That's why it makes sense to always maintain a watchlist of shares and set yourself specific buy-in prices, so that you are well prepared to take advantage of any correction in markets. Moreover, if you are disciplined in your investment approach, and are prepared to wait to buy a holding when the price is right for you, then a shake-out in the markets is actually good news. It not only dampens the over-exuberance of market participants, but it throws up decent buying opportunities in good-quality companies that should produce decent long-term returns.
True, a large number of the shares I have highlighted in the past 12 months have produced bumper returns, and some in a short time frame. However, it is worth remembering that equities are not a one-way bet, and sometimes we are in for the long haul. But, even when that is the case, more often than not the shares I have previously highlighted that have failed to perform will ultimately offer a great buying opportunity for medium-term gains.
Lights, camera, action
For example, I first highlighted shares in Aim-traded Pilat Media Global (PGB: 49p), a supplier of business management software to the industry, in the autumn of 2010 when the price was 42p ('Lights, camera, action', 27 Oct 2010), and again in my 2011 Bargain Share Portfolio when the price was 49p. Unfortunately, a dispute with Fox Television and a failure to hit profit guidance badly hit sentiment.
However, having reassessed the investment case a year ago ('Recovery small-cap plays', 9 May 2012), when the price was around 28p, I decided that the rationale for making the original advice still held. The litigation with Fox had been resolved and the backlog of revenues a year ago accounted for a reassuring 80 per cent of income. On an underlying basis, the business was still very profitable and cash generative, with net cash increasing by almost £3m to £6.7m in 2011. That was a significant sum for a company with a market value of £16.7m at the time.
In hindsight, the decision to maintain the buy advice has worked out well as a trading statement last week confirmed that the recovery is solidly underpinned. It has also rewarded opportunistic buyers a year ago, with a bumper 75 per cent share price gain and one that looks fully warranted.
Recovery on track
In the financial year to the end of December 2012, Pilat produced revenues of £23.5m, around £1.5m higher than house broker Shore Capital's forecast, buoyed by a bumper performance during the seasonal strong fourth quarter. In turn, cash profits of £3.1m were well ahead of the £2.3m forecast, which meant pre-tax profits of £1.8m smashed the £1.2m estimate to produce adjusted EPS of 2.2p.
Importantly, this momentum has continued into the first quarter. In a trading statement this week, Pilat revealed that revenues had risen 15 per cent to £5.8m in the three months to the end of March, and adjusted operating profit increased by 45 per cent to £311,000. Licence fees grew by a third to £0.5m, or a tenth of the total, continuing the trend seen in the fourth quarter of 2012. Implementation fees accounted for two-thirds of revenues, having risen by 13 per cent in the quarter, which is reassuring since these services are provided to existing customers and highlight the potential for new business from the installed client base. Moreover, gross margins are also improving, a trend that is expected to continue as new contracts are signed.
That's because Pilat’s main product, IBMS - a business-management system for large broadcasters - is now attracting real interest across the world. The product manages workflows, channel scheduling, airtime pricing and billings, and streamlines the running of TV businesses, from small single-channel operations to large multi-channel and on-demand platforms.
Contract wins
In the past couple of months, Pilat has announced two major contract wins. One is with Starz, a US leading provider of premium pay TV content and services, whereby the company will license and implement Pilat Media's IBMS software to replace a number of legacy systems in the areas of content and rights management, on-demand programming, and transmission scheduling. The contract is worth around $5m (£3.3m).
Pilat has also just announced a contract with Seven Television, Australia's largest free-to-air television network. The Australian broadcaster is licensing the full suite of IBMS modules, and will be implementing the system across its entire TV business operations. The value of the contract is AUS$7.5m (£5m) and further revenues are expected from additional services and support and maintenance. This is Pilat's tenth client in Australia and New Zealand, further strengthening its presence in the region and reinforcing IBMS as a leading integrated broadcast management system for multi-platform businesses.
Potential for cash returns
Importantly, Pilat's cash generation is robust. Net cash at the end of March had risen to £11.9m, up sharply from £10.9m at the end of December, and from £7.1m a year ago. To put that into perspective, Pilat has a market value of £30.6m. This means net cash equates to 40 per cent of the share price. Interestingly, chairman Michael Rosenberg notes that "cash will continue to grow strongly and the board is examining the best use for its cash pile". It is only reasonable to expect either bolt-on acquisitions or a significant return of cash to shareholders, both of which would be positive for the share price.
Low rating
Following the full-year results in March, analyst Robin Speakman of brokerage Shore Capital upgraded his 2013 EPS estimate by 19 per cent to 2.5p, but noted that "forecast assumptions remain conservative relative to Pilat's market position and opportunity. We believe that lying behind Pilat's accelerated progress is an improving quality of revenue and earnings stream. This is a function of growing underlying recurring revenues and greater client and geographic diversity."
Mr Speakman also points out that "the strategic move into the complimentary field of broadcasting streaming, catch-up TV and 'video on demand' through the 'OTTilus' project (set to be launched later in 2013) could lead to a step change in prospects next year". Revenues and earnings from OTTilus are excluded from Shore Capital's forecasts above.
But, even if we assume that Pilat only meets the 2.5p a share EPS estimate for 2013, then net of cash, the company is being rated on a very modest PE ratio of 12. Moreover, all the benefits from OTTilus are yet to come.
Target price
Interestingly, Pilat's shares are approaching the 55p level which capped the previous major rally in March 2011. A breach of this level would be a major buy signal in my view and would significantly increase the odds of the company's share price returning to the record high of 88.5p, which dates all the way back to January 2007. There is very little technical resistance between 55p and 88p, so the re-rating could be quite sharp if it happens, as seems likely.
