Today's pre-close trading statement from Aim-traded Amino Technologies (AMO: 90p) has left me with a conundrum.
To re-cap, I advised buying shares in the Cambridge-based set-top-box designer of digital entertainment systems for IPTV, home multimedia and products that deliver content over the open internet when the price was 83p ('Set up for a buying opportunity', 10 Jun 2013). Trading at the half-year stage was bang in line with analyst estimates, which fully justified that decision. In fact, having reassessed the company's results for the six months to the end of May, I decided to upgrade my fair value estimate from 100p to 115p ('Hot tech shares', 15 Aug 2013). A few weeks later the price peaked out at 108p, so delivering a 30 per cent gain for those who followed the initial advice in June.
Importantly, the price move was fully supported by fundamentals. At the time, broker Northland Capital forecast that Amino's revenues would 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 and lift EPS from 5.4p to 6.2p. Analysts at N+1 Singer had similar forecasts.
Factoring in a hefty cash pile of £18.2m, or 33p a share, sharply up from £13.9m in the prior year as a result of strong cash generation and one-off rebates on duties, this meant that a third of the company's market value was backed by cash. It also meant that, once you stripped out net cash from the share price, Amino was being rated on a modest 11 times earnings estimates for the 12 months to end-November 2013.
The good news is that the cash pile has since risen to £19m, or 34.5p a share, and the board has stated that it will lift the full-year dividend by 15 per cent to 3.45p as previous guidance. Moreover, guidance from the company is that the payout will be lifted by at least 15 per cent for the current financial year. On that basis, the shares offer a prospective payout of almost 4p. That's the good news.
The bad news is that revenues have undershot previous guidance significantly due to a change of mix to lower priced, lower specification products and a fall in demand from a major customer. As a result, revenues will only be in the range between £35m-£36m in the financial year to end-November 2013, although profits and EPS are still in line with market estimates. It's a similar story for the financial year to end-November 2014 as new revenue guidance of around £35m to £36m is well shy of the £45m previously forecast by analysts. True, the company is still expected to report pre-tax profits of £3.7m and EPS of around 7p for the 12-month period as the benefit of cost-cutting and tight cash management come through, but there will be a complete absence of top-line growth. This news explains why shares in the company have been marked down from 95.5p to 90p this morning.
The conundrum I have is that although Amino's shares offer value trading on 8.5 times earnings net of cash, and offer an attractive 4.4 per cent forward yield for the coming financial year, a catalyst is lacking to spark a higher rating. Analysts at broking houses N+1 Singer and Northland Capital have moved their recommendations to hold this morning and have target prices around 100p, while broker finnCap is maintaining a 120p target price
On a positive note, the obvious consequence of the revenue shortfall is that Amino's board will be far more likely to look at alternative uses for its burgeoning cash pile, which now accounts for 40 per cent of the company's market valuation. This could either be a cash return or acquisitions, either of which would bring into focus the low rating. An acquisition could also kick-start sales growth once again.
So, although I am also reducing my recommendation to hold, I am not bailing out on the shares, which I see as having recovery potential and await a full update from the company at the end of January when the financial results to end-November are released.
Unloved in New York
I have to admit that I was shocked by how the IPO of Bollywood film producer EROS (NYSE: EROS) on the New York Stock Exchange panned out.
To recap, it is a company I have followed for sometime and a month ago advised buying the Aim-traded shares at 250p ahead of the IPO ('Time for some price action', 22 Oct 2013). Moreover, having assessed the pricing of the offer I remained positive in the run up to the IPO when the price had subsequently risen to 300p ('Get ready for some price action', 6 Nov 2013). I had good reason to be because as part of the IPO Eros planned to issue 12.5m 'A' ordinary shares at a price between $15 (£9.31) and $17 per share. Of these shares, 7.8m were to be issued by the company and a further 4.68m by selling shareholders.
The initial price range in New York reflected a proposed one-for-three consolidation of the existing Aim-traded ordinary shares in connection with the proposed listing. On this basis, post the listing there would be 51.4m shares in issue, giving Eros a market value of between $771m to $871m.
This implied a price range of 931p to 1,056p per 'A' ordinary share listed on the NYSE, which equated to a price range of between 310p and 352p per Eros ordinary share listed on Aim prior to the share consolidation. So the investment risk definitely looked favourable as there was potentially 17 per cent upside by buying the ordinary shares on Aim in early November and selling them in New York, assuming of course the investment bankers could get the IPO away.
