Amino Technologies - Growth Stumbles

http://www.aminocom.com/


Amino Technologies (LSE:AMO) has been an example of what can happen when not all goes to plan. I looked at the company back in August at 92p when I concluded that there should be appreciable upside as the company returns to top line growth. Having stated that they were on track to meet full-year targets at the end of H1, the company reversed this view in late November during a scheduled period-end trading statement. The result has been that the share price has slipped over fears that Amino is not actually a growth company, and that top line growth will remain under pressure for the foreseeable future. There is definitely weight to that view, so a look back over the operational and financial outlook is warranted. The share price of Amino now stands at 83.5p, so not a particularly large fall, but certainly not one that is welcomed. At this level, with circa 55m shares in issue, the company is valued at £45.97m.

This article is a follow-on from the below post. For full context and information, read this article first:
http://www.theel1tetrader.com/2013/08/amino-technologies-robust-setup.html


The technical picture of Amino has deteriorated since the initial review. The reason for that has been the trading update, which provided a swift spike downwards. That has led to the moving averages converging to produce a bearish signal that is likely to send the shares down to the 80p level in due course. At 80p, there are two support lines which are; horizontal support (previously resistance) from H1 2013, and an upward trendline stretching from the two identifiable lows in 2012. The horizontal support is more likely to provide the bulk of any support given that this is where prospective investors would choose to place limit buys. The indicators show that the shares are technically oversold, but the lack of liquidity means that they aren't particularly important.

The trading update (the components of which I will outline shortly) led to various institutions adjusting their positions in Amino. Miton Group upped their stake from 12.05% to 14.86% on the day of the trading update (they have been accumulating for months), whilst Investec and Schroders both reduced their stakes to below 3% and below 18% respectively. Given the strength of the wider market, it is no surprise to see the institutions move their holdings. After all, during times of market prosperity, they want to be backing the winners rather than holding out for longer-term gains that may, or may not materialise. Nonetheless, that institutional selling, which has been confirmed through holdings RNS', has led to the price weakness.

Seeing as the trading update has been the main news item since the initial review, I'll cover this first. The trading update concerned the H2 2013 trading performance.

The update started "The company expects to deliver profit and period-end net cash in line with market expectations and, as such, demonstrate solid like-for-like growth in these metrics". This has been achieved through a focus on gross margin performance, tight cost control and strong cash conversion.So far so good. However, the company then went on to say that during H2, a change in product revenue was seen, with an increased split towards the lower priced, lower specification products. Furthermore, significantly reduced demand from a major customer meant that the two factors would lead to a substantially reduced revenue total for the full-year that would be well south of market expectations. The new revenue total was forecast to be between £35m and £36m which is sharply short of the £43m original forecast and means H2 revenues were down 25% on H1. In addition, the board expects that trends will continue into 2014. They therefore revised their 2014 revenue figures downwards, so that they are expected to be broadly flat for the 2014 financial year.

The immediate point to recognise is that there is the real risk that Amino has become a mature company, with revenues in decline and showing no tangible signs of uplift. Seeing as the resumption of revenue growth was one of the main components for putting a Buy tag on Amino in the first instance, that was highly disappointing. The scale of the revenue miss (potentially £8m) suggests that the majority of the shortfall was caused by a major customer pulling their orders. Looking back at the 2012 annual report, that looks probable. Using the 2012 annual report as reference material, 2 customers in the USA accounted for £15m of total revenue whilst 1 customer in the Netherlands accounted for a further £6.66m. This is not the first time that a major customer has been lost either - there was a substantial loss of revenue from an Italian customer during the 2012 financial year that saw revenues plummet from £13m to £1.4m. The fragmented customer base does therefore cause some concern.

However, if you look past that, there are some signs for optimism as well. The period-end net cash balance is estimated to be approximately £19.0m alone. That equates to a massive 41.3% of the market cap and is a comfortable buffer. However, the most intriguing point is that the profit figures for the 2013 year and 2014 year and expected to be in line with market expectations. That tallies with the revenue losses being on the low margin products, but it also suggests that the cost controls undertaken by the company, are working wonders. Had the revenues come in as expected, it is therefore possible that Amino would have beaten market expectations. As it stands, those revenues did not come in, so it is a pointless task to dwell on that. However, that cash buffer continues to mean that the financial state of the company is secure.

A few numbers can be run on those figures bearing in mind the share price of 83.5p and the cash balance of £19m versus a market cap of £46m:
- £3.3m of pre-tax profits are expected for the last financial year with that figure rising to £3.6m for FY 2014
- Cash at the end of FY 2014 is expected to be around £20.5m, allowing for a figure of £1.5m to be set aside in cash generation
- EPS projected at ~6.10p for FY 2013 with this rising to ~6.80p in 2014
- Full-Year dividend of 3.45p with a dividend next year at least 15% higher

Using those figures we can derive some PE ratios. For the FY 2013 results, Amino is valued on a PER of 13.69 currently, which is not unreasonable for a company that can be considered ex-growth. However, once you factor out the cash pile, that figure drops sharply to a PER of 8. Applying a 10% discount to the cash pile (assume it is just collecting dust aside from working capital) still retrieves a PER of 8.6 which is a little low, even for a mature company. Mature companies generally attract a PER of sub 15, although towards the upper end for tech firms and sometimes even higher during a bull market [such as now]. For FY 2014, those PERs are 7.2 and 7.7 respectively which are once again low - chuck in a rising dividend yield of 4.13% increasing to a minimum of 4.75% for 2014, and the downside should be fairly well protected against from the current level (take 5% as technical downside).

