The company concerned is IMImobile (IMO: 160p), an Aim-traded technology business that listed on the London junior market a year ago and is a provider software and services to help clients to communicate and transact with their customers more effectively on mobile devices. IMImobile’s products allow businesses to use mobile as a channel to create new revenue streams, as a customer relationship management and customer engagement channel, and improve their business operations.
The company has more than 100 major customers in over 60 countries across Europe, the Americas, Middle East, Africa and India including some of the largest mobile telecom network operators in the world (Vodafone, Telefonica and Orange). The client base also includes governments, media companies and over 8,000 small and medium sized enterprises. Key customers include Centrica, Coca-Cola, the AA, the BBC and major financial institutions.
In terms of the product offering, IMImobile's DaVinci suite of products is modular, scalable and delivered through cloud infrastructure which is integrated into mobile operator networks, internet services and social media platforms. Its products and solutions have helped IMImobile establish a blue-chip client base of global enterprises. Headquartered in London and with regional head offices in Hyderabad, Atlanta and Dubai, the operation now employs 680 staff worldwide. It is highly profitable and fast growing too.
Sound financial record
In the financial year to end March 2015, results of which were released at the end of June, the company delivered a 28 per cent increase in cash profits to £9.2m driven by a 12.5 per cent rise in revenue to £48.9m. After accounting for a £2.44m non-cash depreciation and amortisation charge, this resulted in a 31 per cent increase in pre-tax profits to £6.7m and a 53 per cent rise in fully diluted EPS to 8.9p.
The company generated £8.2m of cashflow from operating activities which bolstered net funds to £14.6m, or 30p a share, by the March year-end. That’s after funding the £8m net cash outlay last autumn to acquire TexTLocal, a cloud based, mobile messaging business predominantly targeting SMEs in the UK. It’s proved a smart deal too. That’s because if TextLocal had been acquired at the start of IMIMobile’s financial year it would have contributed £7.5m of revenue and a profit of £1.2m before share based payment charges.
Moreover, after factoring in a full 12-month contribution of TextLocal this fiscal year, the full benefit of new contract wins and IMImobile’s impressive track record of generating compound annual revenue growth of 14 per cent over the past five years, analyst Eric Burns at broking house W.H. Ireland predicts pre-tax profit will rise again to £8.4m on revenue of £59m in the fiscal year to end March 2016. On this basis, EPS increases by 15 per cent to 10.2p which means the shares are being rated on 13 times current year cash adjusted earnings estimates. That seems a very reasonable valuation to me, a view the company’s house broker concurs with as Mr Burns has a target price of 187p, a valuation that would give the company a market value of £90m and represents a multiple of around 10 times cash profit estimates of £10.6m to IMImobile’s enterprise value (market value plus net funds).
I would point out that the founders of IMImobile own ‘B’ shares which can convert into 11.3m ordinary shares and this is not reflected in the issued share capital of 48m on which the EPS estimates are based. That said, there is no doubt that IMImobile is doing well, a fact that investors are warming too as its shares have risen by a third to 160p since listing on the Alternative Investment Market in June 2014. They have also ripped ahead by 50 per cent since the end of April this year as eagled eyed investors exploited the valuation anomaly with peers in the software space.
It’s therefore rather unusual to be able to buy the shares at almost 40 per cent below the current share price, but I have found a smart way of doing so. Let me explain.
Spark due a re-rating
As regular readers of my columns will be aware, I successfully followed Aim-traded investment company SPARK Ventures (SPK: 4.5p) a few years back. Having first advised buying the shares three years ago ('The spark for a re-rating', 10 Jul 2012), I subsequently crystallised a 85 per cent gain on the holding after accounting for cash returns when I called time at the start of last year (‘Sparks fails to ignite’, 6 January 2014).
It proved the right decision in hindsight as SPARK’s share price was 9.25p at the time, so even after adjusting for a further cash return of 4.5p a share in May 2014, the holding has failed to generate positive upside in the past 18 months. However, having gone through the company’s fiscal 2015 accounts, it is clear to me that investors are missing a trick. That’s because the company is now in the final stages of completing a divestment programme that started in 2009 and has so far seen the company realise £54m from its portfolio and return 13p a share to its shareholders.
