Small Cap Report (22 May) - ZYT, PGB, INL, CHH, PMP, SID, APH

22nd May '13 by Paul Scott

9 comments 18410 reads

Pre 8 a.m. comments

I'll comment on Zytronic (LON:ZYT) after 8 a.m., as it's not especially time sensitive.

Things that might be time sensitive include a contract win announcement from Pilat Media Global (LON:PGB). This is an Anglo/Israeli company with interesting-sounding company which supplies software to the television sector, globally. I have been a shareholder since being very impressed with their cheap valuation (in my opinion) relative to what struck me as good results, and also an amazing balance sheet which has around half the market cap in genuinely surplus net cash.

Pilat (pronounced "pill-at") had already issued an upbeat outlook for this year, so another contract win should give things a nice boost. It's for AUS$7.5m which at £1= AUS$1.5 translates to £5m, which is pretty material to Pilat's results, although it's a split of licences & implementation revenues that will be spread over this year & next year.

At 40p, Pilat's market cap is only £25m, yet it had £10.7m in net cash at the last set of results, for the year-ended 31 Dec 2012, announced on 25 Mar 2013. Moreover, that's real surplus cash, not up-front payments from customers (which many software companies use to flatter their cash balance - you can check by finding out what the "deferred income" creditor is, as this should strictly be netted off against net cash).

Furthermore, Pilat's profit of £1.8m last year is after accounting for £1.1m of amortisation of intangible assets. I checked the Annual Report, and it turns out that this amortisation charge is purely historic, and no current costs are being capitalised. Therefore the real profit figure to focus on is actually £2.8m for 2012.

The outlook statement on 25 Mar 2013 was strong (see below), and this £5m contract win announced today is likely to make the 2013 results even better. As such, I reckon these shares are a bargain, but as always this is just my opinion, so please do your own research. The Israeli angle may put off some investors, but I've made enquiries and am told that this company & its management are kosher.

Pilat Media is in a very healthy position. It has a strong balance sheet with significant cash resources which it expects…

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alterego

22nd May '13

Paul, Do you understand why PGB don't use some of that cash to pay a dividend?

Paul Scott

Good question alterego! In a word, "no", I don't know why they don't pay dividends, when they clearly have plenty of cash to do so. In the past they spoke openly about plans for the cash pile, but have gone strangely quiet about it recently. Perhaps there is an acquisition in the pipeline?

There is an issue with the 2 large shareholders - one is connected to a Director, and the other tried to buy the company on the cheap a few years ago, but was rebuffed. So there are apparently some issues between these 2 shareholders, who do not see eye to eye apparently.

However, in my view that's probably a good thing for small investors, as we're not likely to get stitched up, compared with if 2 large shareholders were acting in concert & therefore controlling.

It's a pity they didn't use the cash to do share buybacks when the shares were cheaper.

cig

How does Pilat Media's valuation compare with other Israeli companies listed locally? You'd expect a blanket war zone discount (sadly the Middle East is more likely to blow up than say Shropshire).

PGB web site says "Offices strategically located in the US, UK, the Netherlands, Australia, and Israel keep Pilat Media on top of the latest industry trends and technologies. They are staffed by our international team of more than 200 professionals who are well versed in the local standards and business practices of each region."

Headquarters are in London - not sure how much also being listed on TelAviv exchange matters.

Cisk

Paul, I went to Proactive Investors last week and saw Alliance CEO John Dawson present - here's a (lengthy) summary which I posted on ADVFN - may be useful for any holders out there.

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John is one of the few presenters I’ve seen who finished exactly on time: He presented an overview of the company, including a very useful slide showing the age of some of the products in the portfolio – the average age being 34 years!

He also showed a sales graph of the products, averaging circa 3% pa, and then walked through some P&L graphs etc, both historic and for last financial year.

One chart clearly showed the impact of Deltacortril and the massively +ve impact it had on the bottom line. Removing this one-off event, the profit trend was very clear, with a gradual rise since halting work on the sleep drug the company was developing back in the mid-2000s.

John then discussed prospects in some detail for some of the larger contributors, specifically:
Ashton & Parsons – baby food – this is very much in demand, and sells on ebay for far higher than the retail price (I checked this and it is indeed true). This product was manufactured using very old machinery (40 years rings a bell) so it kept breaking down. New machines are being commissioned to come on stream later this year (I’m not sure at whose cost – I’ll follow up with John on this). Once in place, production will resume, and given the pent-up demand there is no reason to assume that the product won’t contribute significantly later in the year.

