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ShareProphets share tips of the year number 23: Sell Telit Communications says Tom Winnifrith

By Tom Winnifrith | Monday 2 January 2017

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.

Telit Communications (TCM) is the most heavily shorted stock on AIM but its share price has proved incredibly resilient. At 275p it is almost up at 2016 year highs and the company is capitalised at £317 million. But you simply cannot defy gravity forever and, as a sell, it is my next share tip of the year.

In early November it issued a trading statement which it would no doubt describe as bullish. For bullish I read bullshit.

Telit said that it was "refining guidance" for the full year to 31 December. It increased its adjusted EBITDA and earnings per share guidance towards the middle and upper end of the previous range, citing better gross margin and operational cost discipline. The Group has also narrowed the revenue guidance range.

In terms of sales by "narrow" what it means is cut. The prior range was $370-$390 million it is now $370-375 million. The "adjusted" EBITDA number goes from $52-60 million to $54-59 million and earnings forecasts go from 24-30 cents to 26-30 cents. So the EBITDA and EPS numbers are sort of increases but sort of not.

Of course the real point is that sales are vanity and EBITDA is "bullshit earnings". Adjusted EBITDA is fiddled bullshit earnings. Profits (earnings) are a matter of opinion it is cash generation that matters. Telit is always profitable but never a cash cow. That is why it recently had to take on even more debt.

The trading statement made no mention of cash generation or rather the lack of it. In the first half of calendar 2016 the company reported EBITDA of $21.4 million, adjusted pre-tax profit of £11.4 million but burned cash of $30.2 million. Okay $14 million of that was on acquisitions and $7 million on dividends but ignoring that the cash burn was still $9.2 million.

Net debt at 30th June was £29.1 million but given that new facilities have been taken on since I expect it will be materially higher now. As such you have a business with an EV of at least $430 million generating sweet FA cash. An EV/free casflow multiple of gazillions is just too high. far too high.

That makes this a share tip of the year as a sell.

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