Globo bear raid presents buying opportunity

Globo is exposed to one of the fastest growing segments of the mobile industry and is expected to produce 33 per cent compound annual earnings growth from 2012 through to 2015 but trades at just eight times 2014 forecasts. If those earnings stand up - and the bears argue they don't - then the shares clearly represent great value.

Globo's business is multi-faceted but it essentially provides a platform to allow businesses run secure mobile applications as well as software that increases functionality on older phones. Its burgeoning Go!Enterprise division is where the major growth opportunity lies. Revenues soared from €2m (£1.67m) to over €12m last year benefiting from the rapidly emerging Bring Your Own Device trend, whereby businesses allow employees to use their own mobile devices for work.

As well as this structural growth opportunity, problems at BlackBerry (TSX: BB), which currently dominates the highly competitive mobile enterprise security market, represent a huge opportunity. Meanwhile, a deal with one of the biggest electronics distributors in the US, Ingram Micro, provides a way into the massive American market. A £24m placing and a $5m acquisition of a US rival last month should also help.

But here's where things get tricky. The bears point out that while Globo's profits have been soaring, the company does not produce cash and high levels of receivables and its use of invoice factoring suggests it is struggling to collect reported revenues. They also say there are disparities between Globo's accounts and those of its Greek subsidiary, which Globo recently sold a 51 per cent stake in. Finally, three Globo directors sold the majority of their holdings to institutions for a combined £710,000 in the recent share placing - hardly a show of faith.

We believe these concerns, while understandable, are in fact overblown. First off, Globo's policy of recording development spending as an asset then pushing the cost through the profit-and-loss account during the three years following a product's launch is entirely compliant with IFRS accounting standards. True, such policies do mean profits can be reported during a period when massive investment is eating up cash. However, the difference between Globo's spending and amortisation is now coming more into line, dropping from €6.3m in 2011 to €3.4m in 2012. Arguably, the reported profit growth, even though it is not yet backed by significant cash generation, can be seen as a reflection of the success of this spending. And if reported growth is sustainable, the amortisation policy should work to smooth the growth profile (spreading growth over several years instead of a big, late spike) rather than obliterate it.

The company has also published a raft of additional information on its accounting to allay fears about the disposal of its Greek subsidiary and to offer a decent explanation for the high levels of outstanding payments, the age profile of which is improving. Meanwhile, house broker RBC Capital notes Globo changed its auditor to a big five firm from a smaller independent prior to its last set of results, and that "AIM undertook a random full audit of Globo's accounts earlier this year (along with a number of other AIM-listed companies), which Globo passed in full without issue".

In a show of faith, founder and chief executive Costis Papadimitrakopoulos purchased 150,000 shares in the company at 65p each on 31 October taking his holding to 69.5m or 18.6 per cent of the company.