More repeat buying opportunities

In late February, I initiated coverage when the shares were priced at 25p, noting at the time the unusual reason given by the directors for raising £20m in an oversubscribed placing and open offer ('Follow the smart money', 27 Feb 2017). That’s because Kromek didn’t need the money to fund its business, but the board wanted to bolster the balance sheet in order to strengthen its position when negotiating contracts with government bodies and original equipment manufacturer (OEM) customers.

My timing proved prescient as the heightened threat of terrorism following a spate of attacks has brought to investors’ attention one of Kromek’s products: 'dirty bomb' detectors. These are 10 times faster at detecting gamma and neutron radiation, and a tenth of the cost of conventional detectors. They are proving popular as security agencies used them to protect US President Donald Trump during his visit to Brussels in the summer, the New Jersey Port Authority in New York is now deploying them, and they have been field-tested by the US authorities in Washington DC. Furthermore, if the US government decides to roll out these detectors across up to 23 cities in the US, then each contract could be worth north of $10m (£7.8m), according to Kromek’s chief executive, Dr Arnab Basu. The company’s ability to fund such large contracts, if forthcoming, is clearly enhanced by having a chunky cash pile in the bank.

Importantly, Kromek keeps on winning contracts; the latest being a five-year award, worth a minimum of $5.3m, from an existing customer in the bone mineral densitometry sector for the incorporation of Kromek’s CZT-based detector modules in a new product. The contract will begin in the current financial year, supporting Mr Basu’s assertion that “as customers move away from legacy diagnostic systems, CZT-based detectors will become a core technology, and we anticipate being one of the major suppliers to this segment.”

The order also adds weight to market expectations of a near-40 per cent rise in Kromek’s revenue to £12.5m in the 12 months to the end of April 2018, an outcome that should see it achieve cash profit break-even on an underlying basis, according to analysts at Cenkos Securities and Equity Development. That’s because 60 per cent of the revenue projection is supported by a flow-through from the existing order book, a fifth is backed by repeat orders from customers, and only £2.5m is dependent on new orders.

So, having advised running profits after my 34p initial target price was hit (‘Four small-cap plays’, 3 Jul 2017), I feel the subsequent pullback in Kromek’s share price to just above the 26p major support level offers a repeat buying opportunity. Buy.

Priced for orbital gains

I also feel that there is a repeat buying opportunity in the Aim-traded shares of Satellite Solutions Worldwide, a satellite internet service provider offering an alternative high-speed broadband service. I first advised buying at 5.5p ('Blue-sky tech play', 21 Mar 2016), after which the price hit a high around 10p in March this year before profit-taking set in. I last rated the shares a buy at 7.25p (‘Four small-cap plays’, 3 Jul 2017), and there has been some important news since then.

This month’s acquisition of Quickline, a leading provider of fixed wireless broadband in the UK, for an initial consideration of £5m, of which £2m was satisfied in shares and the balance in cash from a placing that raised £8m at 7p a share, is worth noting for a several reasons.

Firstly, it adds 4,500 new customers, mostly schools and residential customers, in an area of the broadband market where Satellite Solutions previously had no exposure. Quickline has already been awarded a £2m grant by Broadband Delivery UK, part of the Department of Culture, Media and Sport, to support the rollout of superfast fixed wireless broadband in Lincolnshire, and is on the shortlist for a £20.5m grant to provide fixed wireless broadband in Yorkshire, with deployment expected in the second half of this year.

Secondly, Satellite Solutions can now tailor its offering of either a satellite internet service, or fixed wireless broadband, or a combination of both, to much larger potential addressable market. And thirdly, scaling up Quickline’s customer base and leveraging its installed asset base should deliver significant margin gains as revenues grow.

This explains why analyst Kevin Fogarty at house broker Numis Securities raised his cash profit estimate by £860,000 to £6.4m for the financial year to the end of November 2018 based on Satellite Solutions delivering revenue of £51.5m, or £3.8m more than previously forecast. So, even allowing for an increased share count following the placing, this implies a pre-tax profit of £1.9m, and fully diluted EPS of 0.21p, or 12 per cent higher than prior forecasts. There should be upside to these estimates, too, as £2m of the placing proceeds have been earmarked to finance further acquisitions, and £2m will fund growth opportunities for Quickline.

The good news gets better still. That’s because French president Emmanuel Macron has announced plans to accelerate the rollout of universal high-speed broadband coverage across the country, with the existing target of 2022 brought forward to the end of 2020. Satellite Solutions has 12,000 customers in France, making it one of the largest independent satellite broadband providers. Mr Macron stated that the rollout cannot be done by fibre alone, so the 2m households that cannot be connected economically to the fibre network will now have broadband delivered through a combination of satellite, optical fibre and mobile internet. This can only be supportive of Satellite Solutions’ business.

