In fact, having issued a conditional buy recommendation on the shares at a price of 47p with an initial target price of 60p ('Going global', 2 February 2015), and seen the price hit an intra-day high of 59.25p on Friday, 6 March 2015, I now believe that they are poised to launch another attack on that 60p price level. I also feel that a run-up to the February 2014 high of 69.5p is on the cards too, and there could even be a chance of the 74p high from January last year being taken out. I have good reason to think this way as the fundamental case for investing is highly supportive.
Following a 28 per cent increase in fiscal 2014 EPS to 9.4¢ (6.8p), well ahead of analysts' expectations of 8.2¢ when I initiated coverage only three months ago, analysts are now predicting Globo's EPS could be as high as 12¢ in fiscal 2015, or the equivalent of 8.7p a share at current exchange rates. For a cash rich company on course to post EPS growth of 28 per cent for two years running, a prospective PE ratio of 6.5 is hardly exacting. It's not exacting either for a tech company with a growing US bias and one looking to boost that exposure by using a strong balance sheet - net funds are just shy of 8p a share - and improved cash generation to make complimentary bolt-on acquisitions.
Indeed, around 113 of Globo's employees are now located within its US operations, and the company continues to win contracts from big multi-nationals for its products. These include licensing its Go!Enterprise enterprise mobility management (EMM) product which enables employees to securely access their corporate intranet and any other internal web application through the secure mobile browser of GO!Enterprise Office; and access enterprise information such as email, files, contacts, calendar, tasks and notes from any mobile device.
Globo's market-leading mobile application development platform, GO!AppZone, is proving incredibly popular too as it enables organisations to develop highly secure, bespoke apps for a range of mobile operating systems. The company's revenues from EMM and mobile application development platforms almost doubled to €58m last year to account for more than half of Globo's trunover of €106m.
US lisiting to tap into overseas demand for shares
It's a high-growth story that US investors will shortly be able to tap into because in response to growing interest from over the pond, Globo has filed an application with the US Securities and Exchange Commission to issue a Level 1 American Depository Receipt (ADR) for trading on OTCQX International. The OTCQX quotation will be complementary to the London Stock Exchange Aim quotation, which will continue to serve as the principal trading platform for the shares. The ADR programme is being sponsored by The Bank of New York Mellon and will be created using the existing issued share capital of the company. In other words, Globo's growth story is going Stateside.
In my view, a business operating in a hot area of the tech sector, and one offering a robust earnings growth story, is likely to appeal greatly to US investors given the single-digit earnings multiple. A share price break-out above the 61.75p resistance level dating back to January 2014 now looks firmly on the cards and I have upgraded my short-term target price to 69.5p. Even then the shares would still only be trading on 10 times last year's reported earnings and only 7 times 2015 cash adjusted earnings. Trading on a bid-offer spread of 55.5p to 56p, I rate Globo's shares a buy.
Please note that I have taken into account the ongoing Greek sovereign debt bail-out situation when making this recommendation and also the fact that 15 per cent of Globo's revenues originate from Greece, including exposure to government departments.
Pittards fundraise worth taking up
Aim-traded Pittards (PTD:128p), a maker of leather products to retailers including Hermes, Nike and Marks and Spencer, has announced a placing and open offer to raise £5.6m net of expenses at 120p a share, a discount of 12.4 per cent to the share price prior to the announcement. It looks a sensible fundraise to me as £1.5m of the net proceeds will be used to help purchase the freehold of the company's operating site and premises in Yeovil for £3.6m. The balance of the consideration is being funded by a mortgage of £2.1m from Pittards' bankers, Lloyds.
Currently, the company pays £272,000 per a year in rent for the site, but the lease is due to expire in little over two years time. So by acquiring the freehold now, the company can secure its long-term future in the area without facing potential disruption to the business in the event of having to relocate. Moreover, it makes financial sense to do so as the combined interest and loan repayments are no more than the current rent payable in the early years of the mortgage, and will reduce thereafter. This means that there will be cash flow benefits and lower operating costs as interest payable on the mortgage will be significantly less than the existing rent bill. It's worth noting too that the cost of building a new 140,000 sq ft facility on an 8.1 acre site would be considerably more than the £3.6m acquisition cost of the Yeovil site.
