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Amino tunes into growth from disruption

Despite its growth and dividend prospects, Amino’s earnings multiple remains undemanding
August 23, 2018

Estimates from Grand View Research suggests the pay-TV market could be worth $255bn (£200bn) by 2025 – up from $211bn in 2016. This would seem to be excellent news for network operators. But television has also been transformed in recent years by the rise of on-demand, ‘over-the-top’ (OTT) content platforms such as Netflix (US:NFLX) and the 'cord cutting' experienced by incumbents. To stay relevant, telecoms and cable companies must find cost-effective ways to offer programmes any time, anywhere and across multiple devices.

IC TIP: Buy at 184p
Tip style
Speculative
Risk rating
High
Timescale
Long Term
Bull points

Well-positioned to capitalise on changing TV market

Strong revenue visibility

Robust balance sheet with no debt

Undemanding rating

Bear points

Revenues impacted by customer order phasing

Industry-wide pricing pressures dampening gross margins

That’s where Amino Technologies (AMO) can help. Amino enables internet protocol TV (IPTV), providing hardware (internet-connected set-top boxes) and software (the business regards itself as software-led) to help operators meet modern-day consumer requirements. Amino was working with more than 250 operators in more than 100 countries as at May 2018. It uses its own technologies to integrate with third-party platforms, and to deploy software remotely to “upcycle” operators’ expensive-to-replace, legacy hardware.

But even though Amino should benefit from TV’s progression towards an 'all IP', cloud-based future, it trades on a forward price/earnings ratio (PE) of just 11 times. True, sales can be lumpy, it has some large competitors and big tech companies have ambitions in this space. However, we think now is an attractive time to buy, especially as some recent setbacks should only be temporary.

First, a change in order phasing by a major operator in North America – Amino’s largest market – meant revenues from devices (including integrated software) dropped 21 per cent to $36.6m for the half-year to May 2018. This reduced group sales by 17 per cent to $41.2m. That said, reassuringly, this weaker performance simply reflected a return to Amino’s traditional seasonality with a greater second-half weighting. Management maintained full-year guidance – its confidence accentuated by a 10 per cent dividend hike.

Amino has also faced industry-wide pricing pressure on certain device components, dampening its adjusted gross margin from 44 per cent to 42 per cent. Such pressures look set to continue into the second half. However, it is working to soften the blow via supply chain management. And an increasing focus on software-as-a-service (SaaS) sales should help drive margin expansion as well as providing re-rating potential. In fact, revenues for standalone software and services rose 24 per cent to $4.6m, representing 11 per cent of total sales.

These software sales also improved revenue visibility, with annual run-rate recurring revenues up 27 per cent to $4.7m. Such visibility was further buoyed by a 40 per rise in orders. More than three-quarters of expected full-year revenues were booked by the interim stage.

Amino swung to a small first-half loss due in part to a $1.6m charge relating to the rationalisation of its research and development centres. But this should add to the group's allure as an asset-light business given its model of outsourcing hardware manufacture, which was reflected in 93 per cent first-half adjusted cash profits conversion to adjusted operating cash. The cash could, perhaps, support future acquisitions.

AMINO TECHNOLOGIES (AMO)  
ORD PRICE:184pMARKET VALUE:£134m
TOUCH:183-185p12-MONTH HIGH:221pLOW: 175p
DIVIDEND YIELD:4.4%PE RATIO:11
NET ASSET VALUE:94¢*NET CASH:$15m
Year to 30 NovTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
 41.75.17.35.5
Year to 30 NovTurnover ($m)Pre-tax profit ($m)Earnings per share (¢) Dividend per share (p)
201610212.718.66.1
201796.115.222.66.7
2018***10515.519.27.3
2019***11017.021.08.1
% change+5+10+9+11
BETA:0.34   

*Includes intangible assets of $58.1m, or 80¢ a share

**FinnCap estimates and $ conversion for 2016 and 2017, adjusted PTP and EPS figures

Beta: 0.34

Normalmarket size: 1,500

£1 = $1.27