By Cynical Bear | Saturday 13 May 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.
I spend most of my time being critical of companies that issue RNS’s containing half-truths, exaggerations or are just an opaque mess. However, a week ago, I read an RNS which impressed me for being just the opposite. It persuaded me to do further research which has led to this very rare beast – a buy tip….for Frontier Smart Technologies (FST).
So what is it that has brought about this Damascene conversion?
The company issued a trading update on 5 May which started as follows:
“The Board is pleased to report that the Group has continued to build on the momentum achieved in the second half of 2016, with H1 revenues significantly ahead of last year. Taking a prudent view of H2 trading across the Group, the Board expects full year EBITDA profit to be materially ahead of expectations.”
This is a good trading update anyway but I liked the fact that it said that even taking a “prudent view” it would be materially ahead. I also liked the fact that to help out investors without instant access to broker forecasts consensus, it clarified exactly what expectations were, namely EBITDA for calendar 2017 of approximately £1 million.
The RNS went on to say that it was ahead of budget in terms or revenues and margins in both its Digital Radio and Smart Radio divisions. That all sounded great and I was surprised the share price didn’t react more positively, so thought I should do more digging.
It is clear that this company, previously known as Toumaz, has been an absolute shocker for much of its life on AIM since it joined in 2005 and I am sure this is partly to blame. Retained earnings in the most recent final results show cumulative losses of an astonishing £105 million which tells its own tale. Those most recent results for 2016 were the first time that it had ever reported a positive EBITDA.
The fault has to lie in the main with its efforts in the healthcare arena, where it was targeting wireless monitoring plasters (it actually partnered with CloudTag at one point!). However, it finally saw the light last year after years of hefty losses and sold its entire healthcare business for £1.3 million. It was then just left with a business in the audio space which is predominantly made up of a business it bought in 2012 for up to £32 million, Frontier Silicon.
I’m no expert on this space but technology for digital radio and connected audio seems like a decent area to be in, with growth potential. It isn’t a start-up having generated revenues of £32 million in 2016 and it states separately that its Digital Radio division generated EBITDA of £8.7 million and this year is going even better.
I also like the fact that it expenses all its R&D costs so that EBITDA is a decent proxy for cash generation and I like the fact that it states that the R&D costs will reduce this year, down from £6.6 million, which should also boost the bottom line.
The debt position is very manageable with about £4 million owing over the next 18 months or so but its cash balance at year–end was £3.4 million and it should be generating cash this year so expect that just to be paid off in due course and for the cash balance to start building.
Its current share price is 90.5p in the middle, valuing the business at just under £40 million. From what I’ve read this week, I don’t think it would be that surprising a result to generate EBITDA for 2017 in excess of £3 million with future growth forecast. Anything close to that together with a positive outlook would lead to a significant re-rate of the stock and I could imagine a world in which the share price doubles from here.
So there you have it. I’ve written about 250 articles on here since I joined in January 2016 and I think this is my first buy tip based on fundamentals rather than some dodgy sentiment / hype play. I’d be happy buying up to 100p with an initial sell target of 200p, by the time of the 2018 interims announcement in about 15 months’ time.
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