This news overload can offer an investment opportunity to those willing to do the leg work and scour the London Stock Exchange's regulatory news service. And that's exactly what I have been doing. From my lens at least, investors have clearly failed to realise its significance of an announcement from Vislink (VLK: 41p), a global technology business specialising in the collection and delivery of high-quality video and data from the field to the point of usage.
An exciting strategic alliance
It's an important one too because Nasdaq-quoted GoPro (US: GPRO), the world's number one manufacturer of high-performance and rugged cameras, has entered into an exciting strategic alliance with Vislink to help it develop a new professional grade, live, high-definition broadcast solution for its most advanced camera yet, the HERO4. GoPro has a market value of $6.7bn and generates annual sales of $1.3bn (£860m).
GoPro's chief executive and founder Nick Woodman is aiming to put one of his cameras on every player in professional sport, enabling viewers at home to watch their own chosen coverage on a second or third inset screen through the red button while simultaneously watching the main action live too. It's no mean feat to achieve, but having worked with Vislink on a transmitter that is small enough to be mounted and worn under the most extreme conditions, the product was showcased last week at the Winter X Games in Aspen, Colorado.
Analyst Tintin Stormont at broker N+1 Singer points out that GoPro cameras are already used extensively in professional applications, worn by athletes or mounted on gear during televised events, but so far the footage has been restricted to a post-production workflow with memory cards being shuttled back to the outside broadcast truck to provide a look back at the action. This new solution is the first time official GoPro products have been used to transmit the action in high definition, allowing for integration into a live television broadcast. Analysts Andy Edmond and Paul Hill at research provider Equity Development note that it's not just an endorsement of Vislink's cutting-edge technology, but the partnership - which will be formally signed following further product testing - could also generate substantial revenues.
Step change in profitability
Analysts at both companies are maintaining their fiscal 2015 forecasts, but in my view the contract with GoPro not only underpins those estimates, but offers scope for upgrades as this year progresses. N+1 Singer predicts another step change in profitability, pencilling in pre-tax profit of £7.4m on revenue of £71.1m in 2015. Equity Development has the same revenue forecast, but is looking for profit nearer £7m.
Before then Vislink is scheduled to release its full-year results at the end of March. They are likely to make for a good read as analysts expect a blow-out second half that will see adjusted pre-tax profit soar by as much as 50 per cent to £6.6m in 2014, according to N+1 Singer, on the back of a 13 per cent rise in revenue to £68m. That's hardly a performance that warrants a share price rated on just 10 times likely post-tax earnings for 2014, falling to nine times 2015 estimates. There is a decent income for shareholders, too, because even if Vislink's board only maintain the dividend at 1.25p a share then the dividend yield equates to 3.2 per cent. That dividend looks safe; not only is it covered by EPS more than three times over, but Vislink has the benefit of an ungeared balance sheet so is not constrained by its finances.
Importantly, the agreement with GoPro is further recognition of Vislink in this niche industry, a point I noted when I last reviewed the investment case after Nasdaq-quoted Harmonic Inc (US: HLIT), a worldwide leader in video delivery infrastructure for emerging television and video services, acquired 4m new Vislink shares at a price of 50p ('Insider buying signals', 9 Sep 2014). Harmonic also announced a strategic five-year partnership with Vislink's subsidiary, Weybridge-based Pebble Beach Systems, a leading developer and supplier of automation, 'channel in a box' and content management services for TV broadcasters, cable and satellite operators.
Currency tailwinds to boost earnings
It also seems lost on investors that the strengthening of the US dollar against sterling is very good news for Vislink as the company generates 90 per cent of sales outside of the UK. Around a third of the company's total revenue is from the Americas, so the 12 per cent fall in sterling against the greenback since the start of July will have a positive impact on the profit generated from these operations on translation.
Moreover, I expect further dollar strength in the year ahead as investors prepare for a normalisation of interest rates in the US, while the first base rate hike in the UK could be delayed until next year if, as seems likely, the rate setting Monetary Policy Committee (MPC) of the Bank of England decide that the slump in the UK inflation rate - largely due to the collapse in the oil price - is not conducive to a base rate rise even though there is evidence of tightening wage pressures in the labour market. Either way, at the very least you should expect the £400,000 currency headwind Vislink suffered in the first half of 2014 to be completely reversed this year as it now benefits from a strong currency tailwind. To put this into some perspective, the current exchange rate of £1:$1.50 is a hefty 12.7¢ below the average rate of £1:$1.627 for 2014, a fact I feel is not priced into current earnings estimates for 2015.
