Third quarter results for Avesco and other updates

Avesco released their third quarter results today, and they certainly didn’t disappoint. The underlying growth story remains firmly intact, and in my opinion this is still a hidden gem.

Whilst the final results will give a clearer and fairer picture of progress, the nine month comparatives point towards a company that is steadily growing organically and has a very bright future.

Trading profit for the nine month period virtually doubled from £1.7m in 2010 to £3.2m this year, whilst the operating profit of £2.8m has increased more than four-fold. Diluted EPS comes in at 6.1p with an adjusted figure of 7.9p.

The nine month figures also appear to indicate another slight improvement in margins to around 34% (about 33% last year).

Clearly, the company has achieved significant growth this year which is even more impressive given that last year they benefitted from the Shanghai Expo, the Football World Cup and the Winter Olympics.

If you dig a bit deeper into the report, you will see that all three divisions (Creative Technology, Full Service and Broadcast services) were profitable. CT and FS are the most indicative of the underlying progress since they are less dependant on the major events; both produced a significant uplift in profitability, with CT producing a 21% increase in revenues and a 120% increase in operating profits. Broadcast services benefits the most from the even year effect, and will almost certainly show a huge uplift in revenues and profitability next year.

Ian Martin the Chief Executive commented:-

 “The Avesco Group enjoyed another period of strong growth during the nine months ended 30^th June 2011, with further progression in revenue growth and profitability.

Looking towards 2012, we expect to benefit significantly from the “even year effect”, notably with the inclusion of business generated from the European Football Championships and the London Olympics. In addition, we have a full 12 months’ contribution from a number of multi-year projects that we have begun during 2011”

I have highlighted the last sentence since this appears to be something I wasn’t personally aware of, but which looks significant.

It is amazing to think that Avesco is still valued at a 24% discount to its tangible net asset value which currently stands at £1.50 per share. The possible payout from Disney is approximately £1.40 per share.

Essentially this profitable and growing business with revenues well in excess of £100m is being accredited with having no value (apart from its assets). It must still be one of the most undervalued companies on the market.

In other updates, Zetar’s Finance Director has bagged himself £20,000 worth of shares in the company at prices around the £2.50 mark.

DCD Media appear to have secured their short term future, with the help of one of their major shareholders, through the issue of convertible loan notes and Subscription Shares. Existing shareholders will see their holdings significantly diluted. Taya Investments, another major shareholder, are noticeable by their silence. Taya were once rumoured to be a possible bidder for DCD Media. They don’t strike me as a company that would be happy to see their 20% stake significantly diluted by this funding proposal. This story may yet have further to run?

Your m8 , my m8, TRAKM8

In one of my previous blogs, I wrote an article about the significance of Director buying entitled “Put your money where your mouth is”.

I do like Directors to own a fair chunk of their own businesses, and I’m always interested when they buy or sell.

This month I noticed that the Directors of a company called Trakm8 had bought 400,000 shares between them, which collectively takes their holding in the company to around 46%. Notably, the two Directors that purchased the lion’s share were the Finance Director and the Sales Director.

After some research, I decided to join them.

From their website, “Trakm8 designs, develops, manufactures, supplies and supports vehicle tracking, fleet tracking and GPRS/GPS tracking products and services. The company provides both hardware and software telematics solutions.”

I think that the market may be missing the underlying growth story here, and may have been mislead by what appears to be a drop in EPS from 3.1p (March 2010) to 1.1p (March 2011).

This is one of those instances where the EPS is not the most reliable indicator of the progress a company has made.

The difference in the EPS figures is accounted for by a substantial tax credit in 2010, as opposed to a tax charge in 2011. This masks the excellent underlying growth.

Revenues grew by 22% to £4,186,000 and operating profit 19% to £329,000. Profit before tax increased 23%.

What is also impressive is that they increased cash balances from £427,000 to £1,119,000, gross margins were 66.6% and the NAV increased to £2,236,000 (includes £1.2m of intangibles). The market capitalization, when I last looked, was around £2.7m. This certainly doesn’t look expensive given the growth prospects and balance sheet.

Further attractions include contracts secured with Jewson and the AA (over the past year or so), a significant jump in monthly recurring revenues from 49.9% to 61.7%, and relatively low borrowings at £184, 491 (reduced from £223,265 the previous year).

The Chairman’s outlook states that “The board is confident that the revenues and profitability growth of the group can be continued over the next 12 months”.

The current p/e ratio is about 13, and my conservative forecast puts the company on a forward p/e of around 10. This seems mean given the growth prospects.

A couple of bear points might include

1)       The Company not paying a dividend. They prefer to reinvest their growing cash resources into the business and look for suitable acquisition targets.

2)       The illiquidity of buying their shares.

Overall, it looks an interesting story, and if growth continues over the next two to three years then the share price has substantial upside potential.

As ever, time will tell.

Will you fall in love with Cupid's growth story?

For those of you who like growth companies, here's an interesting story. Cupid is essentially a global on-line dating company achieving rapid growth through acquisition. The company, which joined AIM in June 2010,  released it's half-year results today and exceeded market expectations. Revenues were up by 189% at £25.4m with 53% of the total achieved outside the UK.  EBITDA increased to £5.7m, a rise of 137% and they have £8.4m cash on the balance sheet and no debt.

Cupid are building a truly global presence, and establishing a strong foothold in the North American market.

Monthly revenues now exceed £4.5m per month, which projecting forward should produce a figure in excess of £52.4m for the full year. EPS at the interim stage was around 4p, and broker's forecast's come in at about 9p for the full year. However, I could easily see them achieving 10p+ for 2011 giving a forward p/e of around 24.

The Chief Exec's statement is very bullish:- "We are in a very strong position and remain confident that we will grow value for shareholders in 2011 and beyond. The market for our services is global and growing and we are well placed to take advantage of the numerous opportunities that exist".

It's a truly impressive growth story so far, and I will be keeping a careful eye on the SP and future developments. However, I shan't be buying at the current share price. 

At heart I 'm a value seeker, and my issue with growth companies is that forward p/e ratios of 20+ don't leave any room for mistakes. Essentially growth has to continue at the heady pace expected by the company and the market. Cupid currently has a market cap. of £200m which is about ten times its net asset value (including intangibles). Without a dividend and/or sufficient asset backing then any hint of slowing growth can have a catastrophic effect on the SP. I'm not that brave.

That said, if I was to have a punt on a growth company in the expectation that they could continue to produce impressive figures, then Cupid would certainly be of interest. The very nature of their business appears ripe for consolidation and rapid growth, and I can see the story running for many years to come.

In conclusion, and perverse though it may sound, whilst I can't justify buying Cupid's shares using my strict (largely value based) criteria , a gut feeling tells me that I might be missing out on the next ASOS like growth story here?

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