of 2008 it shipped 10m boxes, 32 per cent more than the previous fourth quarter.
| ORD PRICE: | 164p | MARKET VALUE: | £490m | |
| TOUCH: | 163-164p | 12-MONTH HIGH/LOW: | 164p | 34p |
| DIVIDEND YIELD: | 0.6% | PE RATIO: | 41 | |
| NET ASSET VALUE: | 48p | NET CASH: | £37.7m | |
| Year to 31 Dec | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2006 | 178 | -27.5 | -13.0 | nil |
| 2007 * | 250 | 15.4 | 6.3 | nil |
| 2008 | 745 | 13.8 | 4.0 | 0.6 |
| 2009** | 1,124 | 76.9 | 18.3 | 0.8 |
| 2010** | 1,236 | 94.2 | 22.1 | 1.0 |
| % change | +10 | +22 | +21 | +25 |
Normal market size: 3,000 Matched bargain trading Beta: 0.52 *Seven months ended 31 Dec **Altium Securities forecasts (Profits & earnings not comparable with historic figures) | ||||
More share tips and updates...
Pace has become much more of a global player since last year's £66m acquisition of the French de-coder business of Philips. The business, whilst loss-making at the time, brought 20 new customers and more than 30 new products to Pace as well as internet protocol television (IPTV) and retail capabilities. It was quickly rebranded as Pace France and by last December had been turned around, registering profits of £8.4m on the back of £293m in sales. But, more importantly, the Philips deal allowed Pace to expand its geographic footprint substantially. Sales generated outside the UK have grown significantly in the past year, with revenue from continental Europe and Asia Pacific more than quadrupling in 2008 to account for just under half of group sales.
The integration process has also squeezed out inefficiencies and costs from the enlarged group. As a result, Pace is edging closer to making operating profit margins of 8 per cent, which it hopes to hit in 2010. As a stepping stone, it looks likely that for 2009 margins will return to their level - 6.8 per cent - before the Philips deal.
However, Pace's expansion also means that a large portion of revenues are now denominated in euros. Simultaneously, the majority of its components costs are incurred in US dollars, so the group is now more vulnerable to currency fluctuations. Currency volatility in the fourth quarter of 2008 did little to affect last year's results. However, the worry that it could hit 2009's profits prompted management into an extensive hedging programme. Pace says that three-quarters of this year's expected revenues are now hedged.
