Thursday, September 27, 2012

Thu 27 Sep (part 1) - IND results

Good morning. The focus today (for me) is on IndigoVision (IND) final results for y/e 31 July 2012. My journey with IND began in 2004, when the shares were a completely bombed-out wreck from the TMT boom & bust. I spotted the potential in the company, and the early stages of growth, and bought 8% of the company. It was a helluva risk at the time, as that was pretty much my entire portfolio in one share, but it paid off handsomely, with IND being my meal ticket for the following 5 years - the shares went from under 50p to peak at £10.

Of course, we all know what happened next, with the credit crunch - share prices were pole-axed, and despite putting in solid performances for several years, IND's share price collapsed from £10 to just £2. This absolutely crushed my portfolio, as even though I'd sold some on the way up, I made the terrible mistake of gearing up on the balance, which multiplied the downside, financially crippling me.

I don't mind being completely open about this, as I hope it stops other people making the same mistake - excessive gearing is a big mistake, and gearing combined with large positions in illiquid small caps is a highly toxic mixture that will, sooner or later, become a disaster. The worst thing was that the market dried up in 2008, so I couldn't sell even if I'd wanted to, so it was just a slow-motion train crash as my portfolio was slowly crushed.

Still, life goes on, and we never stop learning, so this has proved a valuable if painful lesson, learned the hard way, about not using gearing with illiquid shares.

However, I've always believed in IND's potential, although frustratingly they also scored some own goals with product quality issues arising from badly designed new products a couple of years ago, leading to an extended period of troublesome warranty claims & reputational damage.

Questions began to arise about the founding CEO, until in a bizarre Board Room coup, he was ousted after trying 3 times to buy the company on the cheap with a Venture Capitalist. It really was bizarre, given that he owns about 23% of the company, normally an unassailable position. The FD, Marcus Kneen was promoted to new CEO nearly a year ago, and has implemented a more rigorous management approach.

Note that at 352p/share, with 7.55m in issue, IND's mkt cap is £26.6m

So that's the background, what are the figures like this morning? Well, the figures were pre-announced in last month's trading statement, so there are no surprises there - turnover is up 5% to £30.3m, operating profit is up 123% to £2.7m (although that reflects more on H2 of the previous year being bad), and adj EPS tripled to 25p/share.

Pretty good so far. The final divi of 5p makes 10p for the year, up 33%.
The real surprise however is a fabulous Special Dividend of 70p/share! This is amazing since IND has carefully husbanded its cash pile, which has risen to £6m, or nearly a quarter of the mkt cap. The rest of the balance sheet is extremely strong too, with only £4.8m total creditors (both current and long-term). The special divi works out at £5.3m total cost, so amazingly IND are giving away pretty much their entire cash pile to shareholders.

This really is amazing, because mgt have traditionally been so cautious. Therefore they are sending a very clear signal that the business is doing well, it's difficult to imagine a more confident action.

This is backed up by the crucial narrative to the results. With this type of share, outlook is everything. Since they operate on 59% gross margins, it only needs a fairly small increase in sales to deliver a big increase in profits (which is what attracted me to the shares in the first place, together with world-leading video compression technology).

The outlook section sounds decidedly upbeat. Current year (7 weeks so far) has seen double digit sales growth, and this sentence intrigued me,

"Over the next 18 months, management is clearly focused on achieving growth rates at least equal to those of the markets in which IndigoVision operates. Whilst forward visibility of future sales remains relatively short, at this early stage there is every reason to believe that the current year will be a good one".

Combined with the special divi, that sounds great to me. They mention 20% p.a. market growth elsewhere in the report, so this is clearly signalling that we can hope to see 20%+ sales growth this year. That means potentially a £6m rise in turnover to £36m, and at 59% gross margin that equates to operating profit rising from £2.7m to £6.2m this year! Of course there would be some extra overheads too, so take off maybe £1m for that, and you still arrive at a doubling of profits this year from £2.7m to around £5.2m+.

The market would then put the shares on a growth PER (maybe 20-30?), in line with other growth companies), and that works out at almost 50p EPS even on a notionally fully taxed basis. So by my calcs that gives potential share price upside on this year's earnings to £10-15/share. Plus the market would then factor in some future year's growth too, and we could be heading towards my original long-term target of £25-30 a share (which is £187-225m mkt cap).

People have ridiculed me in the past for having such a racy share price target, but if you crunch the numbers, decent growth and a growth company PER could get us there in say 1-2 years. Indeed, the report today gives a tantalising glimpse of the upside case, when the Chairman opens the narrative with,
"These are excellent results from a business with the potential to be much larger. Extensive changes to the business, both completed and planned for the current year, are designed to position it for future growth".
So overall I'm expecting a decent share price recovery from IND in the coming weeks, as these results sink in. Certainly it warrants a 500p+ price before the Special Divi, which will be paid to shareholders on the register on 2 Nov 2012. After that, who knows? The upside case just became a lot more credible, and this could I think be a very exciting time for we IND shareholders.

OK, I'll publish this, then come back to look at some other company results. Have a good day everyone! As an aside, I got my first ever payment from Google for advertising revenues, for the first 2-3 months of this site running, a whopping £106! So thank you to everyone who has taken an occasional interest in my sponsors' messages! It's not the amount that matters, but more the fun of being paid something for doing what I enjoy & what other people seem to find useful. I shall put it towards a new laptop (going to try a Chromebook, as I'm moving rapidly over to the cloud & love all Google's services).

FTSE futures are looking a bit healthier, with a rebound overnight, IG are currently forecasting us to open up 17 points to 5791.

Best wishes, Paul.


  1. Hi Paul.
    This looks like a different company from the turbulent times last year. I`ve been out of the shares for quite awhile, frequently frustrated by the lack of progress. Decided to buy back in today feeling much more positive on the future for the company. Do you think that Vellacott with his 23% holding poses any future problems for IND.
    Admire the fact you have never lost faith in the company.
    All the best.

  2. "...I got my first ever payment...a whopping £106!
    put it towards a new laptop (going to try a Chromebook)..."

    Ahh, vendor financing at its best!! subsidize a service with money that you earn from selling something when they use a subsidized service ;)
    I wonder what's the accounting treatment for this?
    reminds me of Tesco's flap over how it accounts for Clubcard point sales.


  3. I hadn't thought of it like that Samir!
    But the sheer stress of the windows laptop crashing repeatedly, getting slower over time, etc, and replacing that with google cloud products where everything is saved automatically every few seconds, is just brilliant alone. So much less stress!

    If I wanted to earn more ad revs, I'd let google advertise hot asian babes, etc, here. Massive revenues. But I blocked all ads that seemed to me unseemly. Principles should always come before profit. Simple as that.