It also means that there is a continual news flow from companies on my watchlist. In fact, no fewer than five companies I have recommended in the past have issued trading updates in the past week. All need updating.
Call-busting numbers
Netcall (NET: 40.5p), a small-cap business offering software to make telephone call-handling more efficient, has released a reassuring pre-close trading update ahead of full-year results on Tuesday 24 September.
The company continues to experience strong demand across its product portfolio, driven principally by the "private sector and orders for business process management and software-as-a-service (SaaS) solutions." Chief executive Henrik Bang points out that Serengeti Systems, acquired nine months ago, has been successfully reorganised and is now creating cross selling opportunities from the company’s customer base. Mr Bang also notes that the launch of the Liberty platform has been well received with many customers choosing to "acquire or upgrade to the platform."
As a result cash profits will be "comfortably in line with market estimates" which means that pre-tax profits are nailed on to increase from £3m to £3.8m in the 12 months to June 2013 as analysts predict. On this basis, adjusted EPS rise from 2.2p to 2.8p. This stellar cash performance has driven up net funds up from £8.2m to £9.2m, more than I expected.
In light of contract wins and the investment in new products, I remain comfortable with analysts' conservative looking pre-tax profit estimates of £4.2m on revenues of £18m for the current financial year to 30 June 2014. On this basis, adjusted EPS rises to 3p. And with cash generation strong, it would be no surprise to see the cash pile grow above £10m in 12 months' time. That's the equivalent of 8.5p a share. In other words, Netcall shares are trading on a modest 10.5 times June 2014 earnings estimates net of cash. For a business producing double-digit earnings growth, that’s hardly an exacting valuation. For good measure, the board is expected to declare a dividend of 0.6p a share, a rise of 20 per cent, so the prospective yield is 1.5 per cent.
In my opinion, Netcall shares are easily worth 48p, a level which could easily be hit in the coming months. On a bid-offer spread of 40.25p to 40.5p, I have no hesitation in reiterating my previous buy advice (‘Small cap winners’, 1 July 2013). Trading buy.
Game on
Aim-traded online casino operator 32Red (TTR: 55p) delivered a robust trading update last week ahead of interim results on Thursday 12 September. The Gibraltar-based company operates eight websites including casino sites 32red.com; nedplay.com, goldenlounge.com and dashcasino.com.
In the six-month period, 32Red’s casino revenues rose 14 per cent to £16.5m, total revenues hit a record of £19m, and active casino accounts increased a third to 42,500 customers after 32Red recruited 17,500 new players. Importantly, acquisition costs for these new recruits were kept in check at £159 per player which is easily covered by a casino yield of almost £400 per player. And this momentum shows little sign of waning as gross win is up 12 per cent since the start of July.
As I pointed out ahead of the trading update, this type of business is highly cash generative which is good news for income seekers (‘Game on’, 8 July 2013). In fact, when the company issues its interim results, the cash pile at the end of June could be as high as £7.4m, or the equivalent of 10p a share. This has already enabled the board to pay a special dividend of 2.5p a share since the period end which we have banked (ex-dividend: 10 July). And expect further good news as analysts predict the interim and final dividend’s payout will both be raised by around 17 per cent to 0.7p and 0.94p, respectively, to produce an attractive forward yield of 3 per cent.
I also believe that analysts are bang on the money with their forecast that revenues will rise from £32.1m last year to £39.2m in 2013. On this basis, cash profits jump from £3.4m to £4m, pre-tax profits rise from £3.2m to £3.8m and underlying EPS increase by over a fifth from 4.1p to 5p. For the year after, the respective forecasts are for revenues of £45.6m, cash profits of £5m, pre-tax profits of £4.8m and EPS of 6.3p. To put the modest valuation into perspective, that’s less than 10 times this year’s earnings net of cash, falling to a bargain basement 7.5 times 2014 earnings estimates. In my opinion, a rating of around 11 times 2013 earnings estimates net of cash is more appropriate.
So, ahead of what is going to be an impressive set of half year numbers in seven weeks time, and most likely another upbeat trading update, 32Red shares continue to rate a value buy on a bid-offer spread of 53.5p to 55p. My three-month fair value target price is 66p. Trading buy.
Russian roulette worth playing
It is fair to say that investors have yet to work out the true worth of Aurora Russia (AURR: 31.75p), an Aim-traded investment company in the process of selling off its assets and returning cash to shareholders. True, some shareholders who followed my advice to buy at 30.5p ('Time to play Russia roulette', 4 Feb 2013) will have taken some profits after tendering 36.9 per cent of their holdings back to the company at 52.3p a share in May as I advised. Factoring in the 70 per cent-plus profit on the tendered shares, this means the carrying value is only 17p on the balance of your holdings. This compares favourably with Aurora's current share price of 31.75p.