Importantly, the insiders have significant skin in the game as six directors participated in the placing, taking their stakes to 13.8 per cent of the share capital. I think their lead is worth following, especially as the current rating of 9.5 times 2018 cash profit estimates to Satellite Solutions’ enterprise value implies 45 per cent share price upside to my fair valuation of the equity. Please note that the half-year results are out on Thursday 31 August, and the pre-close update was in line with Numis’s estimates that suggests cash profits will quadruple to at least £4.5m in the 12 months to November 2017. Buy.

Exploiting currency volatility

I have been taking another look at currency manager Record (REC:46p), having included the shares in my 2015 Bargain Shares Portfolio when the price was 34.3p, since when the board has paid out dividends of 5.45p a share, including a special payout of 0.91p a share earlier this month, alongside the 1.175p final payout for the financial year to the end of March 2017. The dividend was a key bull point in my original analysis, and that’s still the case.

Indeed, Record’s board has taken the view that with the balance sheet robust, assets under management at record levels and revenues from passive hedging mandates now covering all of the company’s £11.7m of overheads excluding variable remuneration, it can be more generous with the payout, so much so that the 2.91p total dividend last financial year equated to all of the company’s reported EPS. The board also sanctioned a £10m tender offer of shares at 44.79p each, buying back 22.3m of the 221.4m shares in issue at the end of July. The total cash return was around £14.6m including the final and special dividends, but this still leaves Record with a cash surplus of £13.1m on its balance sheet, a sum worth 6.5p a share, after setting aside £8.9m of its cash pile for regulatory capital.

The company now has 199m shares in issue, and as the tender offer took place just four months into the financial year to the end of March 2018, this has the effect of reducing the average share count for the 12-month period to 206m shares, or 5.5 per cent fewer than the weighted average of 218m used in the 2017 financial year. That’s worth noting because when I covered the full-year results in early summer ('Check into small-cap value plays', 20 Jun 2017), analyst Rae Maile at house broker Cenkos Securities was forecasting a £1m rise in Record’s current-year pre-tax profit to £8.9m based on revenue increasing from £23.6m to £25.5m. On that basis, Mr Maile was pencilling in a 10 per cent increase in EPS to 3.2p. However, with fewer shares now in issue, and hardly any change in interest income due to the paltry returns earned on cash on deposit, this means that if Record hits Cenkos’s profit numbers then EPS could rise to about 3.4p, implying 17 per cent year-on-year growth.

So, effectively, the shares are being rated on 11.6 times likely cash-adjusted EPS after stripping out Record’s own cash of 6.5p a share, factoring in the reduced share count, and using a stable corporation tax charge of 21 per cent. Moreover, with cash set to build up again with profits, this could offer upside to Cenkos’s dividend forecast of 3.2p, which factors in a full payout of earnings. But even if the payout per share is only raised from 2.9p to 3.2p, the prospective dividend yield is still attractive at 6.9 per cent.

Importantly, there are reasons to expect greater interest in currency hedging strategies in the coming months as the US central bank looks to start an unwinding of its $4.5 trillion (£3.5 trillion) balance sheet, having achieved the objectives set out when it unleashed an unprecedented bond buying programme to flood the monetary system with liquidity after the 2008 global financial crisis. The rhetoric from the European Central Bank (ECB) is also being closely monitored by currency investors who have been betting that the pick-up in economic activity across the eurozone will spur the ECB into adopting a less accommodative approach to monetary policy, and possibly at its next meeting on Thursday 7 September. The single currency has risen 12 per cent against the dollar so far year, and has pummelled sterling, too.

The bottom line is that the large swings we have been witnessing in foreign exchange markets over the past year look set to continue, and that’s supportive of demand for Record’s currency hedging strategies. Add to that a modest rating, attractive dividend yield, and a share price within touching distance of this summer’s seven-year high of 48p, and I see potential for a chart break-out. Offering 30 per cent upside to my new target price of 60p, equating to 15 times cash-adjusted earnings estimates, Record’s shares rate a buy.

Bango a trading buy

Aim-traded shares in Bango (BGO:225p), a provider of a state-of-the-art mobile payment platform that enables smartphone users to charge purchases made in app stores straight to their mobile phone account, rallied strongly after I last advised buying at 191p (‘On the upgrade’, 18 Jul 2017), hitting a high of 275p before profit-taking set in. To an extent that’s understandable as the price had almost trebled since I first advised buying at 93p ('Bang on the money', 26 Sep 2016). Interestingly, the buyers returned around the 200p level, and justifiably so as we can expect a robust trading update when the company reports half-year results on Tuesday 19 September 2017.

In fact, with the exit run-rate of end-user spend processed through Bango’s payment platform hitting £300m at the end of June, up from £195m at the start of the year and well on the way towards analysts' year-end exit run-rate of £352m, the likelihood of Bango achieving run-rate break-even in the fourth quarter is well underpinned. I maintain my 300p target price and rate Bango’s shares a buy.