Pebble Beach is a leading developer and supplier of automation, 'channel in a box' and content management services for TV broadcasters, cable and satellite operators. Having developed a portfolio of software products to support a wide range of broadcast applications, the product offering is proving very popular with customers. In fact, in the first three and a half months under Vislink’s ownership, Pebble Beach contributed £1.1m of operating profit on revenues of £3.1m. That contribution exceeded the targets set by Vislink's management and is set to ramp up strongly from here, too. That's because the partnership will enable Harmonic to sell packages integrated with Pebble Beach products to the international broadcast market. Harmonic has already placed an initial order valued at £2m to secure products for onward sale in its integrated packages. The company is a major player in video delivery infrastructure and one that is predicted to generate group revenue in excess of $430m (£267m) this year.
This is one of the reasons why analysts Paul Hill and Gilbert Ellacombe at research firm Equity Development are predicting a “blow-out” second half for Vislink. But it is not the only one as the combination of better equipment volumes, licence sales, cost savings from cutting headcount by around 10 per cent (to generate savings worth around £1.6m a year), and a stronger order book should all contribute to a robust second half. Factoring in a second half contribution of £2.9m from Pebble Beach, analysts at Equity Development are predicting Vislink will report a 33 per cent rise in pre-tax profit to £6m on revenue of £64.6m to produce EPS of 4p. However, this is likely to prove too conservative in my view.
Jeremy Silewicz at Edison Investment Research expects the company to grow adjusted pre-tax profit by more than half from £4.5m to £7m in the 2014 financial year on 18 per cent higher revenues of £71m. If achieved this would translate into EPS of 4.6p. There could be upside, too, as in last week’s half-year results release the company reiterated its commitment to achieve 2014 operating profit of £8m through both organic growth and acquisition.
Expanding addressable market
Irrespective of the level of the growth achieved, what is clear to me is that by expanding its addressable market and reducing dependence on the £230m global broadcast contribution sector, where Vislink has a market share of around 20 per cent, the company’s earnings stream will become less susceptible to lumpy hardware sales in the traditional broadcast market (which disappointed in the first half) and more exposed to the more cash-generative surveillance, mobile broadcast and playout automation markets.
These new markets have stronger growth prospects, too. For example, the use of 3G, 4G and Wi-Fi networks in outside broadcasts means that the company’s new product offerings enable its customers to feed live streaming videos straight to websites, and far more cost effectively. This not only increases demand from traditional broadcasters who prefer to use lower-cost transmission mobile networks rather than expensive satellite links, but it also means that coverage can be increased.
Director buying supportive
The directors of Vislink can certainly see the potential for the company’s technology, and the upside from the Harmonic deal; executive chairman John Hawkins purchased 95,000 shares at 47.29p each post results and finance director Ian Davies acquired 50,000 shares at 45.35p. They are likely to prove shrewd purchases as the insiders clearly took advantage of some short-term share price weakness last week. Some profit taking post results was understandable to an extent as some traders banked quick-fire gains after Vislink's shares had run up 20 per cent following my buy recommendation at 43p ahead of the results release (‘Time to make the link’, 26 August 2014).
It’s worth noting that Vislink shares have now recovered most of the lost ground and, with the directors predicting a bumper second half, I see no reason at all why they should not achieve my conservative six-month target price of 60p, or the equivalent of 11.5 times 2015 EPS estimates of 5.2p. Equity Development is even more bullish, having upgraded its target price from 70p to 75p post results.
For a company set to grow normalised EPS by 50 per cent this year and next, a rating of 12 times 2014 EPS estimates and a price-to-book value ratio of 1.1 shout value to me. Moreover, there is a decent dividend if, as analysts predict, the full-year payout is maintained at 1.25p a share, implying a yield of 2.5 per cent. That seems reasonable to assume because with the £2m investment from Harmonic in the bank, and buoyed by a robust second-half showing, analysts believe Vislink could reverse a net debt position of £250,000 at the end of June to net funds of £2.6m by the December year-end.
Needless to say, priced on a bid-offer spread of 48p to 48.5p, and with 25 per cent upside potential to my 60p target price, I firmly believe that Vislink's shares continue to rate a strong buy.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