Pittards also plans to use around £400,000 of the proceeds from the placing and open offer to settle deferred consideration due on the 2009 acquisition of The Ethiopia Tannery Share Company, the largest tannery in Ethiopia, and to buy out minority interests in a subsidiary. The remaining £3.7m of the capital raise will be used to develop and expand the business.
Financial flexibility
Importantly, the company's pro-forma net debt will fall from £7.6m at the end of 2014 to £6m post fundraise after accounting for the £2.1m new mortgage from Lloyds. Pro-forma gearing will be the equivalent of only 25 per cent of enlarged shareholders funds, down from 42 per cent at the last financial year-end. Importantly, with the benefit of a strengthened balance sheet, Pittards' board will have greater financial flexibility to develop its business, a fact that the directors acknowledge as four are subscribing for 112,500 shares. The placing of 4m new shares has been oversubscribed, over half of which have been placed with Downing Investments and just over 10 per cent with Artemis which currently holds 20 per cent of the issued share capital.
The open offer of 842,000 shares is being made on the basis of one new share for every 11 shares held and will raise a maximum of £1m for the company. True, the interests of existing shareholders will be diluted by around 28 per cent even if they take up their full entitlement, but eligible shareholders can make excess applications for shares in the open offer which will be satisfied on a pro-rata basis in the event of other shareholders not applying for their full entitlement. Given that Pittards' share price is 8p higher than the open offer price, I would recommend making an excess application under the open offer. Please note that this is not a rights issue so only shareholders holding the shares at close of business on Thursday, 7 May 2015 are entitled to apply for the discounted open offer shares. The closing date for the offer is 2 June 2015 and the new shares will be listed three days later.
Under Aim rules, broking house WH Ireland is unable to release its new forecasts due to the capital raise. However, the brokerage previously predicted Pittards will deliver an increase in pre-tax profits from £1.6m in 2014 to £1.8m this year based on revenues of £39.5m. So after adjusting for the cost savings on the Yeovil premises, and reduced interest costs, I believe Pittards should be able to increase pre-tax profits to £2m, or 25 per cent higher than last year. It could be more if the favourable currency tailwinds benefiting the company continue.
This means that based on an average issued share capital of 12.1m shares for fiscal 2015, I believe Pittards is capable of producing EPS of 13.3p this year. On this basis, the shares are rated on 9.5 times my EPS estimates, and on a 26 per cent discount to book value post fundraise. In my book that represent value, and with the company set to issue a positive trading update at today's annual meeting, and the business better funded which reduces the risk profile, I maintain my buy rating on the shares on a bid-offer spread of 126p to 128p. Please note I included Pittards as one of my Bargain shares portfolio for 2015 at the current share price.
Greenko share sell-off
Shares in Aim-traded shares in Greenko (GKO:70p), the Indian developer, owner and operator of clean energy projects, have endured a roller coaster ride since I initiated coverage at 138p ('Buy signal flashing green', 18 March 2013).
Having hit a high of 180p at the end of September 2014, Greenko's share price fell steadily thereafter and I subsequently downgraded my view to hold when the price was 104p after it became apparent that the operational progress the company has been delivering is being undermined by its capital structure ('Small cap updates', 31 March 2015). Clearly, some investors headed for the exit as Greenko's share price declined a further 20 per cent to 82.5p by the time analysts at brokerage Investec released a note in mid-April with a 150p revised target price.
In that note to clients, Investec's utilities analyst Harold Hutchinson noted: "We believe the recent share sell off reflects some shareholders' concern on Greenko's financing structure. This has been magnified by the potential conversion of the Government of Singapore (GIC) (which invested £100m in Greenko Mauritius in 2013) and Global Environment Emerging Markets (invested in 2009) minorities into ordinary shares in the near future. The original GIC investment at a subsidiary level offered re-assurance to ordinary shareholders in terms of capital commitment. The need now is for Greenko's capital structure to be simplified and organised to ensure a recovery in confidence of all shareholders."
