The latest contract award is worth £5m with Trak Global, a leading UK based telematics business, and is an extension to an ongoing supply partnership under which Stadium produces Trak Global’s insurance telematics and usage-based insurance (UBI) units. The products are fitted to a vehicle and monitor individual driving styles taking into account factors such as acceleration, braking and speeding; encouraging insurance customers to adopt a safer driving style as it can benefit the level of the insurance premium.
Insurance Telematics, which underpins UBI, is one of the fastest growing machine-to-machine (M2M) vertical markets, with analysts at consultancy firm Berg Insight projecting compound annual growth rate (CAGR) of 42 per cent in the market between 2015 and 2019. To give you some scale of the business opportunity here, at present 9m vehicles in the US and Europe have UBI units fitted, and this is predicted to grow to 60m vehicles by 2019. But that would still only represent 12 per cent of the total car parc, highlighting the scope for significant growth thereafter.
This new contract will underpin the continued growth in Stadium’s Wireless division that was clearly evident in yesterday’s full-year results. Like-for-like sales in the technology products division surged by 33 per cent last year, mainly driven by the well-timed acquisition of United Wireless 18 months ago which has increased the company’s exposure to the design and manufacture of electronics for the high growth M2M wireless sector that supports wireless connectivity between devices. Berg Insight estimates that the global number of cellular M2M subscribers increased by 23 per cent during 2015 to reach 265m at the year-end - corresponding to around 3 per cent of all mobile subscribers – and is anticipated to grow annually at a similar rate in the next five years to reach 744m by 2020.
On this basis, cellular M2M network revenues are forecast to increase from €8bn in 2015 to €22.8bn, an area that chief executive of Stadium, Charlie Peppiatt is aiming to exploit. In fact, he has just returned from a 10-day trip to California where he sees “a huge amount of opportunity for business.” The sharply rising contribution from the Stadium’s Wireless business, combined with a maiden contribution from last summer’s Stontronics acquisition, a UK based maker and supplier of power units, explains why revenues from the company technology division surged by 92 per cent in the 12-month period to account for half of Stadium’s annual revenue of £53.9m. It’s higher margin too, accounting for 71 per cent of normalised operating profit of £4.6m, up from £3.2m in 2014, and helps explain why pre-tax profits last year surged by almost half to £4m.
Strong order book and higher margin mix
Expect Stadium’s technology products division to account for just under two thirds of the company’s revenues in 2016, guidance that looks well underpinned by a group year-end order book worth £19m, up from £15.5m at the end of June 2015, and that’s before accounting for the £5m Trak Global contract, and a power supply contract award for the new Raspberry Pi 3, a credit-card-sized single board computer from the Raspberry Pi Foundation. I understand from finance director Joanne Estell that trading in the 10 weeks since the year-end is ahead of last year giving strong credibility to forecasts from analyst Jon Lienard at brokerage N+1 Singer that Stadium’s current year revenues will rise by 15 per cent to £62m to deliver a 38 per cent rise in pre-tax profits to £5.5m and lift EPS from 9p to 10.9p.
On this basis, expect the dividend per share, which has just been hiked from 2.1p to 2.7p for the 2015 financial year, to be raised again to 2.9p. This means that the shares are rated on 11.5 times’ forward earnings and offer a prospective dividend yield of 2.3 per cent. In my view that’s a low rating for a company that’s exposed to some high growth areas of the electronics markets, winning new contracts, and has a strong order book to support earnings guidance.
There is the possibility of more corporate activity too given that net debt of £4.7m is relatively modest at 25 per cent of shareholders funds and Stadium has ample headroom on existing credit facilities. The fact that both the Stontronics and United Wireless acquisitions have proved themselves should be supportive of institutional demand for another equity raise if a larger bolt-on acquisition is considered too. Indeed, investors who participated in last summer’s placing and open offer at 110p (‘Powered up for gains’, 29 July 2015), an equity raise that funded the Stontronics deal, have done well.