Since the company’s March 2015 year-end, the board have agreed to sell-off off all its nine remaining small private equity shareholdings to Hollyport Secondary Opportunities IV Unit Trust for a total of £3.7m, or £600,000 less than their combined book value. Five of these nine investments have so far completed to realise £2.8m and boost SPARK’s cash pile to just shy of £9m, including £3.1m of restricted cash that is expected to be released shortly. This only leaves SPARK with the four remaining private equity investments worth £900,000 and a shareholding of 10.5m shares in IMImobile that has a value of £16.8m, or £4m more than the holding was valued at SPARK’s March 2015 fiscal year-end. It also means that the company’s spot net asset value is closer to £26.6m, rather than £22.6m in its fiscal 2015 accounts.
From that figure you have to deduct an incentive fee due to the company’s investment manager which is earned when assets are sold and all the proceeds are returned to shareholders. To quantify this fee, if the entire holding of restricted cash and IMImobile shares was turned into free cash at current valuations, the manager would be due an incentive fee of approximately £2.4m. On this basis, SPARK’s pro-forma net asset value is nearer £24.2m, or 5.8p a share based on 418.8m shares in issue net of the 31.1m shares held in Treasury. So after accounting for a £2.4m incentive fee to the company’s investment manager, SPARK will shortly have net cash of about £7.6m, or 1.8p per share.
This means that with its shares trading on a bid-offer spread of 4p to 4.5p, valuing the company at £18.8m, the 10.5m shares in IMImobile are in effect only being valued at £11.2m or 106p each. That’s almost 40 per cent below the current open market price.
Of course, SPARK still has to realise the full value of the IMImobile shareholding which was subject to a 12-month lock-in following the flotation. This restriction only expired three weeks ago. The company is also incurring a management fee of £100,000 and staff costs of £50,000 each quarter which will eat into the aforementioned cash pile.
But it’s clear to me that there is value here. Indeed, once SPARK announces a further cash return in due course, then I expect its share price to mirror that of IMImobile more accurately and for the unwarranted share price discount to book value to narrow markedly. It’s also worth pointing out that the company has value as a shell company once all the asset sales are complete and cash is returned to shareholders given that it has substantial tax losses and a valuable Aim-listing too. I have not valued this in my pro-forma valuation, but it could easily add 0.5p a share or around £2m to the valuation.
Trading strategy
It’s worth noting that it is possible to deal between the bid-offer spread on the shares and in decent bargain sizes too. I would therefore recommend buying SPARK’s shares up to a maximum price of 4.75p to provide a margin of safety. If the market makers raise their offer prices then simply hold back and wait for them to drift back. This investment has potential to reap a 25 per cent return, and perhaps even more, over the next six months if you are disciplined. Buy.
MORE FROM SIMON THOMPSON...
At the end of April, I published an article with all of the share recommendations I have made this year. Since then I have published articles on the following companies:
■ Marwyn Value Investors: Buy at 220p, target price 260p ('Exploiting a value play', 5 May 2015)
■ Pure Wafer: Buy at 113p, target 140p to 150p; Paragon: Run profits at 440p, but buy on a confirmed breakout above the 445p and new target of 500p; 600 Group: Buy at 16.5p, target 24p; Fairpoint: Buy at 127p, target 190p; AB Dynamics: Buy at 207p, target 230p ('Repeat buy signals', 11 May 2015)
■ Globo: Buy at 56p, target 69.5p; Greenko: Hold at 70p; Pittards: Buy at 128p ('Breakout looms for mobile wonder', 12 May 2015)
■ Macau Property Opportunities: Buy at 214p; Dragon-Ukrainian Properties & Development: Hold at 28p; Raven Russia: Hold at 53p ('Overseas property plays', 13 May 2015)
