It has also proved incredibly rewarding this year during which time I have written no fewer than 180 articles on over 100 listed companies out of my watchlist of 200 quoted shares on the Alternative Investment Market (Aim) and London Stock Exchange. As a result there is a continual news flow from companies I follow to report on. This also explains the stream of articles I have written in the past three months to keep you all abreast of developments concerning the companies I have advised buying shares in.
Call-busting numbers
Netcall (NET: 45p), a small-cap business offering software to make telephone call-handling more efficient, has issued yet another upbeat trading statement this week.
The shares have reacted positively and have now more than trebled since I first advised buying at 13p ('Queuebusters', 17 Jan 2011). I have remained positive ever since, reiterating that advice twice last year at 19.5p ('Three undervalued small caps', 30 Jan 2012) and at 31p ('Small-cap wonders', 1 Oct 2012). I had no hesitation maintaining the buy recommendation on valuation grounds this year either, reiterating my advice at 31p ahead of the interim results at the start of the year ('Jumping the gun: take two', 15 Jan 2013). I wasn't disappointed as a bullish update highlighted strong operating cash flows, double-digit underlying sales growth and good progress in integrating an earnings-enhancing acquisition.
Moreover, with Netcall expecting further cross-selling and up-selling opportunities from that deal, analysts’ earnings estimates certainly looked well underpinned for the full year to the end of June 2013. The decision to run gains was not a difficult one to make when I updated the investment case in the summer when the price had risen to 39.5p (‘Small cap winners’, 1 July 2013). At the time I raised my target price from 40p to 48p, a level that is now rapidly approaching as investors have reacted positively to a number of announcements from the company.
Liberty driving cloud based business
The trading update at last week’s annual meeting was certainly positive. Chief executive Henrik Bang reported that the company’s enhanced Liberty customer engagement platform, which is available both via the cloud and on-premise, is generating good growth in orders. New customer wins in the first few months of the new financial year include National Car Parks and Origin Housing.
In fact, the company continues to experience strong demand across its whole product portfolio, driven principally by the private sector and orders for business process management and software-as-a-service (SaaS) solutions. The client base of over 700 organisations includes two thirds of the NHS Acute Health Trusts, telecoms companies BT and Orange, financial institutions Lloyds TSB and Prudential, cinema operator Cineworld and utility Thames Water. It's hardly surprising either that business is robust for Netcall as its clients are increasingly facing the balancing act of having to improve the quality of their customer engagement while at the same time making operational efficiencies and reducing costs. Furthermore, businesses have to deal with customers across a growing number of channels including the internet, mobile networks, social media, web-chat, telephone and text messages.
So, to capitalise on the opportunity here, Netcall developed a platform of products to provide a suite of software solutions which support organisations' end-to-end customer engagement strategies with the aim of also improving customer service, retention and acquisition. The company’s Liberty platform includes multi-channel contact handling that has been designed to improve customer interactions and workflow capabilities. It has been well received by customers who have been choosing to acquire or upgrade to the platform. Customer wins include Oxford City Council and King’s College, London. The benefits to customers have been immediate with service desk interaction rates up 50 per cent at King’s College and email response times reduced to minutes.
And the good news story gets better because in another trading update this week, Netcall reported that it has achieved accreditation as a PCI DSS Level 1 accredited Service Provider for its cloud based payments solution, which is the highest possible security level in accordance with the Payment Card Industry Data Security Standard (PCI-DSS). The payment service has been successfully deployed at one of the UK's major mobile operators and is now generally available to customers via the company’s cloud platform.
This can only be good for sales and revenues in the current financial year, and beyond, which is one reason why the shares are trading at a 12-year high of 45p. That said, there is still value on offer. Let me explain.