It’s worth noting too that even though guidance is for development spend to be raised from £385,000 to £500,000 this year, the strong cash generation of the business should enable net debt to fall further to £4.3m as analysts predict even after factoring in the sharp rise in the dividend.
In other words, having increased total capital expenditure fourfold to £1.9m last year, Stadium is well placed to reap the full benefits of the investment as it’s clearly doing.
Upgraded target price
Trading on a modest 11.5 times earnings estimates, and having advised buying at 104p ahead of yesterday’s results (‘Exploiting market anomalies’, 1 February 2016), I remain very positive on the shares having initiated coverage when the price was 75p ('Switch onto the Stadium of light', 30 July 2014). In fact, reflecting current trading and contract wins, I have upgraded my target price to 150p, equating to 13.6 times 2016 earnings estimates, falling to a very reasonable 10.5 times 2017 EPS estimates of 13.9p. My target price could yet prove conservative. On a bid-offer spread of 118p to 122p, valuing the company at £44m, the shares rate a buy.
Please note that I have written two columns today, and eight so far this week, all of which are listed below.
MORE FROM SIMON THOMPSON...
I have written articles on more than 90 companies this year:
■ 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 Holdings: 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 the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small-cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p ('Investment company watch', 16 February 2016)
■ GLI Finance: Buy at 31p ('GLI Finance review offers potential for gains', 17 February 2016)
■ Trifast: Buy at 112p, target 140p ('Engineered for a higher rating', 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ Marwyn Value Investors: Buy at 190p ('Undervalued, cash rich investment, 18 February 2016)
■ Henry Boot: Buy at 220p; Moss Bros: Buy at 102p, target range 120p to 130p; Creston: Sell at 103p; Minds + Machines: Buy at 8.5p ('Changing places', 22 February 2016)
■ CareTech: Buy at 245p, target price 300p ('Asset backed, lowly rated property play', 23 February 2016)
■ WH Ireland: Buy at 90p, medium-term target 120p ('WH Ireland hit by FCA fine', 23 February 2016)
■ Stanley Gibbons: Sell at 44p ('Stanley Gibbons rescue equity raise', 23 February 2016)
■ Gresham House: Buy at 325p ('Gresham House spruces up forestry deal', 24 February 2016)
■ Avation: Buy at 140p ('Aircraft deliveries mask Avation's lift off', 24 February 2016)
■ Tristel: Take profits at 125p ('Investors spooked by bugbuster's sales slowdown', 24 February 2016)
■ Town Centre Securities: Buy at 305p, target price 350p ('Property income play with capital upside', 25 February 2016)
■ Capital & Regional: Buy at 60.25p, target 66.5p to 70p ('Short-term trading buy', 29 February 2016)
■ Cambria Automobiles: Buy at 83p, target 95p; Vertu Motors: Buy at 71.75p, target 85p to 90p ('Lowly rated car dealers motoring back', 7 March 2016)
■ Sanderson: Buy at 80p, target 90p ('Tapping into cloud based profits', 8 March 2016)
■ H&T: Buy at 195p ('A golden opportunity', 8 March 2016)
■ Software Radio Technology: Buy at 25p, target 40p ('Software Radio surges on huge contract win', 9 March 2016)
■ STM: Buy at 55p, target 80p ('Lowly rated, cash rich pensions play', 10 March 2016)
■ Plethora Solutions: Take profits at HK$0.079 ('On the takeover trail', 14 March 2016)
■ Somero Enterprises: Buy at 150p; target 185p ('A solid buy', 15 March 2016)
■ 32Red: Run profits at 150p ('32Red in the money, 15 March 2016)
■ Communisis: Sell at 44p ('Patience running short at Communisis', 15 March 2016)
■ Global Energy Development: Sell at 27p ('Global Energy plays waiting game', 15 March 2016)
■ Raven Russia: Sell at 30p ('Raven Russia battens down the hatches', 15 March 2016)
■ Stadium: Buy at 122p, new target price 150p (‘Switch on for bumper gains’, 16 March 2016)
■ French Connection: Buy at 42.75p (‘Return to profitability looms for chic operator’, 16 March 2016)
■ 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
