Hope you had a good weekend. Now, let’s breeze through today’s movers and shakers.
£26.75 (Down 3.3%)
Breakdown of results
Results came in better than forecasted at £7.24m vs. £7.1m. Most of their sales come from royalty and license fee (£5.3m) with R&D and product revenue making up the rest.
Pre-tax profit increased to £5.7m, compared to £4.2m giving the business a high margin in the 70s.
The biggest surprise is the dividend announcement of a second interim dividend of 31p and a special dividend of 40p.
A great balance sheet with cash making up 60% of total assets. No debt and no pension deficit.
The balance sheet is neat with high levels of cash inflows and the only cash outflow is basically rewarding shareholders. Talking of dividends, this paid the company is paying 91p vs. 62.5p (including the special)
Including the special, the yield climbs over 3%. But what impressed me the most is the 50% dividend growth helped by the special dividend increasing 100%.
Is Bioventix fully-priced in?
When you see revenue of £7.2m vs. the market cap. of £142m it looks pricey. And, despite EPS Growth averaging circa. 26% (which is typical of a sustainable rate for a small business) the market has raced ahead of itself.
Market metrics such as:
EV/EBIT = 27 times, now down to 24 times, the 6-year average is 13 times.
PE = 40.7 times, now down to 29 times, the 6-year average is 19 times.
PB = 17.3 times, now down to 14.1 times, the 6-year average is 7.3 times.
PS = 25.8 times, now down to 19.7 times, the 6-year average is 10 times.
Here is a typical chart of Bioventix showing earnings yield and the average 6-year earnings yield where the market has gotten ahead of itself.
On the flip-side:
If you are a L-T investor, then you thinking five or ten years ahead. My advice is if Bioventix can sustain their business model, then we can make a hypothetical forecast.
Assuming net profit grow by 20% for the next five years, then on current valuation, then PE comes to 11 times. And if the company keeps their current PE ratio of 29 times, you are looking at a share price of circa £70 per share!
Things to be cautious
Looking at Bioventix business and financials, I get the sense of feeling that their technology is reliance on a few talented staff (the company employs 15 people). So, staff safety and morale is paramount to Bioventix continuous success.
Another is the entry of new competitors. Given the low cost of entry (all you need is the talent), then there is no guarantee of success if another business develops a superior product.
It reminds me of Rightmove with their high operating margin and low asset maintenance costs. Unlike Rightmove, they have vulnerabilities because the probability of staff accident can be fatal to future business success or a competitor muscling in (low cost of entry).
So, in many ways they are competitive, but with a few speculative features lingering about.
I think £20 per share or 21-times PE is good value.
Share price: 0.975p (down 11%)
This failing company has been stagnating for a decade as it fails to make significant inroads. Now it reports falling revenue of 9% to £270k, as operating loss increases to half million pounds.
Physiomics is burning between £350k-£450k per year in cash and has become a serial share issuer to the small financial institutions.
The share price resembles that of Enron. Three or four years ago, this stock trades around 20 to 30 pence. Now, it’s one penny!
The continuous placing means there isn’t anything special. Because if there was, then the big boys would have jumped over this and self-funded the operations.
Their latest placing to raise over £500k at £0.025 is a discount of 60% or more to the current share price. This means the financial institutions only have confidence in buying at a huge discount and flipping it back to the market for 250% or more in profit. Meanwhile, the shareholders suffer from the continuous decline in the share price.
Physiomics is a big avoid for retail shareholders because the low market capitalisation of £500k has given retail investors the visual image of seeing this rise by 100%-200%.
My advice is to avoid the shares, but if there is a probability this company makes £3m-£4m in sales in the next five years and generate a decent profit of £1m, then a market capitalisation of £5m (10-bagger) or £10m (20-bagger).
The odds of that happening is rather small.
Therefore, this is a speculative investment where the small financial institutions are making the two to three-baggers!
Spectra Systems Corporation
Share Price: 87p (up 7.4%)
A leader in machine-readable high-speed banknote authentication and brand protection technologies. The update says their authentication technology licensee finished printed notes will reach a record level in 2017.
Which led to Spectra forecasting profits for the year ending 31 December 2017 will significantly exceed market expectations.
So, it is no wonder the shares are up strongly today.
But, forecast pre-tax profit is expected to double in 2017 to £2m, so significantly exceed could mean £2.5m or more in pre-tax profits.
Spectra has two divisions.
Their authentication systems dominate group sales contributing 88.5% while their secure transactions make up the rest.
Spectra displays a typical pattern of surging demand in new authentic systems because of new banknotes. Afterwards, demand wanes down, therefore making it hard for analysts to project profits going forward for more than two years.
Although the business is growing at rapid pace, we don’t know if it will decelerate in the future, which send the share price lower.
Right now, Spectra Systems is hot right now, but without the certainty of being a consistent performer, then I can’t say if the shares will rise for the long-term.
Share price: £3.30 (up 6%)
This electronic product designer helps to supply customer specific products to 25,000 companies.
They make communication, electromechanical, microsystems, imaging and more.
Is this a competitive company?
When a business talks about customise design and manufacture of electronics, you think of a high margin business. But operating margin is around 4%, which is small.
Acal has two divisions and their profitable division is business design and manufacturing, which accounts for 52% of revenue £175.6m (2017) and employ 3,299 staff.
Their custom distribution turnover £162.6m, but employ 443 staff.
The division with the most staff earns the company a higher margin than the high expertise division where the staff are the high earners.
The company is cylindrical and can suffer from falling demand. For example, sales can fall by 30% and the share price gets a pummelling.
Have sales peaked?
Sales haven’t peaked because Acal has been acquiring businesses in the last four years, as acquisitions total £87m.
And that has shown in first-half revenue increasing by 21% (£33m) to £190m compared with last year (H1 2016/17: £157m). The question is: Will profit margin suffer due to numerous acquisitions?
Looking at the PER (PE Ratio) is slightly above their 10-year historical average of 15 times comes to 18 times.
Using the CAPE ratio (Cylindrical adjusted PE) this came to a record high of 30 times earnings. The 15-year average is 12 times.
With revenue rising the market is expecting higher profits, so it is no wonder the share price is rising.
This isn’t a sector I specialise in, so can’t make any share price projection.
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The above analysis is my opinion and nobody else. It does not constitute professional investment advice. Data is correct on at the time of availability.