I first advised buying Amino’s shares at 83p ('Set up for a buying opportunity', 10 June 2013), recommended running profits at 137p (‘Riding bumper profits’, 22 February 2015), before upgrading my advice to a buy again after the company announced the earnings accretive acquisition of California-based Entone, a pioneer in IPTV and home video distribution. I discussed that acquisition in quite some detail at the time (‘Primed for major re-ratings’, 22 July 2015), highlighting that it represented a transformational deal for the small cap company by broadening Amino’s product offering and market reach globally across IPTV, hybrid broadcast and a range of connected home solutions. Strategically, it also fits in well with Amino’s prior acquisition of cloud-TV platform provider Booxmedia in May 2015 to service the needs of customers across a range of markets as they transition to cloud-based IP-driven multi-screen entertainment delivery.
A pre-close trading statement in December confirmed that the integration process is going well for both acquisitions and they are expected to deliver substantial cost benefits. This guidance was inline with that given in an October trading statement. However, in that autumn update, the board also flagged up that due to poor sales execution, revenues in the second half of 2015 would be below market expectations and that profits would be flat year-on-year. My colleague Theron Mohamed covered that warning in a very detailed article at the time when he rated the shares a buy (‘Connect to Amino’s growth’, 29 October 2015).
The major point worth noting is that Amino’s board have taken swift action to address the causes of October’s profit warning. Its sales team has been restructured to address the problems in execution experienced in the second half of 2015, and the new integrated sales operation across the Amino and Entone businesses is being led by Steve McKay. He was responsible for Entone's international expansion and successfully secured a number of Tier 2 customers, including Cincinnati Bell, in his former role as chief executive of Entone. The company now has a better sales focus in all key regions, with dedicated teams for Latin America and Europe and a new combined sales team for North America.
This is important because with Entone now integrated, and the sales effort more focused, then investors are more likely to focus on the organic growth prospects for the enlarged business and potential for raising margins in the Entone business.
A year of profitable growth
True, analysts at corporate broker finnCap downgraded their profit estimates for the 2016 financial year (November year-end) from £9.5m to £8.3m post October’s warning, but this still implies profits will rise by £4m in the 12 month period, a forecast well underpinned in my view. That’s because prior to the acquisition last summer, Entone posted operating profit of £3.3m on revenues of £30m in the 11 months to end May 2015, so the profit from this business alone covers almost 90 per cent of the forecast increase in profits.
Moreover, the company didn’t take on debt to fund the Entone deal as the initial cash consideration of £41.6m and £2.7m transaction costs was covered by £17.6m of net cash on Amino’s balance sheet, a £21m placing alongside the acquisition, and £7.7m net cash on Entone’s balance sheet. In fact, Amino has stated that it ended the 2015 financial year with net funds of £2.1m, three times higher than the estimate of brokerage N+1 Singer.
So after factoring in the 16.15m new Amino shares issued at 130p each last summer to take the issued share capital to 70.2m shares, finnCap now expect EPS to rise from 7p in the financial year to end November 2015 to 9.2p in the current financial year, albeit this is less than the 11.2p estimate at the time of the Entone acquisition. On this basis, Amino shares are rated on 13 times 2016 earnings estimates. There is also a hefty dividend as last year’s payout is expected to be raised by 10 per cent to 5.5p a share at next month’s results, and analysts at both N+1 Singer and finnCap predict a declared payout of 6.1p in the current financial year. On this basis, the prospective dividend yields are 5 per cent and 5.5 per cent, respectively.
In my view, if both the Entone and Booxmedia acquisitions deliver the sales uplifts as expected, and I understand that Booxmedia won major contracts with Belgian broadcaster RTL and Dutch utilities company DELTA in the second half of last year, then investors are likely to attribute a much higher valuation to the high yielding shares given the prospects for a return to earnings growth and a more stable recurring revenue stream from the enlarged operation.
Clearly, a warning is never good, but I believe the reasons for October’s alert were not structural, simply poor sales execution, something that has been subsequently addressed. I also note that some savvy fund managers have been increasing their shareholdings in the past couple of months including Schroders, Investec, Downing LLP and Kestrel Opportunities. Ahead of the forthcoming full-year results and trading update, I rate Amino’s shares a buy on a bid-offer spread of 116p to 120p and have a revised fair value estimate range between 155p to 160p, representing a 10 per cent ratings discount to Amino’s peer group. Buy.
Finally, I have published three investment columns today, and articles on 29 small-cap companies on my watchlist since the start of last week, all of which are available on my IC home page and are also listed in chronological order below.
MORE FROM SIMON THOMPSON...
I have written articles on the following companies since the start of last week:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in market at 183p (‘Tech watch, 13 January 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p (‘Tech watch, 13 January 2015)
■ Trakm8: Buy at 300p, new target 400p (‘Tech watch, 13 January 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p (‘Amino has the ammunition’, 14 January 2015)
■ easyHotels: Buy at 89p, initial target 100p (‘easyHotels ramps up expansion’, 14 January 2015)
■ Stanley Gibbons: Hold at 58p (‘Stanley Gibbons fundraise’, 14 January 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
