Priced for profitable outcomes

The Israel-based technology group is now gaining significant traction in commercialising its valuable intellectual property, as I noted after BATM signed up its first tier 1 telecoms customer for its NFVTime virtual networking solution (‘Bull market pointers’, 1 September 2020). Operating on both Arm-based and Intel-based architectures, the cutting-edge technology enables network carriers to remotely deploy their own virtualised software-based networks. Analysts at house broker Shore Capital believe that revenue from this one customer alone could scale into a multi-million dollar recurring base over the next five years. NFV is critical in leveraging the benefits offered by 5G and the Internet of Things, so expect many more tier one customers to adopt the technology in due course.

BATM’s medical laboratory systems business is firing on all cylinders, too, having just received an initial €4.3m (£3.9m) order for its Covid-19 Real-Time PCR diagnostic antigen test kits and instruments from a major global private laboratory group. BATM expects to receive “further significant orders from this customer during the current quarter and over the next 12 months”. In addition, the directors have updated investors on the progress being made on a raft of new diagnostic kits.

BATM’s new multi-pathogen respiratory molecular diagnostics kit is in the final validation phase, with production and deliveries expected to commence shortly. In less than an hour the test can identify and differentiate between respiratory viruses including those that cause Covid-19, flu and the common cold. As the flu season approaches, this could be a game changer for medical authorities around the world. BATM is also commencing production of its new at-home test kit for flu, developed in partnership with Novamed, after being CE certified and validated. Finally, BATM has started to deliver its Covid-19 antigen kit, which has been upgraded to detect the spike (S) protein, thus providing more accurate results by identifying the virus even in those with a low viral load. This is important in preventing non- and pre-symptomatic individuals from unknowingly spreading the infection.

It’s my strong view that revenues and profits from BATM’s high-growth segments will ramp up sharply in the coming years and in the process dramatically reduce BATM’s enterprise valuation to cash profit multiple of 42 times (based on 2020 estimates). The positive growth trends at work here also justify maintaining my buy recommendation even though the shares have already delivered a 540 per cent gain since I included them in my 2017 Bargain Shares portfolio. A return to this year’s 150p share price highs, and beyond, is not unrealistic. Buy.

RBG reinstates guidance

RBG (RBGP: 68p), a professional services group that owns law firm Rosenblatt, a nascent litigation funding arm and specialist finance boutique Convex Capital, has reinstated guidance and now expects 2020 revenue to be £24m to £26m, up from £23.7m in 2019.

As I noted when I covered the half-year results (‘Investments for the new normal’, 17 September 2020), the trading backdrop remains favourable for Rosenblatt’s legal eagles, who specialise in litigious/contentious work. That’s because economic crises increase the need for the specialist legal advice the firm offers, and downturns lead to an increase in instructions on white collar crime & fraud. Analysts at house broker N+1 Singer are forecasting that Rosenblatt will generate £20.1m of annual revenue this year.

Since the interim results, RBG’s litigation finance arm LionFish has concluded £1.1m of asset realisations and N+1 Singer expects a further £1.9m of realisations before the year-end from the sale of stakes in ongoing cases. In addition, Convex has received a £1.2m fee for arranging the sale of Nutravet, a fast-growing family healthcare company. Convex is working on more than 20 live deals, of which eight are at an advanced stage and underpin aggregate revenue of £4m.

Assuming a further £1.5m of fees earned from Convex in the second half, N+1 Singer’s upside case scenario suggests RBG could deliver 2020 revenue of £26.3m, pre-tax profit of £6.4m and earnings per share (EPS) of 6.2p. Even in its base case scenario for 2021, expect pre-tax profit of £7.2m on revenue of £26.9m to deliver EPS of 6.8p. The higher profitability reflects a larger contribution from Convex.

On a forward price/earnings (PE) ratio of 10, and offering an income, too – the board paid out a 5p-a-share dividend in 2019 and will make a decision on the 2020 dividend when the full-year position is clearer – the shares continue to rate a buy, trading at my 68p entry point (Alpha Report: ‘Back a winning legal team’, 2 June 2020). I maintain my 100p target price. Buy.

Time to dial back into Pelatro

The modest rating of Aim-traded Pelatro (PTRO:41.5p), a company that makes its money by providing telecoms operators with precision marketing software, is completely at odds with the guidance given by the directors at the half-year results.

Pelatro uses 'big data' analytics to reveal patterns, trends, associations and behavioural traits of subscribers. In turn, this insight enables telecom operators to monetise their data, boost average revenue per user and increase their share of subscriber spend. Adopting a more customer-centric approach to marketing also reduces churn rates.

In the first half, underlying cash profit would have been flat at $0.8m (£0.6m) excluding an adjustment of $0.15m on deferred consideration liability. Revenue was 16 per cent lower at $2.3m, but this reflected the non-recurrence of $0.25m-worth of consulting work and was a robust result given Covid-19-related delays to new contracts. More importantly, the current order book supports revenue of $5m for the full year, but this excludes a newly signed five-year contract worth $1.5m.