However, clearly demand for the shares was far more subdued than either the directors had anticipated or, for that matter, the investment bankers leading the IPO had guided the board to expect. In fact, the IPO price was cut twice within a week in the second week of November, initially to $12 a share and then again to $11 by the time the shares were listed on the NYSE 11 days ago. That's where Eros's shares are trading right now. This is equivalent to 226p per old Aim-traded share. Moreover, Eros only sold 5m new shares, raising $55m and giving the company a market value of $535m. That valuation is miles away from the $871m upper range of the IPO the company had guided investors to expect.
New York IPO debacle
The obvious and yet to be answered question is how could the board of Eros's directors and their bankers have gauged investor demand so poorly? It's not as if market conditions are harsh. In fact, the S&P 500 is trading at a record high. The other point to note is that after factoring in the IPO proceeds, and costs of the IPO, by my calculations Eros has pro-forma net debt of between $100m to $110m, so has balance sheet gearing of only 20 per cent. In other words, the board didn't have any pressing financial reason to go ahead with an IPO that was priced at a level to the detriment of minority holders of the Aim-traded shares.
Furthermore, at the current price the shares are rated on 10 times net earnings for the financial year to March 2014. That's hardly an exacting valuation compared with US content providers and the company is even more lowly rated than its peers on an enterprise value to cash profit multiple.
This then begs the question why wasn't the IPO aborted and restarted when institutional demand warranted a listing at a higher price? The obvious, albeit cynical, answer lies in the small print. That's because in connection with the proposed listing on the NYSE, Jyoti Deshpande, chief executive and managing director, entered into a new employment agreement with Eros pursuant to which she is entitled to receive a 4 per cent stake in the company's ordinary share capital on or before 20 September 2013, of which an equal percentage of shares has been locked up for one, two and three years. In addition, Ms Deshpande is entitled to receive 'A' ordinary shares of Eros valued at $2m within seven days of the shares being admitted to trading on the NYSE. In other words, there was every incentive for the company's boss to get the IPO away even if the price was slashed from $15-$17 to a miserly $11 a share.
Ultimately, we have little choice but to await for Eros to announce its third-quarter figures to the end of December, and the final results to the end of March 2014, to provide the much-needed catalyst to get the share price back to where it was trading at before the NYSE debacle of an IPO took place. I still believe that US investors will warm to the company and its game-changing joint venture with US premium network operator HBO, which significantly increases the appeal of the company's shares to US fund managers.
This landmark agreement not only brings the best of Hollywood and Bollywood together, but means that Eros is ideally placed to tap into the rapid growth forecast in the digital pay-TV (direct-to-home satellite and cable) markets in India. Driven by the growth in the middle classes, who spend far more on entertainment, analysts at KPMG predict digital pay-TV audiences in India will rocket from around 65m this year to 161m by 2016. Analysts predict that net profits from the venture could ramp up from $3m on a net subscriber base of 800,000 in the financial year to March 2014, rising to $16.5m the year after (net subscriber base of 2.2m). I will be closely looking for updated guidance on this at the time of the full-year results. If the joint venture is as successful as industry experts believe, then this should be the catalyst to drive the share price higher.
In the circumstances, I would hold onto your Eros shares and patiently wait for the next quarterly earnings announcements from the company. It's worth noting that with only 5m shares issued as part of the IPO, and a lower than normal free float, then any good news is likely to provide an accentuated upwards move in the company's share price. And since Eros is up against some easy comparatives from last year, then the odds still favour a pretty decent uplift in the company's third- and fourth-quarter earnings.
Finally, I have published three columns today all of which are available on my home page. In response to recent newsflow, I am also currently working my way through a large number of updates on the following recommendations: Eurovestech (EVT), Bezant Resources (BZT), PV Crystalox Solar (PVCS), Crystal Amber (CRS), API (API), Mountview Estates (MTVW), Daejan (DJAN), Bovis Homes (BVS), WH Ireland (WHI) and Netcall (NET).
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■ 32Red ('Hitting the jackpot', 11 Nov 2013)
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■ Marwyn Value Investors ('Blue sky territory', 20 Nov 2013)
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■ Heritage Oil ('Bargain shares update', 21 Nov 2013)
