Timing is everything and the trick is to buy in just before the next phase of the up-move begins especially since the longer a share trades in a narrow range, the greater the strength of the eventual breakout. This is why I anticipate newsflow in order to identify likely catalysts for a rerating.
A good example of this is Aim-traded Amino Technologies (AMO: 100p) which I identified as a candidate for a chart break-out when the price was 83p (‘Set up for a buying opportunity’, 10 June 2013). I didn’t have long to wait as the share price has taken off after 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.
Amino has the ammunition
Trading at the half year stage was bang in line with analyst estimates and broker Northland Capital is maintaining its forecast 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.
So having rallied 20 per cent to my target price, on the face of it the shares look fairly rated on 16 times current year earnings forecasts. However, the company is now sitting on a hefty cash pile of £18.2m, or 33p a share, sharply up from £13.9m last year. This reflects strong cash generation and one-off rebates on duties paid on previously recognised international product sales. To put that into perspective, Amino only has a market value of £55m, so a third 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 11 times earnings estimates for the 12 months to end-November 2013.
Decent dividend yield
Moreover, investors are clearly attracted by the upside to the dividend after a maiden interim dividend of 1p was declared and is payable on 20 September (ex-dividend: 4 September). 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 3.5 per cent, rising to 4 per cent in 2014.
However, with cash generation strong (operating cash flow was over £6m last financial year and rose 90 per cent to £3.8m in the first half of the current 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".
Upgraded target price
Having had time to assess the company’s results, I have decided to upgrade my fair value estimate from 100p to 115p. That's because 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 now trading on only 10 times next year's earnings estimates net of cash. That still looks good value to me and a rating nearer 11.5 times November 2014 earnings estimates is far more appropriate. Trading on a bid offer spread of 99p to 101p, I continue to rate Amino shares a buy.
Time for some major price action
Shares in Aim-traded Pilat Media Global (PGB: 58p), a supplier of business management software to the media industry, are now making headway towards my target price of 72p and are also on the verge of a repeat buy signal (at 60p) on the charts. It’s realistic for that target to be hit in the coming weeks if the company’s forthcoming interim results due out on Thursday 29 August, and the accompanying outlook statement, are as positive as I think they will be.
To recap, I last recommended buying the shares a couple of months ago when the price was 49p (‘Buy the break-outs’, 3 June 2013), since when the price has jumped by around 18 per cent. My confidence in seeing further share price upside is not misplaced either as it is now clear that the company is winning some major contracts which greatly supports the investment case and offers scope for Pilat to enter an earnings upgrade cycle.
Sales momentum building
In the first quarter this year, Pilat’s revenues increased 15 per cent to £5.8m and adjusted operating profit surged by 45 per cent to £311,000. Licence fees grew by a third to account for 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. In total, Pilat’s client base includes more than 60 blue-chip media companies across the globe. That figure has been increasing sharply this year.
Major contract wins
Only this week, Pilat has announced a further three contract wins, worth £3m to the company over the next 18 months, in Turkey and South America. They were not one-offs either as earlier this year Pilat won two major contracts including a $5m (£3.3m) deal with Starz, a US leading provider of premium pay TV content and services. As part of the agreement Starz 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.
A couple of months ago, Pilat 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.
Given Pilat generated revenues of £23.5m in 2012, these are all material contract wins and will make a major contribution to earnings over the next couple of years. Moreover, as Avi Engel, chief executive of Pilat Media, points out: "The new contracts not only contribute to revenues, but they are in important emerging markets. In Latin America, Pilat has built on its success in winning its first major client three years ago, GloboSat in Brazil, and Turkey is a large potential market where the board has identified other opportunities for the company.”
True, the business will need to recruit additional staff and increase operational expenses, but even after factoring this in, the board “anticipates that operating profits are also likely to increase”. Analyst Robin Speakman of brokerage Shore Capital goes one step further and notes the company is “guiding to improving operating margins” too.
Cash rich balance sheet
Importantly, Pilat's cash generation remains robust and the company has more than adequate funding in place to service these new contracts. 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 some perspective, Pilat has a market value of £36m. This means net cash equates to a third 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". Expect news here in a couple of weeks time. Realistically, share buy backs, a capital return or acquisitions all look possibilities.
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 notes 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 in 2014". 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 16. This is a conservative assumption given the potential earnings boost from recent contract wins next year.
Repeat buy signal looms
Interestingly, Pilat's shares have now smashed through the 55p level which capped the previous major rally in March 2011 skewing the odds greatly in our favour that a major upleg has now begun. It also improves the chances of the share price returning to the record high of 88.5p, which dates all the way back to January 2007. In fact, there is very little technical resistance between 55p and 88p, so the re-rating could be quite sharp especially if the 60p high from a couple of months ago can be taken out.