Importantly, the fundamental case fully supports a higher share price: Pilat is a company that is winning significant new contracts; generating bumper cash flow and has the potential to return excess cash to shareholders; and looks nailed on to increase EPS by 14 per cent this year, with a decent chance of beating analysts' estimates.
From my lens, the shares are worth 72p, and possibly a lot more if Pilat continues to win new contracts. Please note that the company has two large shareholders which control half the issued share capital and over two-thirds of the shares are deemed not in public hands under Aim rules, which affects the free float and liquidity. The shares are also dual-listed on the Tel Aviv Stock Exchange. I have taken both factors into consideration. Trading on a bid-offer spread of 46p to 49p, I rate Pilat's shares a strong buy and my year-end target price is 72p to offer us almost 50 per cent potential upside.
Visionary gains
It is time to revisit the investment case of Edinburgh-based Indigovision (IND: 405p), a pioneer in internet protocol network-based security surveillance systems.
I included the shares in my 2012 Bargain Share Portfolio when the price was 325p. Since then, the company has paid out 80p a share in dividends, so with the shares trading on a bid-offer spread of 400p to 405p, we are showing a 48 per cent total return in the past 16 months. I last updated the holding when the price was 325p and maintained a buy recommendation at the time ('Bargain share update 2012', 8 Feb 2013). This highlights the earlier point that there can be numerous profitable repeat buy opportunities in the shares I recommend if you are willing to keep a watchful eye.
Based on forecasts from Jon Lienard at broking house N+1 Singer Capital Markets, Indigovision's full-year pre-tax profits are set to rise from £2.7m to £3.4m for the financial year to July 2013. On that basis, EPS rises a third to 32.7p. These estimates assume a rise in revenues from £30.3m to £32.4m, which doesn't seem unreasonable considering that second-quarter sales were 15 per cent ahead of last year and much higher than the 6 per cent growth reported in the first quarter. The performance in the third quarter to the end of April 2013 was comfortably ahead of last year, too. So it is safe to assume that the company is still on course to hit Mr Lienard's estimates.
It's also worth noting that N+1 Singer forecasts Indigovision will have net cash of £2.8m, worth 37p a share, at the July financial year-end. Strip that out from the current share price and it means that the shares are trading on 11 times earnings estimates net of cash. Assuming the board announces a 12p a share full-year dividend as forecast, which would be more than 2.5 times covered by earnings, the prospective yield is 3 per cent.
Interestingly, the share price has today moved through last November's high of 395p which from my lens is very bullish as it offers clear scope for a rally back to last year's high of 490p (adjusted for the 75p a share special dividend). So, both on fundamentals and from a technical perspective, I can see further share price upside. My six-month target price is 490p, which equates to a forward multiple of 12 times EPS estimates of 35.6p for the financial year to July 2014 net of an estimated year-end cash pile of £4.9m, or 66p a share.
Tender profit from Russia
Aurora Russia (AURR: 38p) has announced the results of the tender offer at 52.3p. The basic entitlement of all shareholders who have tendered their shares will be accepted in full at a price of 52.3p.
However, if you followed my advice and offered all your holding for tender, then 4.38 per cent of the excess shares tendered will also be repurchased by the company. This means that 36.9 per cent of your holdings will be bought back at 52.3p, which is seriously good news if you followed my earlier advice to buy Aurora shares at 30.5p ('Time to play Russia roulette', 4 Feb 2013).
In effect, the balance of your holding now has a carrying value of only 17p, which compares favourably with Aurora's current share price of 38p. But I would not advise selling out yet, as we can expect news this summer on the disposals of the stakes in Unistream Bank and Russian DIY retailer Superstoy, both of which should mean further significant cash returns to shareholders.
Bezant buying opportunity
Shares in Bezant Resources (BZT: 20.25p) were marked down 6 per cent this morning after the small-cap resource company announced that AngloGold Ashanti has terminated the Mafulira Project, situated in the Kilindi District, Tanga Region, Tanzania. Detailed analysis concluded that the Mafulira Project, which includes the Mkurumu Project, was not economically viable.
This is hardly surprising as Bezant had already written down the book value of the Mkurumu project to nil value. Exploration activities had been discontinued and exploration costs were fully impaired. True, Bezant still held a 5 per cent free carry in the project and a net smelter return of 2 per cent, but analyst Shamim Mansoor at brokerage N+1 Singer had attributed zero value to it in his intrinsic valuation of Bezant of 37.9p per share. Moreover, I completely ignored the Mkurumu project in my sum-of-the-parts valuation of Bezant.
With the shares trading on a bid-offer spread of 19.5p to 20.25p, I have no hesitation in reiterating my buy advice from last week (‘Deep value small cap plays’, 28 May 2013).
Greenko stock overhang clears
I noted with interest some very large institutional trades at the end of last week in the shares of Greenko (GKO: 132p), the Indian developer, owner and operator of clean energy projects. On further investigation, it would appear that the company’s share price was being held back a stock overhang which has now been cleared. This largely explains why the shares had been drifting down after I advised buying them at 138.5p ('Buy signal flashing green', 18 Mar 2013).
According to a market source familiar with the company, “9.8m shares were traded in Greenko on Wednesday 29 May. This was effectively a clear out trade that removed the overhang that has been around for a couple of months. Three of the company’s top 10 shareholders (M&G Investments, Prudential and Lloyds Banking Group) bought the stock (at 120p), plus two new institutions were buyers.”
I have it on very good authority that “most of the stock sold was from two funds that have suffered redemptions plus one large fund that had been instructed to reduce its smaller holdings. None of the sellers were selling for Greenko-related reasons, but for external factors.”
So with the overhang now cleared, it is only reasonable to expect Greenko's share price to now make some headway. This seems to be happening with the price moving up to a spread of 126p to 132p. I remain a buyer.
