By Tom Winnifrith | Wednesday 17 October 2012
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.
AIM listed tech stock 1Spatial (SPA) has been a bit of a star recovery play over the past couple of months and an announcement of a potential new contract win today has lifted the stock ( 2p just a month or so ago) to 4.125p, valuing the business at £14.45 million. But there is far more to go for – my target price remains at least 8p and here is why.
Today’s RNS reads:
The Board of Directors are pleased to announce that the Company has been selected as a preferred bidder in a significant contract tender to Ordnance Survey Ireland (OSi). The contract is to provide OSi with a Geospatial Management Solution and will include the sale of software licences, services and support and maintenance. The preferred bidder status does not create a legally binding contract, however the Directors anticipate that this will lead to a formalised contract in due course.
The Board of Directors believes this strengthens 1Spatial's already existing relationship with OSi and its strategy to support Big Data in relation to National Mapping Agencies on a global basis. Shareholders will be given further updates during the course of the contract.
Does this mean that 1Spatial has won the contract? Chatting to CEO Marcus Hanke this morning the answer is more or less a certain yes. What is it worth? Well the initial deal could potentially be the largest in the history of 1Spatial. This really could be very big indeed.
One of the reasons that investors have not flocked to this company is that P&L reports continue to be mangled by costs of M&A deals and restructuring post deals. That phase is now almost over with the 1Spatial business that merged with Hanke’s Avisen last year now stripped back at a cost level to where it should be but at the same time winning ever bigger deals.
How does this affect my forecasts? For this year ( to 31st January 2013) I am still looking for the group to report underlying EBITDA of c£2million and to end the year with net cash of £3-4 million ( assuming that the non core Storage Fusion business is not sold). Next year is when the real kicker comes in with the 1Spatial unit (rather than the Avisen business) driving the growth. If SF is retained within the group I would see 1Spatial reporting a Pre-Tax profit of at least £3 million (with a zero tax charge thanks to past losses) and ending the year with net cash of at least £5 million. If SF is sold (and Hanke insists that it is worth £10 million) then net cash is £5 million + SF proceeds and pre-tax comes back to c£2.5 million.
So what is the company worth? A PE of 8 + cash gives a target price of 8p with SF or potentially up to 9.5p if SF is sold. Is such a rating generous? For a business that is clearly growing fast, generating cash and has a strong balance sheet it strikes me as rather mean. But given 1Spatial’s track record it will do for now. As the company delivers there is material scope for a re-rating and as such 8p is very much a first target price. Clearly still a buy.
Libertarian investment writer Tom Winnifrith writes extensively for a number of US and UK financial websites. All of that material appears on his own blog, which also carries his extensive original non financial material, at TomWinnifrith.com – for alerts on all Tom’s writings follow him on twitter at @tomwinnifrith
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