■ Trakm8: Run profits at 135p; Redde: Buy at 120.75p, target 140p; STM: Run profits at 45p, but conditional buy on close of 48p and new target of 60p ('Smashing target prices', 14 May 2015)
■ Bilby: Buy at 75p, target 100p ('Buy to build' growth play, 18 May 2015)
■ Bioquell: Buy at 148p, target 170p to 185p; Somero Enterprises: Buy at 140p, target 185p; KBC Advanced Technologies: Buy at 109.5p, target 165p; Inspired Capital: Hold at 14.25p ('Three value plays', 19 May 2015)
■ Renew Holdings: Buy at 315p, target range 350p to 375p; Manx Telecom: Buy at 198p, target 210p ('Renewing old acquaintances', 20 May 2015)
■ Marwyn Value Investors: Buy at 228p, target 260p; Charlemagne Capital: Hold at 13.5p; Bloomsbury Publishing: Hold at 178p ('Lights, camera, action', 21 May 2015)
■ Anite: Buy at 91.5p, target 110p ('Testing a breakout', 26 May 2015)
■ Character Group: Buy at 415p, target 525p ('Playtime', 1 Jun 2015)
■ Tristel: Run profits at 96p; Pure Wafer: Buy at 123p, target range 140p to 150p; Crystal Amber: Buy at 153p ('Hitting target prices', 2 Jun 2015)
■ B.P. Marsh &Partners: Buy at 150p, target range 170p to 180p; Moss Bros: Buy at 110p, target range 120p to 130p; SeaEnergy: Sell at 15p ('Exploiting a valuation anomaly', 3 Jun 2015)
■ Globo: Buy at 59p, target 69.5p; London & Associated Properties: Buy at 38.5p; Greenko: Hold at 44p ('Catalysts for share price moves', 4 Jun 2015)
■ Burford Capital: Buy at 148p, target 190p ('Legal eagles', 8 Jun 2015)
■ Market strategy ('Financial Market Watch', 9 Jun 2015)
■ Software Radio Technology: Buy at 29.5p, target 40p to 43p; Tristel: Run profits at 92p; Creston: Buy at 136p, target 150p; Sanderson: Buy at 69p, target range 80p to 85p ('Blue sky potential', 10 June 2015)
■ 1pm: Buy at 67p, target 80p; Vislink: Buy at 58p, target 70p ('Small-cap growth stocks', 11 Jun 2015)
■ Elegant Hotels: Buy at 105p, target 135p to 140p ('Checking into an elegant investment', 15 Jun 2015)
■ First Property: Run profits at 45p; AB Dynamics: Run profits at 225p and target 250p; Inspired Capital: Sit tight at 20p (Bargain shares updates', 16 Jun 2015)
■ Trakm8: Run profits at 159p, new target 180p; Anite: Sit tight at 126.75p; Trifast: Run profits at 129p, target 140p; Record: Buy at 37p ('Small cap wonders', 17 Jun 2015)
■ Inland: Run profits at 71p, target 80p; KBC Advanced Technologies: Buy at 110p, target 165p; Caretech: Buy at 237p, target 300p ('Riding an earnings upgrade cycle', 18 Jun 2015)
■ Ensor: Buy at 97p, minimum target 125p ('Building up for a takeover', 22 Jun 2015)
■ GLI Finance: Buy at 54p, target 80p; Pittards: Buy at 128p; Netplay TV: Buy at 9.5p ('A triple play of small cap picks', 23 Jun 2015)
■ Bilby: Run profits at 97p; Safestyle: Run profits at 220p; Epwin: Run profits at 134p ('Soaring small caps', 24 Jun 2015)
■ Faroe Petroleum: Buy at 86p, target 100p; Greenko: Hold at 65p; Communisis: Buy at 48p ('A slick investment', 25 Jun 2015)
■ Mountview Estates: Buy at 12,250p; Inland: Run profits at 71p, conservative price target ('Running bumper profits', 29 Jun 2015)
■ Redde: Run profits at 138p, target range 150p to 155p; Trakm8: Buy at 175p, target 200p; Cohort: Buy at 312p, target 365p; Burford Capital: Buy at 175p, target 190p; Flowtech Fluidpower: Buy at 135p, target 155p ('Riding earnings upgrade cycles', 7 Jul 2015)
■ Crystal Amber: Buy at 161p; Stanley Gibbons: Buy at 258p; Somero Enterprises: Buy at 150p, target 185p; Globo: Buy at 49p, target 69.5p ('A quartet of small-cap buys', 8 Jul 2015)
■ H&T: Buy at 200p; STM: Buy at 47p, target 60p; Stadium: Buy at 113p, target 140p ('Exploiting upgrades', 9 Jul 2015)
■ Cambria Automobiles: Buy at 57.5p, target 75p ('Driving a re-rating', 13 Jul 2015)
■ Walker Crips: Buy at 47p, target 60p; 600 Group: Buy at 18p, target 24p; Henry Boot: Buy at 235p, target 260p ('A trio of small cap value plays', 14 Jul 2015)
■ Bilby: Buy at 90p, target 120p; 32Red: Buy at 67.5p, target 90p; Marwyn Value Investors: Buy at 244p, target 275p (‘Acquisitions drive earnings upgrades’, 15 July 2015)
■ Vislink: Buy at 53p, target 70p ('Awarding success', 16 July 2015)
■ 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'