Investors are also failing to recognise that the oil price slump is in effect a tax cut for consumers who will enjoy higher net disposable incomes as a consequence. It's also good news for advertisers and broadcasters. And although the terrorist attacks in Paris were sickening, a direct consequence of them is to raise the need to further increase government surveillance, a market Vislink caters for by manufacturing microwave radio, satellite transmission, cellular and wireless camera systems for defence, law enforcement and public safety.
Risks and rewards
Of course there are risks to any investment. Investing is never a one-way street. In fact, having initiated coverage on Vislink when the price was 43p ('Time to make the link', 26 Aug 2014), and seen them hit a high of 51.75p, they have subsequently fallen back to below my buy-in price. So why have the shares underperformed?
There is always execution risk with acquisitions and Vislink has its fair share to integrate. However, there is nothing to suggest that these are underperforming. If anything, they are outperforming as was clearly the case with the performance of Pebble Beach when the company reported its half-year numbers.
I also feel that Vislink is well resourced enough to be able to meet analysts' growth assumptions without the need for an equity raise or fundraisings in the debt markets, so an imminent fundraise should not be deterring investors' appetite for the shares. So perhaps the lacklustre share price performance is more to do with the fact that investors became wary of small-cap cyclical companies last autumn during the stock market shake-out and attribute a greater possibility to another downturn, even if this was unwarranted. Vislink's products are closely linked to trends in advertising given its dependence on broadcasters and it still has a 20 per cent market share of the global broadcast contribution sector where hardware sales can be lumpy. The company is also relatively small, so there may be concerns that it could be squeezed out by large rivals and, of course, there is a risk that the adoption of new products may take longer to gain traction.
If this indeed is the case, and I am struggling to find a sensible reason for the share price performance since the autumn, then these concerns are being overplayed in my view. For starters, the company's operations are now far more exposed to the more cash-generative surveillance, mobile broadcast and play-out automation markets, all of which have strong growth prospects. The alliances with GoPro and Harmonic clearly show the potential for the company's technology here.
In addition, the use of 3G, 4G and Wi-Fi networks in outside broadcasts means that Vislink's new product offerings offer a cost advantage to its customers when feeding live streaming videos straight to websites. If anything, this boosts demand from traditional broadcasters who prefer to adopt lower-cost transmission mobile networks rather than use expensive satellite links.
Exploit a price anomaly
I can only conclude that Vislink's shares are being anomalously priced and the forthcoming full-year results will act as a platform to allay the unfounded concerns that investors may have with its business. If am right, then it's worth buying in ahead of the release of a likely bumper set of figures at the end of March to take advantage of the mispricing. The directors have faith as the chairman and finance director each bought 95,000 and 50,000 shares, respectively, at prices around 47p and 45p, post release of the half-year results. Offering 50 per cent upside to my 60p target price - below the 75p target of Equity Development - I rate Vislink's shares a strong buy on a bid-offer spread of 40.5p to 41p.
Funded for profitable growth
Vislink is not the only small-cap company I follow that has been punching above its weight. Aim-traded property fund manager First Property (FPO: 34p) has just entered into a fund management agreement with an existing pension fund client, the Shipbuilding Industries Pension Scheme (SIPS), to establish and manage a new UK property investment fund. The client has committed at least £125m into the new fund for a minimum of 10 years. The unleveraged fund will target a total net return of 7 per cent or more by investing in all commercial and residential property sectors.
To put this award into perspective, First Property had £163m of assets under management at the end of September, excluding the USS mandate which expires in August. So it not only raises the company's profile, but should earn around £500,000 of profit, too. Excluding this contribution, analyst Chris Thomas at Arden Partners believes First Property is now generating recurring pre-tax profit of £7.1m and EPS of 4.4p, so depending on how quickly the SIPS fund can be invested then there should be upside to these estimates in time.
So, having upgraded my target price to 38p to 40p at the end of last year, I have no hesitation in repeating my buy advice on the shares which still offer a 3.5 per cent forward dividend yield and are priced on a modest premium to underlying book value.
Please note that I am working on my 2015 Bargain Shares Portfolio and the feature will be published in the magazine of Friday 6 February and online well before the markets open. I will update my view on all the constituents of my 2014 portfolio at the same time. Once I have completed work on the feature I will update a number of the companies on my watchlist which have issued trading updates recently, including Arbuthnot Banking (ARBB); Secure Trust Bank (STB); 32Red (TTR); KBC Advanced Technologies (KBC); Greenko (GKO); Flowtech Fluidpower (FLO); SeaEnergy (SEA); K3 Business Technology (KBT); Safestyle (SFE); and Global Energy Development (GED).
■ Simon Thompson's 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 stockpicking'
