- Full-year cash profit up 12 per cent to $9.3mn
- Adjusted pre-tax profit up from $2.8mn to $4.8mn
- Potential for M&A activity and divestments
Technology group BATM Advanced Communications (BVC:19.25p) is undergoing a corporate reorganisation, restructuring non-core activities and prioritising its core cyber security, network solutions and diagnostics activities.
As part of the new strategy, the directors have engaged investment banks in both Israel and the US to explore corporate activity to add to the group’s capabilities, and to secure attractive terms for disposals.
BATM closed the 2023 financial year with net cash of $31.7mn after deducting $4.5mn of lease liabilities and $4.6mn of bank debt, so has ample firepower available for acquisitions. It is also scaling up sales and marketing functions.
In the short term, the increased investment will impact profit, hence why analysts at house broker Shore Capital reined in their 2024 cash profit estimate from $13.5mn to $9.4mn. This implies a flat performance year on year. However, analyst Robin Speakman notes that there is scope for “better forecast outcomes and so upgrades are also real and high from this point”.
Bearing this in mind, the group’s cyber division secured $32.4mn of new orders in 2023, increased revenue 76 per cent to $10.3mn and quadrupled cash profit to $2.4mn, or a quarter of the group total. One of the orders from a long-standing defence department customer was for BATM’s latest high-performance encryption platform. The $26mn contract will be delivered over the next five years, and the directors expect to receive further orders for the technology in the current year.
Moreover, BATM is ramping up its high-margin edge computing and network function virtualisation software product suite, Edgility. Having been awarded two five-year orders with a leading provider of emergency connectivity services in North America to support critical public infrastructure, BATM’s management expects to receive further orders from the client as it’s rolled out across other US states and the Asia-Pacific region. The product is also undergoing evaluation and successful proof-of-concept trials with leading network operators and systems integrators. In 2023, the group’s networking division (which includes Edgility) quadrupled cash profit to $1.7mn.
Diagnostics division offers growth potential
Admittedly, the group’s diagnostic division reported 9 per cent lower annual cash profit of $3mn on flat revenue of $33.3mn. However, adjust for Covid-19 product sales, which boosted the 2022 result, and divisional revenue increased by a fifth.
Interestingly, BATM’s directors highlight strong interest in two new molecular diagnostics instruments. The first provides laboratory clients with an integrated, compact, cost-effective nucleic acid detection system based on the real-time polymerase chain reaction (PCR) method. The second helps automate the manual library preparation process for an advanced technology used for DNA and RNA sequencing and variant/mutation detection.
In addition, BATM has been strengthening its distribution operations and conducting a sales and marketing campaign for diagnostic clients who have been awarded government funding. It should lead to tenders, which management is confident of winning orders from.
Of course, firm orders will be needed for investors to warm to the investment case once again, having seen analysts’ 2024 earnings expectations materially lowered since the interim results (‘Contract wins mean this cyber stock is now a buy’, 29 August 2023). Valued on eight times cash profit to enterprise valuation of $75mn, and 10 per cent below book value, the rating is about right for now. Hold.
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