Surgical Innovations

Those of you who take a peek at my blog on a regular basis will be aware that until relatively recently I was a shareholder in a company called Surgical Innovations. I bought shares in SUN for just below 2p and sold them for over 10p, crystallizing a fivefold profit in just over a year.

Whilst I could and can see a very bright future for this company, I was more than happy with my gains, and stated at the time that whilst I could see potential upside in the SP over the medium to long term, I felt it unlikely that the SP would multi-bag again in such a short time period.

Surgical Innovations released their interim results today, and there is nothing in the report that would lead me to change my mind.

The shares took a hit today and are now trading below my sell price. On the face of it, the results are disappointing with both revenues and operating profits falling against the comparable period last year. However, a one-off industrial contract did flatter last year’s figures, and there has been a temporary reduction in OEM orders due to the phasing of larger orders. This largely masks an excellent 29% revenue increase in SI branded products, and an impressive 7% improvement in margins. Basic earnings per share at the interim stage are 0.12p.

The company is confident that growth prospects will be achieved in 2012 and 2013, and current trading is encouraging with strong customer demand.

Previous broker forecasts for 2011 are for an EPS of 0.6p. Given the improvement in margins, and the expected progress in the second half, this doesn’t look too outlandish. This gives a forward P/E ratio of 17.5 (SP 10.5p at time of writing). The market capitalization is about £40m with a NAV of approximately £11m. Revenues at the interims came in at £3.2m with a profit before tax of £474,000.

Great little company, great prospects for growth going forward, but at this stage in its development it looks fairly priced to me.

As I mentioned in a previous blog, Surgical Innovations will remain on my monitor, and I may reconsider buying again on any significant SP weakness.

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.