Moreover, managing director Subash Menon points out that $4m of the 2020 pipeline of $8m is from existing telco customers for various new modules and products, such as cross-selling opportunities where Pelatro is the only contender. These projects have a high probability of being signed off. Mr Menon also adds that “their businesses, while impacted to some extent due to Covid-19, are quite resilient due to the higher level of usage of data by their consumers. Most have moved online as have educational institutions and a variety of other activities. This has resulted in considerable increase in data consumption [by both individuals and enterprises], leading to higher revenue from data products offered by telcos”. This dynamic can only be positive for converting Pelatro’s total bid pipeline of $15m over the next 12 months.

At the same time, the board’s strategic move to generate a higher level of recurring licence fee income is improving the quality of Pelatro’s revenue stream. In the first half, about 82 per cent of software and managed service revenue was repeat business. A £2.1m placing over the summer is being used to strengthen the sales team and fund working capital for the managed services operation. In turn, this is enabling the company to tender for larger contracts.

House broker Cenkos is maintaining forecasts that point towards 2020 revenue increasing by 10 per cent to $7.4m to deliver flat cash profit of $3m (£2.3m). Deduct forecast year-end net cash of $3.4m (£2.6m) from Pelatro’s market capitalisation of £15.5m, and its enterprise valuation equates to less than six times cash profit. That’s hardly an exacting rating for a company boasting a bumper bid pipeline and one that now processes data for 19 telecom operator clients around the world with more than 800m subscribers.

After I last suggested buying the shares at 50.5p the price subsequently rallied by almost 50 per cent to 73.75p before succumbing to profit taking (‘Six small-cap buys’, 22 June 2020). I feel that a similar rally could be on the cards, making this a repeat buying opportunity. Buy.

Chariot outlines ESG credentials

Aim-traded shares of Chariot Oil & Gas (CHAR:3.79p) are little changed from when I upgraded my view from run profits to speculative buy (‘Chariot’s North African adventure’, 17 April 2019). However, investor appetite for pure oil and gas exploration and production plays certainly has changed since then. That’s because consumer preferences for energy consumption have shifted dramatically towards more sustainable, clean, renewable and alternative fuel-driven solutions to demand. At the same time, retail and institutional investors now apply environmental, social and governance (ESG) principles to portfolios. Companies that fail to adapt risk becoming irrelevant.

Chariot’s new management team has taken note and the company is now effectively an out-and-out play on the Anchois gas discovery in Morocco, located 40km offshore in 388m-deep water, after taking a hefty impairment charge on assets (Namibia and Brazil) in the interim results. Importantly, Anchois offers the company strong ESG credentials as an enabler of Morocco's aim to transition to renewables and increase the use of gas in power generation. Coal still accounts for two-thirds of the country’s power generation, but gas is a growing component as part of the national strategy to reduce imports and transition to lower-carbon energy.

Bearing this in mind, much of Morocco’s installed power capacity is in the form of underutilised combined cycle gas turbines. Connection into these installed power stations could be achieved through the nearby Mahgreb-Europe gas pipeline, thus enabling Chariot to build a high-performing business supplying a reliable source of cheap energy to the population of a power-hungry, growing economy. The Anchois gasfield is a huge resource to meet this demand as a new independent audit by Netherland Sewell and Associates estimates it has 361bn cubic feet (bcf) of 2C contingent recoverable resources, and 690bcf of 2U prospective resources. It’s commercially viable, too, as highlighted by indicative pricing of $8/mmbtu (power generation) and $10-11/mmbtu (industry) based on other operators in Morocco.

Chariot is currently engaging with potential off-takers both within the domestic Moroccan gas market, and through the Maghreb-Europe pipeline to the European gas market. It is also in discussions with a variety of parties for the provision of development debt finance. House broker FinnCap estimates that $300m to $500m of funding will be required to get the project to first gas. Clearly, signing up European and domestic gas buyers is a pre-requisite for Chariot to raise debt funding. The company has time on its side as it is fully funded through 2021, having cut annual cash overheads by 45 per cent to $2.5m. Closing cash was $5.8m (£4.5m) at end-June 2020.

Admittedly, the shares are highly speculative, and investors have endured a rollercoaster ride since I included them, at 8.29p, in my 2017 Bargain Shares portfolio. The reason the holding has still produced a 39 per cent return on that entry point is because I subsequently top-sliced two-thirds at 17.5p ('Bargain Shares on a tear', 3 April 2017), thus offering a free ride on the balance before I turned buyer again 18 months ago.

However, if you can stomach the risk, there is undoubtedly material potential upside on offer as highlighted by FinnCap’s risked net asset value of $153.5m (£118m) for the Anchois gas field, a sum equating to 31p a share, or eight times Chariot’s current share price. The point is that any positive newsflow on securing agreements with gas off-takers – the directors describe negotiations as “encouraging” – and securing project finance with institutional lenders, should see shares in the £14m market capitalisation company take off. Speculative buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

Special offer: Both books can be purchased for the special price of £25 plus discounted postage and packaging of only £3.95. The books include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential, too. Details of the content of both books can be viewed on www.ypdbooks.com.

Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.