Commenting on the performance, Keith Todd CBE, Non-Executive Chairman, said: "Amino's continued focus on profitable growth has seen demand for our higher margin products. Whilst headline revenue is now expected to be at lower levels than previously anticipated, we remain confident in the outlook for the Group's profitability and cash generation. To this end, we have increased our dividend by 15.0% to 3.45 pence per share and I am pleased to reiterate our progressive dividend policy to increase this by no less than 15.0% for 2014. The company continues to invest in strategic initiatives and product development around a wider solutions-based offering aimed at driving future growth for existing and emerging markets"

In light of the trading update, Northland Capital downgraded Amino from Buy to Hold, consequently reducing their target price from 110p to 100p. They commented that: "A yield >3.5% is attractive, but management needs to explore ways to use its cash to help grow the top line, or return more non-core cash to shareholders". Taking a contrary stance, FinnCap re-iterated their Corporate rating, but upgraded their target price to 120p from 100p.

Given that the board have recognised that Amino will not experience revenue growth next year, and there is a substantial cash pile, it would be reasonable to expect the management to step up and make a decision on how to use it. £19m in net cash is probably about double what the company requires, so it wouldn't be unreasonable to expect £1m-£9m to be spent to enhance growth or shareholder returns. In fact, it would be poor from management if they don't use that cash in my opinion. The board need to signal what options there are for the cash and then follow a strategy for using it. Arguably, having cash on the balance sheet is good for financial security, but having too much cash is a poor allocation of a valuable asset. After all, the interest collected on it will be negligible, and the company is struggling to drive top line growth.

There are range of options for how it could be spent, here are four:
1. A special dividend to return cash to shareholders
2. Initiate a share buyback scheme
3. Target acquisitive growth in the same sub-sector
4. Target acquisitive growth in a slightly different sub-sector

Ideally either options 3 or 4 would be pursued because options 1 and 2 do little to aid long-term growth rates, although they do return value to shareholders faster (2 would raise the EPS figures, but damage liquidity, which is already low). I reckon option 4 is also preferable to option 3. The reason is that the market in which they operate, set top boxes, is considered by many to be largely mature. That's not entirely true in that the LatAm market remains open to such products and represents a medium-term growth region. Furthermore, continuous product development in the market means that new applications are continuously being made. Amino has made a number of non-RNS announcements regarding product development, including the integration of the new Opera-powered Amino TV App Store, and the introduction of a Wi-Fi USB stick that can be plugged into the newer models of their set top boxes. The integration of the VUDU, subscription free, video-on-demand service onto their 'Live Home Media Centre' platform also represents an example of how strategic partnerships can boost the entertainment offering. This product development was shown in October when previously NASDAQ listed GlobeComm (since taken over), selected Amino's set top boxes for deployment across 1,100 US retail stores. That said, the interest has not yet fed through to revenue figures, which it ultimately needs to.

In light of the stumbling growth, a conservative PER of 10, applying a 10% discount to the cash balance would be a fair starting point to start valuing Amino at. At 6.1p, a PER of 10 equates to 61p. 90% of the current cash balance is equivalent to 31p per share, hence the total price in this scenario is 92p/share. That scenario attracts a healthy 3.75% dividend yield. A less strict valuation could see PER of 14, applying no discount to cash. At 6.1p, a PER of 14 equates to 85.4p. 100% of the cash balance is equivalent to 34.5p/share which gives a total price of 119.9p. This scenario attracts a modest 2.9% yield. In light of the trading update, I deem it prudent to lower my target price from 130p to the average of these two (106p).

The situation at 83.5p remains fairly similar to what it was at 92p, although the big setback of the revenue shortfall has since come to light. The similarity is that Amino remains an extremely well-funded company, with strong cash flow, a rising dividend, and is undervalued on a range of metrics. The catch is that it's not completely obvious to see where any share price catalysts will materialise from. Amino does not release many news statements due to the nature of its business, so the only way to drive long term price progression is through improving revenues and profits along with fulfilling the promise of increasing the dividend. The new 106p target still remains good upside of 27% although hasn't performed as hoped, and that upside is somewhat diminished on my previous expectations. Amino is still a medium-term proposition as any major short term price movements are unlikely. The current valuation is fairly well underpinned, although the chart has little support down to 80p. Most of the market is watching to see if they will utilise their cash pile, and for what. Growth has stumbled, and management need to restart it using the funds at their disposal.

2 comments:

  1. Interesting thoughts el1te. Potentiall quite undervalued but need to wait for the market tide to turn

    ReplyDelete
  2. Results out on the 27th. They should be interesting

    ReplyDelete