Datong up for sale. Markets overheating?

I don't expect it will happen too often that I write about a company in which I have recently invested on a Wednesday, and on Friday they declare that they have received an approach by a potential offeror for the company. However, that's exactly what happened with Datong this week.

As always with my stock picks, I try to buy the shares when I perceive them to be cheap, so I don't suppose it should come as any surprise when other companies recognise that this is the case and make an offer for the entire share capital.

Over the medium to long term I was hoping that Datong would become a multibagger, but if they do receive a good offer for the company then that's fine since it will inevitably be at a significant premium to the price I have been paying to acquire shares.

The share price finished Friday at 48.5p, a jump of nearly 25%. I expect that if an offer does materialise then further substantial gains are to be had, although it should be emphasised that the sale process is at an early stage and there are no guarantees that an offer will materialise.

At this stage it's impossible to say what a potential offer could be pitched at. I would argue that it's worth NAV plus a mutiple of future earnings (bearing in mind that they have just secured a £7.5m contract to be delivered over two years). In this case a price above £1 is not unreasonable. However, an offeror might argue that they will pay let's say 20 times last year's earnings about 60p or around NAV 74p.

Given that the company has put itself up for sale, I am hoping for two or three interested parties to create a bidding war which will ultimately lead to the best price (closer to my figure), but as I've said they might not get any bids at all.

I shall hold all of my shares regardless of what happens since even at 48.5p the shares remain undervalued.

On other matters, I notice that some of the pundits are predicting a market correction. I say, who cares, unless you trade the indices? As a long term investor and stock picker I'm only ever concerned whether or not the stocks I hold are undervalued or overvalued, if it's the former then I continue to hold and acquire and if it's the latter then I sell.

However, to add my own two-penneth, I would say this. Certain stocks have clearly run ahead of themselves, and judging by the general euphoria and self-congratulation on the bulletin boards, I anticipate one or two are in for a nasty surprise. It appears that certain companies have had a rapid run up in their share price linked to recovery prospects and improving economic conditions. However, all indications are that economic recovery both domestically and globally is going to be slow progress, and some results are likely to disappoint in the near term.

That said, the financial crisis and global recession of recent times was an extremely unusual event, the dot-com mania in reverse, if that makes sense. In my view there will be some market pull-backs (there always is), but for what it's worth given that global growth has hardly got back into first gear, I suspect that the current bull market will last far longer than even some of the most optimistic analysts predict. 

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."