Amino Technologies - A Robust Setup

http://www.aminocom.com/

Amino Technologies Logo

Amino Technologies (LSE:AMO) is an internationally focused company that provides digital entertainment hardware for Internet Protocol TV (IPTV) and Internet TV along with a range of other digital solutions. The company, which is based in Cambridge, has had a strong couple of years in terms of share price, but has seen its turnover stagnate since 2010. Delving further into Amino, there are clear reasons why this sort of share is an attractive proposition for investors. Amino peaked at over 300p in 2005, but following the effects of the financial crisis, hit an all-time low at 24.5p in late 2009. The shares currently trade just off multi-year highs at 92p which gives the company a market capitalisation of £50.64m - a level, which in my opinion, provides adequate room for upside in the future.


Even though Amino has clearly performed well to date, I reckon the outlook for the shares still seems bullish. Institutions are still acquiring by the looks of it, and the shares certainly don't look like they are running out of steam having set a series of new highs over the past 6 months. There are two feasible scenarios in my opinion. The first is another step higher over the coming weeks that will test 100p. A break through the 100p level is imperative, and if the share price can surpass that level, the future looks rosy for the company. The second scenario sees bullishness drop off a little in the short-term with a period of sideways movement. I would not expect a re-test of 80p by any means and in this instance I would expect a drop lower to around 86/87p which is not bad risk for the potential reward. From that platform I would expect a gentle drift upwards. In any case, I am optimistic about where the company is going in the medium-term.

Directors holdings in Amino are encouraging also. There are currently 55m shares in issue. Just less than 500,000 shares are held by directors, and admittedly that is not a lot in absolute terms. In relative terms though, the top 5 directors holdings still amount to a very material £457,000. The most recent buys came in January with CEO Donald McGarva and CFO Julia Hornby taking stakes of £24.8k and £7.7k respectively. To add to this, institutional investor Miton Group have been adding to their holding during 2013. Over the course of the year they have increased the number of shares held from 3.95% to 11.11% which is undisputedly a large increase. Some of this buying pressure has been very slightly offset by BlackRock and Henderson decreasing their holdings, but Schroders has not materially changed its stake and still retains 21% of Amino.

Amino's aminet A140 digital services box.
Amino is listed under the Technology Hardware and Equipment sector of the LSE. It develops and has its own range of set-top and digital services boxes such as the aminet A140 shown on the right.  The company has three target markets; Network Operators, Hospitals & Hotels and Enterprise. These boxes can be updated through telecoms wires.

The company has over 850 customers across 85 countries and whilst its HQ is in Cambridge, it has offices located in China. In Amino's 2012 Annual Report, the company noted how demand for the products remains resilient in established economies in North America and Europe and this helps the company expand into some of the more underdeveloped economies. The lower price point of some of Amino's products has also allowed for this change. Looking at the future, Amino's OTT (Over-the-top) products support HTML5 which is expected to become dominant in the Internet over the next year or so.

During product development the company has secured impressive partnerships with both Intel and Ericsson and the least that this does is help with securing contracts and putting a "rubber stamp" of approval. Considering Amino is only capitalised at £50m, to have such partnerships is a huge vote of confidence, and one that should not be understated.

Proof for this was delivered in December 2012. The company announced the receipt of a major contract with a European Telecoms operator for its 'Live Media Gateway Platform'. CEO McGarva commented: "This is a breakthrough contract with a large and growing operator. They recognise that the combination of trusted and secure Aminet pay-TV performance - and a proven global Android apps development environment - offers an exciting new way to secure and grow their customer base with a powerful multiscreen entertainment offering."

Further to this, in June this year, Amino and partner Intracom Telecom were awarded a further contract to provide IPTV entertainment to a major South Eastern operator. "This new order supports the network operator's rapid deployment of IPTV across several countries. The service delivers a mix of live TV, premier sports channels, video-on-demand (VoD) and a rich set of "infotainment" services to end users."

Amino's CEO also seems a CEO with excellent experience. Donald McGarva has previously been the Asia-Pacific DHL Senior Vice President and held senior/leadership positions in a number of reputable firms including Fujitsu and BG Group. His first year as CEO came to a close in 2012 and the share price transformation is clear. I would back McGarva to continue the trend seen in Amino's share price since he was appointed.