Calculating the level of potential dilution
The issue of dilution to existing shareholders is the one I raised in my article at the end of March. That's because GIC has the right to exchange its 17.38 per cent interest in Greenko Mauritius into a minimum of 44.8m Greenko ordinary shares anytime between 1 July 2015 and 30 June 2017. However, the number of new ordinary shares to be issued is capped to prevent GIC from owning more than 29.9 per cent of Greenko's enlarged ordinary share capital. Greenko currently has 155.8m shares in issue.
So with Greenko's share price significantly lower than at the time when GIC made its original investment, then GIC could end up owning a minority interest in Greenko Mauritius as well as being issued with a slug of new equity in Greenko. Global Environment Emerging Markets (GEF) has the right to exchange its 14.09 per cent interest in Greenko Mauritius into a minimum of 29.1m Greenko ordinary shares anytime between 1 July 2015 and 30 June 2017.
To put the interests of both GIC and GEF into some perspective, Investec calculate that GEF's interest in Greenko Mauritius would convert into 75m new Greenko shares based on its present value of $113m (£75m) and using a share price on conversion of 100p; and 70 per cent of the GIC interest would be satisfied by the issue of 99m new Greenko shares based on a present value of its investment of $210m (£140m). But because of the 29.9 per cent shareholder cap, GIC would also retain an interest in Greenko Mauritius worth £40m. As a result, Investec have factored in a raised share count of 329m, up from 156m currently, assuming conversion occurs on 1 January 2016 and a share price of 100p being accepted by both GIC and GEF. This is significantly higher than Greenko's current share price.
It's possible that both GIC and GEF would accept conversion of their minority interests under these terms as it would enable Greenko to simplify its balance sheet and funding structure, remove the issue of dilution that is undermining sentiment, and enable investors to focus on the strong operational progress the company is actually making. Greenko's operating profit is expected to more than double from $55.6m in the 2014 fiscal year (nine month period due to change of year-end), to $121m in 2015, and $174m in 2016, according to analysts at both brokerage Arden and Investec.
An issue that needs addressing
The issue of GIC's and GEF's minority interests needs sorting out as soon as possible because the more Greenko's share price falls, the greater the potential dilution to its existing shareholders of which the top 11 institutions and investors control almost 80 per cent of the share registrar.
Clearly, a highly dilutive share issue is not in their interests and they should be doing everything in their power to avoid this. That's because the financial liability from these minority interests is now almost double Greenko's market value of £110m as a result of the slide in its share price, so unless Greenko's board can restore some confidence in its share price then existing shareholders face being diluted by well over 50 per cent.
That said, it's in the interests of both GIC and GEF to reach a compromise which in turn would enable Greenko's shares to re-rate to a more sensible valuation without investors fretting about being diluted any further. Also, it makes no financial sense for them to undermine the ability of Greenko's board to progress with its expansion plans as GIC and GEF are still only minority shareholders in Greenko Mauritius, owning less than a third of that subsidiary between them.
In the event of a compromise being reached, I feel there is upside for existing shareholders. That's because after factoring in a December 2015 year-end net debt figure of around $920m, an increased issued share capital of 329m shares - assuming of course that GEF and GIC accept conversion terms around 100p a share - then Greenko's enterprise value of $1.5bn (based on a share price of 100p) would still be only 8.5 times fiscal 2016 operating profit estimates and 7 times likely cash profits.
So if you followed my earlier advice I would hold onto Greenko's shares ahead of this summer's annual meeting and interim results in September as I believe that a positive announcement from the company's board on a resolution to the issue of the GIC and GEF minority interests could prove a watershed for its battered share price. It's worth noting too that the shares are now in extreme oversold territory (the 14-day relative strength indicator has a reading of only 20). Hold.
Please note that I published an article with all the share recommendations I have made this year at the end of last month.
■ 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
