In a pre-close trading update this week, the board revealed that challenging conditions for Vislink's Communications Systems business, and the broadcast hardware market, combined with a back-end loading to revenues due to the timing of some new products launches, albeit they have been well reviewed, means that some sales from this business may fall into early 2016, rather than in the financial year to end-December 2015. As a result, the company's new guidance is that revenues could be anywhere between £54m and £58m in 2015. Analysts Tintin Stormont and Oliver Knott at brokerage N+1 Singer believe that this translates into operating profit of between £4.5m and £6.7m, but are cautiously taking the low-case scenario, implying full-year pre-tax profits of £4.2m, a forecast matched by analysts Paul Hill and Hannah Crowe at equity research firm Equity Development.
To put this downgrade into perspective, when Vislink reported adjusted pre-tax profit of £2.2m on revenues of £26.6m in the first half of this year, Equity Development expected Vislink to report a 3 per cent rise in pre-tax profits to £7.3m on flat revenues of £62m in 2015. Analysts at N+1 Singer were even more bullish and thought the company would report profits £400,000 higher than Equity Development's forecast at the time. So if full-year pre-tax profits come in at £4.2m, as analysts at both research firms now believe, then the profit shortfall is more than £3m. It also means that at the low end of the new profit range we can expect adjusted EPS of 2.5p, rather than the previous consensus estimate of 4.8p, representing a hefty 29 per cent decline on the adjusted EPS of 4.1p reported in 2014.
Taking the long view
Despite this massive profit miss, there are positives. Firstly, the dividend of 1.5p a share looks safe as Vislink's net debt is predicted to be £6.5m at the end of this year, so is well within a revolving credit facility of £15m. Balance sheet gearing is 12 per cent of shareholders' funds of £54.8m. In fact, the board is looking at making a bolt-on acquisition to augment its Pebble Beach business (see below), something it wouldn't be doing if finances were stretched. At the current share price of 28p, the historic dividend yield is 5.4 per cent.
Secondly, VCS has successfully restructured its business and annualised cost savings of £2.5m are expected to be reaped in 2016. This gives some reassurance that divisional profits from the VCS unit, compromising surveillance and broadcast businesses, can recover to £5.7m in 2016 from £4.1m this year, as predicted by Equity Development. The forecast for 2016 is based on a 5 per cent rise in divisional revenue to £47.7m. Bearing this in mind, the 2016 Rio Olympics and the US Presidential elections, combined with the increasing need to deploy real-time mobile surveillance for public safety should provide a supportive backdrop for revenues to recover next year.
Thirdly, Weybridge-based Pebble Beach Systems, a developer and supplier of automation, 'channel in a box' and content management services for TV broadcasters, cable and satellite operators, continues to perform well. It recently announced a major order of approximately $2m (£1.3m) with Scripps Group, a leading US developer of high-profile content for lifestyle media platforms including television, digital, mobile and publishing; and its first order for Orca, an IP-enabled software-defined integrated channel, which runs on a virtualised platform. Analysts at Equity Development believe the division should be able to turn in 2015 operating profit of £3.3m, and are pencilling in 10 per cent growth in 2016 after factoring in contract wins.
So after factoring in the restructuring benefits, assuming a modest recovery in VCS's revenues, and continued growth in Pebble Beach, analysts are predicting Vislink's pre-tax profits could recover to somewhere between £6m and £6.3m in 2016 based on group revenues of around £58.4m. This implies EPS in a range of 3.6p to 3.7p and a forward PE ratio of less than eight. That's inexpensive.
Of course, it's only reasonable that investors are adopting a more cautious stance given the scale of the profit miss. The cyclical nature of advertising spend that underpins the income of broadcasters who represent Vislink's customer base is another risk to earnings. Also, a controversial share scheme the directors awarded themselves in the summer ('Awarding success', 16 July 2015) has not been well received. That said, with Vislink's share price trading 60 per cent below the 70p threshold required for the directors to financially benefit from the scheme, then the chances of them reaping windfall gains anytime soon are remote to the say the least. To do that they will have to bring the company back to growth.
That's something I am fully aware of having first recommended buying the shares at 43p ('Time to make the link', 26 August 2014), and last updated my view when the price was 40p ('Building momentum', 29 September 2015). So, having weighed up the investment case, I feel that the current depressed valuation - the shares are priced 37 per cent below book value and on a multiple of five times cash profits to enterprise value - more than factors in the negative factors I have outlined above, and I am happy to recommend that you hold onto the shares for recovery if you followed my earlier advice.
Please note that for a limited period of time, my book Stock Picking for Profit is being offered for sale at a promotional price of £11.99 plus postage, subject to availability, full details enclosed below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ First Property: Run profits at 47.5p ('Investing for bumper gains', 30 Nov 2015)
■ Paragon: Run profits at 384p; Redde: Run profits at 174p; Fairpoint: Run profits at 175p ('Capitalising on investor overreactions', 1 Dec 2015)
■ LMS Capital: Tender your pro-rata allocation ('LMS tender on the money', 1 Dec 2015)
■ Vertu Motors: Buy at 78p, new target range of 85p to 90p ('In the fast lane', 2 Dec 2015)
■ MS International: Run profits at 210p, target bull market high of 240p ('Engineered recovery', 2 Dec 2015)
■ Mountview Estates: Buy at 11,500p ('Mountview's accounts reveal hidden value', 2 Dec 2015)
■ Character: Buy at 485p, new target 600p ('Playtime for a popular Character', 2 Dec 2015)
■ UK housebuilding sector: Buy and hold until end March 2016 ('Time to start building once more', 7 December 2015)
■ GLI Finance: Recovery buy at 35p ('Refinancing for GLI Finance', 9 December 2015)
■ Ensor: Hold at 90p and await news of disposals; Renewable Energy Generation: Await capital payout of 60p a share in January 2016 ('M&A updates', 9 December 2015)
■ Non-Standard Finance: Buy at 89p and take up open offer; Arbuthnot Banking: Buy at 1,530p, break-up value 2,200p ('Speciality finance plays', 9 December 2015)
■ Bilby: Buy at 132p, new target range of 150p to 160p (‘Bilby set for new highs’, 10 December 2015)
■ 600 Group: Hold at 13p, medium-term fair value target of 24p (‘European markets hit 600 Group’, 10 December 2015)
■ Vislink: Hold at 28p (‘Vislink’s sales fall short’, 10 December 2015)
■ For a limited period and strictly subject to stock availability, Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com at a special promotional price of £11.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