Bumper cash generation and earnings growth drive rerating
One reason why I was attracted to the company in the first place was Netcall’s impressive cash generation. To put this into some perspective, in the financial year to end June 2013, both cash profits and cash generated from operations increased by 25 per cent to £4.2m and £4.9m, respectively. As a result Netcall’s cash pile rose by 9 per cent to £9.1m, or the equivalent of 7.55p a share, and that was after factoring in a £1.5m investment in research and development and a further £1.95m making the aforementioned acquisition of Serengeti. It also explains why the board lifted the dividend by 40 per cent from 0.5p to 0.7p a share, a payout that was covered more than three times over by EPS of 2.56p.
Importantly, there is little reason to expect this awesome cash generation to stop any time soon. Analyst Andrew Darley at broking house finnCap predicts Netcall's cash profits will rise from £4.2m to £4.5m on revenues of £17.1m in the current financial year to end June 2014, to generate free cash flow of £3.1m. That will not only underpin another hike in the dividend - finnCap is pencilling in a raised pay-out of 0.8p a share - but it is expected to swell the cash pile even further to £11.4m by next June. That’s the equivalent of 9.5p a share.
Strip out the growing cash pile from Netcall's market value of £54m, and the company is in effect being valued on a modest 10 times cash profit forecasts for the year to June 2014. For a business producing double-digit earnings growth, and one that is conservatively expected by analysts to grow EPS by 10 per cent to 2.8p in the current financial year, that is hardly an exacting valuation.
For good measure, and as I have pointed out in previous articles, by using the burgeoning and low yielding cash pile to make smart bolt-on and earnings enhancing acquisitions, Netcall has been creating further cross-selling opportunities to tap into its client base as well boosting profits and earnings per share.
Upgraded target price
In fact, having reappraised the investment case, I am upgrading my target price from 48p to 55p. If achieved this would value the company on 12 times cash profit estimates net of that burgeoning cash pile, or 16 times earnings estimates, which I still don’t think is excessive.
It’s worth pointing out that the technical set up is also supportive of further medium-term upside in the share price. Firstly, the price looks on the verge of taking out the mid-October high of 45p and from a technical perspective there is very little overhead resistance until the 55p level. Secondly, the price is modestly above both the 20-day and 50-day moving averages (around 42.5p to 43p) so is not overextended either. And thirdly, the 14-day relative-strength index (RSI) is showing a reading of 60, well below the 80 reading which marked the last two intermediate highs, thus offering scope for the current rally to continue.
So, offering potentially a further 24 per cent upside, I have no hesitation in reiterating my previous buy advice with the shares priced on a bid-offer spread of 43.5p to 45p.
Finally, I have written three columns today, all of which appear on my home page. In response to recent newsflow, I am currently working my way through a long number of updates on the following recommendations: Bezant Resources (BZT), PV Crystalox Solar (PVCS), Crystal Amber (CRS), API (API), Mountview Estates (MTVW), WH Ireland (WHI) and Pilat Media Global (PGB).
MORE FROM SIMON THOMPSON ONLINE...
In the past fortnight I have published articles on the following 14 companies or trading strategies:
■ Trifast ('A bolt-on purchase', 18 Nov 2013)
■ Global Energy Development ('Awaiting pay dirt', 19 Nov 2013)
■ Entertainment One ('Blue sky territory', 20 Nov 2013)
■ Marwyn Value Investors ('Blue sky territory', 20 Nov 2013)
■ Polo Resources ('Unloved and undervalued', 21 Nov 2013)
■ Heritage Oil ('Bargain shares update', 21 Nov 2013)
■ Eros ('Conundrum to solve', 25 November 2013)
■ Amino Technologies ('Conundrums to solve', 25 November 2013)
■ Town Centre Securities ('Time to make friends up north', 25 November 2013)
■ Raven Russia ('Cash in on a Russian property play', 25 November 2013)
■ Sanderson ('An app investment', 26 November 2013)
■ Equity market strategy ('Betting on a Christmas rally', 26 November 2013)
■ Eurovestech ('Kalibrate to fuel Eurovestech', 27 November 2013)
■ Housebuilders trading strategy ('As safe as houses', 27 November 2013)