Acne treatment – again this is a product that is being promoted (John mentioned youtube videos by youths praising the product – I’ve yet to check it out…)

Immucyst – product produced by Sanofi until the plant had issues – this will contribute in FY14 when it comes back on stream, and should be very +ve next year.

Acquisitions this year – John showed a slide with acquisitions per year; none so far this FY but given the past record and the firepower available I would be surprised if there weren’t any.

Cashflow – it was very clear that APH is very cashflow positive – a useful table showed that basically acquisitions are funded from cashflow (save a small increase in debt last year of around £2m) and that dividends are a small proportion of available cashflow.

Dividends – APH will continue to pursue a ‘progressive’ dividend policy, but without committing to % each year (cover I think is currently 4.4 times so plenty of headroom there). I asked John about this afterwards, and he was clear that dividends will be paid out of available cash and that acquiring new products are the priority – something I agree completely with.

Questions at the end:
*Amortisation – an ex-accountant asked why APH don’t amortise the value of the products they acquire. John mentioned this has been discussed many times – the accountants are happy with the current treatment. Also given the age of the products – over what period should they be amortised over? It looks like a product pays for itself after around 4 years (given a bedding in period of around a year after buying it). So clearly if you amortise over 20 years etc there would be a relatively minor P&L hit.
*Debtors – someone asked why debtors had gone up (I think by between £1-2m) when turnover was broadly the same. John didn’t know the answer to this (one for the FD) but it’s a relatively small amount in the sales context.
*Competition for new deals – interesting question about this – when Alliance Pharma (LON:APH) bid for a product, is there much competition? John said there is usually at least one other bidder, sometimes they go to auction. He also commented that APH are seeing more opportunities – as big pharma are more keen than ever to shed smaller, niche products.

Overall impressions – It’s the 2nd time I met John in the past month (1st being Master Investor), and he came across very well – very knowledgeable about the company, optimistic about future prospects etc, explained everything very clearly and concisely.

He very clearly talked through the company’s model – very much a virtual organization in terms of manpower and production, with a small core staff dedicated to finding new deals, establishing a sales presence in Europe etc. I asked John previously about expanding into manufacturing – he was less keen on this as clearly it’s something that is not their core competence – and given the diverse range of products in the portfolio, also makes sense.

Alliance Pharma (LON:APH) came across as a having a very stable core of products, with a good margin and gradual sales growth. When promoted, sales growth was shown to be in the order of 100% in some cases. Also new opportunities can produce one-off spectacular sales, such as Deltacortril provided, until generic competition enters the space.

John made the point about how they get their deals – quite often big pharma will divest a small, non-core product because it’s exactly that – and they need the manufacturing capacity for other products. So this presents opportunities for Alliance Pharma (LON:APH).

Finally it’s worth remembering the large shareholding owned by John and his family – so often companies present at these forums where the board have little or no ‘skin in the game’ – instead they have loads of options, bonuses, contracts with their own service companies etc. The fortunes of APH's CEO are aligned with the company, so there is every reason to believe his are a ‘safe pair of hands’.

Cisk,
Great stuff, thanks for sharing!
Paul.

corrsfan

Hey paul I bought some Silverdell (LON:SID) yesterday too. Just before I did I had a look round but couldn't see much other than their trading statement early last month. In it they clearly stated that they expected a Canadian deal would cost them abit now 6-7m because of expenses such as labour/equipment, but they expected to get it back on the second half as money comes back in from various projects. Im also comforted by who their typical clients would tend to be that the monies should be forthcomming without major issues too. If anthing im hoping the fall is just to do with people seeing better things for their money. As this is a boring share linked somewhat to construction

Marky

Quindell:

This is a software contract, Paul. Their software revenues for 2012 were £30.1m of which UK was £19.4m, so yes it is relevant for them to confirm it's a UK contract. Gross profit on software / licenses in 2012 was 70-90% of revenues, so even if we assume only £3.5m revenues and ignore the forward revenues then this provides a further c£2.5m profit for 2013. Not massive in itself, but add this to all the other contract news.

Hi Marky,

Fair comment. Which business of the ones they acquired is producing these stellar results, and how much did they pay for it, and when, I wonder? The bulk of their turnover comes from Ai, which only makes £3.5m profit p.a., on over £100m turnover.

It would be good to get some third party evidence, from people in the insurance industry, as to whether QPP's profits are genuine or not. I've put some feelers out, and have heard mixed messages so far.

Cheers, Paul.

Small Cap Report (22 May) - ZYT, PGB, INL, CHH, PMP, SID, APH

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Paul Scott

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