Cash pile supports share price
However, the shares are still trading on an unwarranted 41 per cent discount to net asset value even though the company is in active talks to dispose of its 100 per cent holding in Flexinvest Bank. This stake has been attributed a break-up value of £10.4m by Aurora’s board, so it is fair to assume this is the figure the management team are aiming to realise on any sale. Moreover, with the company’s issued share capital now only 74.2m shares, valuing Aurora at £23.5m, the stake in Flexinvest is worth 14p a share alone. To this we can add £2.7m of cash held in an escrow account with Deutsche Bank in London relating to Aurora’s disposal of OSG, a fast-growing and profitable records management provider with operations in Russia, Poland, Ukraine and Kazakhstan. This sum is worth 3.5p a share and will be released to Aurora when OSG’s annual accounts to 31 March 2013 are signed off. Aurora also has pro-forma net cash of £2.6m, worth another 3.5p a share, on its balance sheet after deducting the £20m of cash spent on the above tender offer.
In other words, assuming the Flexinvest sale proceeds, then by my reckoning Aurora’s net cash will have swollen to around £15.7m since the end of March, the equivalent of 21p a share. And let’s not forget that a further £2.7m of funds held in escrow is due to be paid to Aurora on 8 March 2014, subject to any warranty claim on the sale of OSG to private equity firm Elbrus Capital. A further earn-out is also payable by Elbrus to Aurora on the signing of OSG’s 31 March 2014 accounts. If OSG’s cash profits exceed £6.3m in that financial period then Aurora is due a further £3.3m. This means that Aurora’s cash could potentially swell further to £21.7m by this time next year, the equivalent of 29p a share, before accounting for administration expenses.
Free ride
To put that into perspective, the company has a share price of only 31.75p. So in effect, investors have a free ride on Aurora’s two remaining investments: DIY retailer Superstoy and Unistream Bank. These are in the books at £10.4m and £12m, respectively, at the end of March. Aurora’s board is in discussions with the majority shareholders of Unistream to review the possibility of an IPO of the company, and is considering an exit from Superstoy next year through a sale to a strategic investor or through an IPO.
The bottom line is that the stakes in Superstoy and Unistream Bank, worth 14p and 16p a share respectively, are virtually in the price for free. Furthermore, with Aurora’s board committed to return cash receipts back to shareholders from the disposal of Flexinvest, and the aforementioned consideration from the sale of OSG, then this can only highlight the obvious value left in the company.
So, ahead of news of the Flexinvest disposal, and an announcement of a further cash return, Aurora shares rate a buy on a bid-offer spread of 31.25p to 31.75p. My target price is 40p.
Thorntons conundrum
Shares in chocolate retailer Thorntons (THT: 82.75p) have found stiff resistance at the 103p level, just shy of my 105p target price. In fact, having originally advised buying the shares at 82.5p ('A sweet investment', 13 May 2013) and then again at 85.25p (‘Fed watch’, 17 June 2013), investors have clearly banked very healthy 20 per cent plus profits each time the share price has come close to my 105p target.
To recap, I rated the shares a short-term trading buy ahead of a pre-close update on 15 July. That announcement was sound enough and did prompt an earnings upgrade from Investec, albeit the broking house's estimates were bottom of the range and the new estimates are still below those of Panmure Gordon. As a result some traders have taken their cash off the table even though the medium-term investment case is still intact, and the shares are only rated on 10 times prospective earnings for the 12 months to end June 2014. My instinct is that a bounce is in order as the relative-strength indicator (RSI) is once again heavily oversold and the share price is close to the 78p support level. So, if you didn't bank the quickfire profits, I would hold your trading positions but place a strict stop loss of 78p.
Amino has the ammunition
It was difficult not to be impressed with last week’s results from Amino Technologies (AMO: 94p), the Cambridge-based set-top box designer of digital entertainment systems for IPTV, home multimedia and products. It also vindicates my decision to buy in at 83p ahead of the figures (‘Set up for a buying opportunity’, 10 June 2013). Moreover, with the shares breaking out to the upside my 100p target price could yet prove conservative.
In the six-month trading period, Amino’s operating profit before exceptional items soared eight-fold to £1.7m to drive underlying earnings per share tenfold to 3.23p. Net cash improved markedly to £18.2m, up from £13.9m, driven by an ongoing focus on margins, tight cost control and strong working capital management. That cash pile equates to 35p a share. Moreover, having raised the well-covered payout by 50 per cent to 3p a share last year, the board kept to their promise that "annual dividend growth will be no less than 15 per cent for each of the next two years" by paying an interim dividend of 1p per share. Analysts are expecting a further hike in the payout to 3.5p for the full-year, rising to 4p next year. The company can certainly afford it as analysts at Northland Capital are pencilling in EPS of 6.3p for the full-year to end November, rising to 7p in 2014.
Trading on less than 10 times earnings estimates net of cash, and offering a prospective yield of over 4 per cent, I would run profits.
Finally, I will update the investment case on Inland (INL), Fairpoint (FRP) and W.H. Ireland (WHI) once I have appraised the companies recent trading updates. I will also revisit IQE (IQE) and Greenko (GKO) after both companies have released their trading updates on Wednesday 24 July.
