Value share heading for growth?

At heart I would describe myself as a value investor, and over recent years I have tried to identify what I perceive to be value shares with good growth potential in the micro-cap sector. If you get the sums right, management prove to be competent, and you throw in a little bit of good fortune then the results can be spectacular.

Two relatively recent examples for me have been Avesco and Indigovision. Both have been multibaggers (I still hold Avesco), because I was fortunate enough to spot their potential whilst their shares traded below asset value. Whilst there were no guarantees that the companies would prosper (both made losses when I originally picked them up), I always felt that they had the potential to become profitable and show good growth with a medium to long term view. Fortunately in both instances that was exactly what happened.

I am hoping that I have now identified a similar opportunity, and in recent weeks I have been acquiring a holding in a company called Datong (DTE). There is a rather excellent article posted by 'hastings' on the ADVFN thread for the company which summarises all of the key details which made the company attractive to me. I am re-posting it below:-

http://www.cambridge-news.co.uk/Business/Private-Punter/Intelligence-on-Datong-shows-profits-wont-stay-under-cover-19022013.htm

The only details I would add are that current assets minus all liabilities amounts to £6.45m against a market cap. of only £5.2m (the company is debt free). NAV is almost twice the current market cap. at £10.3m. Cash on the balance sheet is £2.5m and the company is profitable and generating cash. In fact, if my calculations are correct, on last years figures the market cap. is less than five times the Free Cash Flow.

Add in the fact that the company announced in December that it had just secured a two year contract worth £7.5m then the company does appear to be very cheap. I'm not sure what proportion of that revenue will be booked this year, but given that total revenues last year were just £9.7m, it's certainly a significant contract.

To add some balance it's worth noting that results will probably be second half weighted for 2013, they don't pay a dividend (at the moment) and the p/e ratio (based on 2012 results) is about 13.

Their AGM is at the end of this month (28/02/13) and it will be interesting to see if there is any news about current trading.

As ever, no advice is intended or given and this is a micro-cap and all the usual caveats apply.

Back in profit after Avanti releases encouraging interims

Regular readers of my blog will remember that I bought shares in a company called Avanti Communications back in April 2012 for about £2.60 per share:-

http://michae1mouse.blogspot.co.uk/2012/10/speculate-to-accumulate.html

The share price subsequently rose towards £4, but following a concerted bear raid after releasing their final results the shares fell back below my purchase price. I didn't pick any more up, but I did retain my holding.

http://michae1mouse.blogspot.co.uk/2012/10/a-bear-raid-on-avanti.html

Quite frankly I have always considered this to be a high risk stock that could be prone to wild gyrations in it's share price until it starts to generate cash.

On Tuesday of this week, Avanti released their interim results and, touch wood, I 'm glad I've held on because I'm now back in profit and cautiously optimistic that my speculation could bring rich rewards.

In summary, the interims were very positive not least because they reported that they expect to be cash flow positive in the second half of this year. If indeed they do deliver on this promise then the bears will be running for the hills.

In the outlook statement they state that:-

"Sales momentum for HYLAS 1 and 2 continues to build very well with a Backlog of firm committed orders of GBP290 million giving us confidence that we will sell out our satellites in the timescales contemplated."

They also state:- "Sales momentum continues to build very well. We operate in rapidly developing markets in Africa and the Middle East which are showing very strong demand for our market-beating services, with several HYLAS 2 beams already fully sold."

So very positive all round. Furthermore, Avanti hope to list on the Main Exchange this year and Paul Johnson, a new non-executive director has just purchased £27,700 worth of shares.

It appears the scales have tipped in shareholders favour for now, but it always pays to be cautious with speculative investments like these where fortunes can turn on a sixpence.

I shall continue to hold whilst recognising the inherent risks.

For interest this weeks FT Weekend commented on Avanti as follows:-

"Satellite operator Avanti Communications was up 27.8 per cent after saying it expected to turn operating cash flow positive in the second half of the year. Management said it had invoiced all customers for a new satellite in January and added that contracts in the pipeline should be enough to meet its targets."

Densitron disappoints

Densitron issued a trading statement this week which greatly disappointed and took me by surprise. In early November the company had already issued a profits warning which indicated that they wouldn't meet market expectations. However, at the same time they said operating profit would be above that achieved in 2011.

The latest trading update now states that profit will be materially lower than 2011. Given that the previous statement was issued just two months before the year end, it doesn't instill any confidence in their ability to accurately forecast future trading.

The poor update was compounded by the reluctance of the parties involved in litigation against Densitron to enter mediation regarding a lease property at Wallsend, Tyne and Wear.

The share price nosed dived 20% on the news, but later recovered to end the day around 16% down.

The reason I was so surprised was that in recent days, volumes had been increasing and the share price steadily moving upwards. Rightly or wrongly I expected that news had possibly leaked that trading had picked up and a resolution to the lease litigation had been settled out of court. Given the lowly rating (a low single digit p/e ratio) that would have made the shares very attractive and the share price would no doubt have jumped a similar amount in the opposite direction (if not substantially more). However, if my aunt was my uncle as they say. Such are the vagaries of stock market investment from time to time.

Since I acquired shares in Densitron they have paid good dividends, and I hope these can be sustained despite the profit warning. They have a strong balance sheet with little debt. The p/e ratio is currently around 7, based on 2011 results, although clearly set to rise. They also own a 1.25 acre strip of land in Blackheath where they are seeking planning permission.

At the current share price, I would hope that there is little further downside, and that 2013 may bring better news. I'm also still a little intrigued with the sudden volume increase in recent weeks which moved the share price upwards, although this may amount to nothing. On balance I've decided to hold on to my shares and await developments during 2013 whilst (hopefully) receiving a healthy dividend payout.

Only time will tell whether or not this is a wise move.