Amino's aminet A540 set-top box
Now I turn to the financial performance of the company. The first thing to look at are the 2012 FY Preliminary Results that were announced in January. The following points were displayed:

- Gross profit up 20.8% to £17.5m
- Gross margin up to 42.0%
- EBITDA up 42.2% to £6.2m
- Net Cash of £17.1m
- EPS beat market expectations at 5.4p
- 50% dividend increase to 3p with an expectation to grow the dividend by 15% minimum over the next two years

That final statement is one of particular interest as it proves Amino is a stock with high growth potential. During the year the company received £1.65m in tax rebates (tax that was excess and paid back to Amino). The cash position for a company of Amino's size is superb and this value continues to increase slowly even with the progressive dividend policy. An update on the financial position was given in the Interim Results (H1) out in mid-July:

- Revenue unchanged at £20.1m
- Operating profit before exceptionals rose by 735% to £1.7m
- EBITDA before exceptionals up 83% to £3.3m
- Gross profit rose 30% to £9.3m
- Net cash rose to £18.2m
- Interim dividend of 1p/share. Ex-dividend date 04/09/2013. Payment date 20/09/2013

Non-Executive Chairman Keith Todd reported: "This solid set of results underlines the progress Amino is making against its goal of profitable growth and improvements in shareholder returns. During the period, we have enhanced our competitiveness in our markets through a clear and compelling proposition - quality robust products, operational performance and rapid delivery to meet demanding customer expectations. Our ability to flex our portfolio is demonstrated by new contract wins from target customers in both emerging and established markets."

Reflecting on the results, I agree completely with Keith Todd. Starting at the sole cash level, the £18.2m is a huge cash buffer, especially for a company with such a small market cap. Indeed, the cash covers a massive 36% of the market cap which is very reassuring. The company still expects the net cash position to increase as noted in the Outlook part of the report. The dividend is not that large, but there is a statement to increase it gradually and any investors who buy before September 4 can lock in a 1p interim dividend. The large cash position provides enough room for increases past the 15% alluded to if possible. Using the 15% level (even though it's the minimum) gives forecast dividends of 3.45p and 3.97p respectively. I wouldn't be at all surprised to see the 2014 results yield closer to 4.50p/share.

Progress by the company in Latin America is pleasing as well with this helping Amino's customer base diversify further. Latin America is no doubt a potential growth arena with countries such as Colombia, Peru and Mexico continuing to have good growth potential that Amino could exploit if it can maintain customer bridges in the area. In terms of tax benefits, as of November 2012, the company had £37m of unrecognised tax losses that will help offset the tax rate in the future.

For 2013, brokers are predicting around 6.2p EPS which amounts to a PE ratio of 14.8p using the current 92p share price. Strip out the cash and that figure drops back to around 9.5 which is undemanding in this sector. A PE closer to 20 when discounting most of the cash balance would be fairer than the current market valuation, which still looks too low even with the recent price rally. Brokers Finncap, N+1 Singer and Northland Capital have recently all upgraded their estimates for Amino with new price targets of 100p, 107p and 110p respectively.

Reflecting on Amino there are several points to take away from the company. The first is that, like many other companies, it is not a resource share that will provide volatility or excitement, it is rather a robust medium-term growth share. Amino has a secure balance sheet with a very healthy cash pile that the company has already noted is set to grow further. The dividend yield is decent at around 4% and there is plenty of potential for share price appreciation over the coming months. Revenues have stalled in 2012 and during H1 2013, but I believe that H2 revenues should show a modest improvement along with the target which is to continue improving gross margins. The highest broker target is at 110p - I think that even at that level the company is undervalued on a variety of metrics and a target closer to 130p would be more appropriate. Consequently I have put a Buy tag on Amino at the current price of 92p.

3 comments:

  1. Nice looking company and I like that MITON see potential. Thanks man

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  2. Nice review el1te. Subbed to email updates. Keep up the good work

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  3. Thanks for these. I wouldn't come across these companies without your site so these are eye openers

    CraigJ

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