Timing is everything and the trick is to buy in just before the next phase of the up-move begins. That way your capital is invested for the least amount of time when the price is range-bound, but you are fully invested when the next major price move happens. It's worth noting that the longer a share trades in a narrow range, the greater the strength of the eventual breakout. This is why it pays to anticipate likely newsflow in order to identify likely share price catalysts.
For instance, shares in Jarvis Securities (JIM: 295p) and Treatt (TET: 602p) have both rewarded us with bumper 25 per cent-plus gains in a matter of weeks after I highlighted the investment case and noted that the share price consolidations were coming to an end. It's no fluke either as both companies had been trading strongly, which improved the odds of future upbeat trading updates being released to drive the share prices higher.
Chart breakout looms
Another one of the companies on my watchlist, Aim-traded Amino Technologies (AMO: 83p), is now exhibiting all the right characteristics for a share price breakout, having traded in a narrow range between 73p and 85p since early February. This four-month period of consolidation followed a strong up-move in the previous three months. In my view, a breakout from this trading range could be imminent. That's because, in five weeks' time, we can expect a bumper set of interim results from the Cambridge-based set-top box designer of digital entertainment systems for IPTV, home multimedia and products that deliver content over the open internet such as video on demand. Clients include Vodafone in Iceland and Tele2 in Holland.
The investment case is certainly strong enough to support a rerating. Broker Northland Capital is forecasting that Amino's revenues will rise from £41.7m to £43.5m for the 12 months to end-November 2013 to drive pre-tax profits up from £2.9m to £3.3m. On this basis, EPS increases from 5.4p to 6.2p. Analysts at N+1 Singer have similar forecasts and the board has confirmed that the business is trading bang in line with these estimates.
But what investors have yet to cotton on to is that Amino had a very poor first half in 2012, so comparatives will be very soft when it reports half-year results on Monday 15 July. In fact, the company only made £200,000 operating profit in the six months to May 2012 as the business was in the early stages of a turnaround process after a new management team had taken over. Since then, there has been a focus on higher-margin business, cutting costs and targeting new business in eastern Europe, the former Soviet Union and Latin America.
Investors have also yet to factor in the implications on profits of an improving margin performance: gross margins rose from 35.3 per cent in the first half of the previous financial year to 48 per cent in the second half. What this margin improvement means is that the second-half weighting of Amino's profits will be far less pronounced this year. In other words, the £200,000 profit figure from the first half in 2012 is going to be well and truly smashed in five weeks' time and that's before you factor in the profit growth embedded in the above broker forecasts.
Modest rating
The investment case gets even better because Amino has just announced that it will book an exceptional gain of £1.7m from rebates on duties paid on previously recognised international product sales. These gains will not only boost the reported half-year profit figures, but mean that the company is now sitting on a hefty cash pile of £18.2m, or 33p a share, sharply up from £13.9m last year. To put that into perspective, Amino only has a market value of £46m, so almost 40 per cent of the share price is backed by cash. It also means that, once you strip out net cash from the share price, Amino is being rated on a very modest 8.1 times earnings estimates for the 12 months to end-November 2013.
Moreover, I don't think investors have fully factored in the upside to the dividend either and the fact that a maiden interim dividend will be declared in a few weeks' time. Having raised the well-covered payout by 50 per cent to 3p a share last year, analysts are expecting a further hike to 3.5p this financial year and 4p next. On this basis, the shares offer an attractive prospective yield of 4.1 per cent, rising to 4.7 per cent in 2014. However, with cash generation strong (operating cash flow was £6m last financial year), the cost base reduced and Amino making inroads into new markets to boost profits, future payouts could be even larger. In fact, the board confirms that "annual dividend growth will be no less than 15 per cent for each of the next two years".
Target prices
Interestingly, Amino's share price has attempted three times to breach the 85p level since mid-February. In my view, it will be fourth time lucky. The company will be reporting a good news story and a surge in profits in five weeks' time and on any basis the valuation is modest. In fact, based on a £1.5m rise in revenues in the financial year to November 2014, N+1 Singer predicts pre-tax profits will hit £3.6m - reflecting further margin gains - to produce EPS of 6.9p. On this basis, net of cash the shares are trading on only 7.3 times next year's earnings estimates. Ahead of the results next month, and a likely chart breakout, I rate Amino shares a buy now on a bid-offer spread of 80p to 83p. My fair value target price is 100p, which could prove conservative.
Finally, my next column will appear online at 12pm on Tuesday 11 June.
