Interactive Investor

Edmond Jackson's Stockwatch: Does Globo's board know something we don't?

22nd July 2014 00:00

Edmond Jackson from interactive investor

When might you buck the short-sellers, to buy? Shares with an exciting growth story have been especially prone to soar amid the exuberance of monetary stimulus, this adding to the temptation for critics to establish short positions and publicise their stance. If the company is genuinely sound then in due course its shares will recover; if not then "shorters" contributed usefully to the debate in appraising risk.

At AIM-listed Globo, an enterprise mobility software group, four directors have snapped up £119,153 worth of shares at about 50p. The share price had halved since October to 40p amid ongoing criticism of group accounting. With the business seemingly positioned well and progressing, the directors appear to be saying "thanks very much" rather than making a PR gesture. The non-executive chairman made his first purchase, of 50,000 shares, so should be freshly motivated - not needing to prop up an existing stake.

When I first drew attention at 24p in October 2012 it was along a rationale of a small company with potential to leverage profit: Global's software enabling mobile phones to be empowered as smartphones, also for business people to access files and data.

I also noted inherent risks with fast-moving technology and curiosities such as why Globo kept diluting shareholders with placings when the company's development did not appear to need this extent; why trade receivables represented over 50% of revenue (recently 40%), and the finance director not being a qualified accountant. But the directors were signalling firm belief in value as the chief executive bought 500,000 shares at 18.8p, followed by the commercial and finance directors at about 24p. Their judgment was worth following as Globo shares soared to 88p during 2013, and the table shows financial performance taking off.

Fast-moving marketplace

Globo - financial summary
Year ended 31 Dec20092010201120122013
Turnover (£m)20.926.52337.3659.9
IFRS3 pre-tax proft (£m)2.84101422.9
Normalised pre-tax profit (£m)2.83.59.81422.9
Normalised earnings/share (p)1.6723.24.26.2
Earnings/share growth rate (%)519.758.233.546.9
Price/earnings multiple (x)    7.8
Cash flow per share (p)5.11.51.63.45.2
Capex per share (p)5.74437.9
Net tangible assets per share (p)2.45.19.915.323.4
Source: Company REFS.

Company REFS appears to have difficulties sourcing anyone who wants to put their name to forecasts although a spread of institutional investors has backed Globo, with Standard Life recently raising its stake from 8.89% to over 9%.

One analyst of no hesitation however is Matthew Earl whose blog amplifies my earlier concerns and adds plenty more. Earl gained a reputation as a broker's analyst who criticised business services groups such as Connaught before it went into administration, although Xchanging has seen both its business and shares recover. He now appears to be an independent trader who has repeatedly added to a short position in Globo. While describing himself as a "balance sheet forensic" my chief concern as to risk is Globo operating in a fast-moving marketplace - Blackberry (BBRY) showing how the mighty can fall. With new "apps" appearing all the time you never know what may overtake current software and possibly get bundled onto phones as manufacturers fight for share.

Yet amid the guesswork of how this specialist field will evolve, one independent industry blog speaks well of Globo, suggesting last March that with various aspects of strategy coming together "it's definitely worth taking a closer look." This July its analyst has spoken with Globo's vice-president of business development and observes: "the company is on a tear...when you step back and look at what Globo has put together, you realise just how wide their reach is now..." This hints at commercial reasons why the directors have bought shares after the price drop: the chief executive 89,000 to own 69.7 million (18.7%) and three other directors 50,000 each, including the finance director and chairman.

Inflection point

From an affluent Western perspective and so much publicity surrounding the likes of Apple, it's easy to assume smartphones are taking over the world, however statistics from mobiThinking show smartphone sales out-pacing feature phones only as recently as 2013 and the bulk of growth prospects reckoned to be in Asia-Pacific. With contracts typically lasting 18-24 months there is scope for specialist software providers to flourish and Globo's 19 June AGM statement cited growth in both business and consumer-related revenues. "The focus in 2014 is on enlarging our sales teams, investing in R&D and business development, empowering our marketing strategy and setting up the infrastructure, systems and processes for future global growth."

Assuming Globo's reported financial growth continues anywhere near-trend, the shares' prospective price/earnings (P/E) multiple may only be six or seven times - and cash flow multiples not significantly more - so if the business henceforth capitalises on its market positioning then the medium-term upside is substantial. I still raise my eyebrows at repeated share issues, a tax rate that has risen from 3.9% only to 7.5%, trade receivables levelled off still highly at 40% of revenue, and very high profit margins; which combine as a warning sign to any experienced investor. New group auditors Grant Thornton did not raise any concerns regarding the 2013 accounts (see pages 49-50 of the annual report), although plenty of corporate scandals have been signed off as "a true and fair view." It's also vital to keep aware of competitive issues in the industry.

Considering the Globo directors' previous concerted purchases, they signalled an inflection point well. As ever, where you see fast-growing numbers and a low P/E, the situation has risks and the only way to engage a stock like this is being well-diversified. The next test will be September's interim results, which should at least appear good. So, unless a short-seller has new revelations or markets crack amid war in the Middle East, sentiment may trend more positively.

For more information see www.globoplc.com

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