Join our community of smart investors
OPINION

Bumper upgrades for software maestro

Bumper upgrades for software maestro
December 2, 2013
Bumper upgrades for software maestro
IC TIP: Buy at 67p

Revenues in the third quarter and nine months of the financial year have both risen by 18 per cent to £6.3m and £18.7m, respectively, which in turn has driven up operating profits by almost 40 per cent to £940,000 in the year to date. And with trading in the fourth quarter robust, Mr Speakman has yet again upgraded his full-year revenue forecast by a further £0.5m to £27.5m, which also reflects the heavy seasonal weighting in the full-year numbers to trading in the final quarter. This follows a 12 per cent revenue upgrade after the half-year results in late August and has led to a hefty 11 per cent pre-tax profit upgrade for this year. On that basis, expect adjusted pre-tax profit of £2.5m for the full-year and underlying EPS of 2.95p, up from £1.78m and 2.15p, respectively, in 2012.

Furthermore, with the business now enjoying clear momentum and buoyed by some major contract wins, Shore Capital has upgraded its 2014 numbers, too, and now predict EPS of 3.45p, well ahead of the 3.15p previously forecast and miles ahead of the 2.9p estimate pencilled in ahead of August's interim results. In other words, Pilat Media now looks firmly in an earnings upgrade cycle and one that has some way to run.

 

Contracts wins building

So far this year, five new contracts that have been signed, but it is increasing demand from new projects commissioned by around 60 existing clients that are generating the vast majority of revenues. Moreover, as work on the new projects intensifies, and accordingly incremental fees are earned, expect revenues from the new contracts to ramp ahead in the last quarter of this year and even more so in 2014. Pilat is also scaling up the business in order to be able to deliver the existing backlog as well as accommodating additional new contracts it hopes to win. For example, the company is adding delivery staff such as business analysts, software engineers and quality testers.

It's well worth pointing out that the future profit growth embedded in the aforementioned forecasts for 2014 is already well underpinned by a number of contract wins. That's because the company'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.

For example, in the first half Pilat won a raft of contracts, worth well over £11m, 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.

Pilat also won 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.

The company is also making inroads into emerging markets and has won a further three contracts this year, worth £3m over the next 18 months, in Turkey (Digiturk) and South America (HBO Latin America and VTR in Chile). In Latin America, Pilat has built on its success in winning its first major client three years ago, GloboSat in Brazil. Turkey is a large and potentially lucrative market, too.

Interestingly, a sixth new contract has just been signed, for the provision of Pilat's new IBMS-Express product that has been designed for quick, lower cost but high margin deployment of a cut-down version of IBMS 'out-of-the-box'. Sold under a SaaS (Software-as-a-Service) recurring revenue model, this express contract should pave the way for further expansion into the lower end of the market, which to date has not been serviced by the company.

It’s also worth noting that Pilat's strategic move into the complimentary field of broadcasting streaming, catch-up TV and 'video on demand' through its 'OTTilus' project could lead to a step-change in prospects in 2014. Pilat has so far invested £820,000 in the project and is investing a further £60,000 on a monthly basis. Revenues and earnings from OTTilus are excluded from Shore Capital's forecasts above, although expect a sales launch shortly and revenue generation to follow next year.

 

Impressive cash generation

Equally important for a fast-growing business is cash flow. On this score Pilat ticks all the right boxes. In the third quarter to the end of September, the £539,000 of cash generated from operations covered investment spend of £179,000 more than three times over and meant that net funds ended the period at £12.6m, or the equivalent of more than 20p a share. That's a significant sum considering Pilat only has a market value of £42m, so net cash accounts for around 30 per cent of the share price. Furthermore, assuming Pilat hits Shore Capital's numbers for 2014, that cash pile is predicted to rise even further to £14.7m, or 23.5p a share, by the end of next year.

To put this burgeoning cash pile into some perspective, if you strip out cash from the current share price Pilat is being rated on a PE ratio of 16.6 for the current year, falling to only 13 times likely earnings for 2014. And, remember, these are conservative earnings assumptions given the obvious potential boost from contract wins in the future.

 

Repeat swing buy signal imminent

Interestingly, having risen 4 per cent to 67p post the third-quarter results, Pilat's shares are on the verge of taking out the September high of 69p. Beyond this there is absolutely no technical resistance at all until the record high of 88.5p, which dates all the way back to January 2007. In my view, the re-rating could be quite sharp especially if the 69p high can be well and truly taken out.

The fundamentals certainly support a higher share price: Pilat is a company winning major new contracts; generating bumper cash flow; has potential to return excess cash to shareholders; looks nailed on to increase EPS by 35 per cent this year and by at least 17 per cent in 2014; and is now in an earnings upgrade cycle.

So, although I previously had a target price of 72p on the shares when I initiated coverage at 49p six months ago ('Buy the break-out', 3 Jun 2013), I feel it is now likely to prove conservative. In fact, I am upgrading my target to 88p as I believe a return to the all-time high of 88p is more than justified on fundamentals.

Offering potentially 31 per cent upside to my new target price, I rate Pilat's shares a strong buy on a bid-offer spread of 65p to 67p. The time-frame for this trade is four months to coincide with the release of the bumper set of full-year results in the final week of March.

Please note that the company has two large shareholders that 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.

Finally, I have written two columns today, both of which are 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), Crystal Amber (CRS), API (API), WH Ireland (WHI) and Dragon-Ukrainian Properties & Development (DUPD).

 

MORE FROM SIMON THOMPSON ONLINE...

In the past fortnight I have published articles on the following 17 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 Nov 2013)

Amino Technologies ('Conundrums to solve', 25 Nov 2013)

Town Centre Securities ('Time to make friends up north', 25 Nov 2013)

Raven Russia ('Cash in on a Russian property play', 25 Nov 2013)

Sanderson ('An app investment', 26 Nov 2013)

Equity market strategy ('Betting on a Christmas rally', 26 Nov 2013)

Eurovestech ('Kalibrate to fuel Eurovestech', 27 Nov 2013)

Housebuilders trading strategy ('As safe as houses', 27 Nov 2013)

Bovis Homes ('Bovis poised for chart break-out', 28 Nov 2013)

Netcall ('Dial into cloud-based profits', 28 Nov 2013)

Daejan ('Bargain basement prime property', 29 Nov 2013)