Importantly, the fundamental case fully supports a higher share price: Pilat is a company winning major new contracts; generating bumper cash flow; has potential to return excess cash to shareholders; and looks nailed on to increase EPS by at least 14 per cent this year. In fact, I would not be surprised at all to see house broker Shore Capital raise its estimates post half year results on Wednesday 29 August.
From my lens, the shares are easily worth 72p, and possibly much more if Pilat continues to win new contracts and earnings upgrades come through. Trading on a bid-offer spread of 55p to 58p, I continue to rate Pilat's shares a strong buy ahead of half year results out in two weeks' time.
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 when making this recommendation.
An ‘app’ investment
Shares in Aim-traded software company Sanderson (SND: 53p), a specialist in multi-channel retail and manufacturing markets in the UK, are on the move and with good reason.
Investors are clearly starting to warm to the merits of the business after the company reported a 13 per cent hike in operating profits from ongoing operations in the six months to end-March 2013. And with cash generation strong, net cash rose by around £0.45m to £4.5m in the period. This equates to around 10.3p a share, or 20 per cent of the company's share price. In turn, the board rewarded shareholders with a 30 per cent hike in the interim dividend to 0.65p a share. Analysts at WH Ireland expect the full-year payout for the 12 months to end-September 2013 to be raised by a quarter to 1.5p a share. On this basis, the shares offer a prospective yield of around 3 per cent.
And with a burgeoning cash pile, Sanderson has just announced the acquisition of an e-commerce solutions company Catalan which is complimentary to its existing multi-channel retail business. The upfront £500,000 cash payment may seem punchy in view of the fact that Catalan made pre-tax profits of £27,000 in the last financial year on sales of £0.9m. However, profits were being distributed to the owner who is leaving which means the actual earnings multiple paid is far less punchy. Analysts believe that the revenue and cost savings outweigh the price paid.
It’s certainly a hot area to be operating in as Sanderson’s first half operating profit from its multi-channel retail division jumped a fifth to £0.61m, buoyed by projects for Aspinal of London, JoJo Maman Bébé and Axminster Tool Centre. Future demand is well underpinned, too, because the company makes its money by offering software products and services that have the benefit of reducing costs or improving the efficiency of their business. That's important in a low-growth environment where companies have a keen eye on costs.
Strong demand for e-commerce software
For example, Sanderson works in partnership with clients to deliver e-commerce software systems that underpin their online operations and enable them to cross and upsell products, offer a '3D' secure payment process and integrate online offerings with other parts of their business. It's a fast-growing segment of the retail sector too. Analysts at IMRG, the industry association for e-retail, and Capgemini, a leading consultancy, estimate that UK online sales will grow by 12 per cent in 2013, having grown by 14 per cent in 2012.
Sanderson’s ongoing investment in proprietary software for mobile devices is also paying off; mCommerce now accounts for 10 per cent of sales, having shot up by 162 per cent in the six months to end March. Moreover, analysts at broking house GECR believe that “with strong demand being shown by mCommerce customers, we believe that this could be an area of significant growth and consider an acquisition in this area could be on the cards.” Bulking up high growth e-commerce and mCommerce software businesses would undoubtedly be welcomed by investors.
Low rating
Sanderson has confirmed that it is trading bang in line with broker earnings estimates for the financial year to end September. Analysts at both WH Ireland and GECR expect the company to report pre-tax profits of £2m and EPS of 4p, which means the shares are trading on a forward PE ratio of 13, a hefty discount to the software and computer services sector average of 19. However, once you factor in Sanderson's 10p-a-share cash pile, then the forward PE ratio is even lower at only 10.8, or almost half the sector average. That seems anomalous for a company specialising in some fast growing segments of the retail software market and one that is expected to lift EPS by a third to 4p for the financial year to end September.
Target price
True, the shares have done very well since I initiated coverage two years ago when they were priced at 33.5p ('A valuable stock check', 18 Jul 2011), but they are still adrift of my 60p target price. When I last updated the investment case the shares were trading at 49p (‘Trading plays’, 6 June 2013). Frankly, that target could prove conservative – analysts at GECR are advising their clients that a price of 66p is fair value, equating to a rating of 13 times earnings net of cash.
Ahead of a pre-close trading statement in late October, and possible further corporate activity, I am very comfortable maintaining my buy recommendation with Sanderson shares priced on a bid-offer spread of 51p to 53p.
Please note that in response to requests from dozens of readers, I published an article last week outlining the content of my new book, Stock Picking for Profit: 'Secrets to successful stock picking'
