Stock to Watch: Anite

The software solutions share Anite has been a great performer over the last year, roughly doubling to about 125p despite the market jitters, as the firm capitalises on wireless handset testing for the rollout of 4G phones. It is a watershed moment as AIE enters the FTSE Mid 250 index: does the progress signal long-term potential for profit upgrades; or alternatively, how vulnerable might this technology sector become? Often with technology shares you are trying to decipher if they deserve a genuine growth rating or their market will move on – or turn down if demand weakens.

It has just announced prelims to end-April which were slightly ahead of expectations, showing pre-tax profit and earnings per share both up about 75% to £28.0 million and 6.7p respectively, on revenue up 31% to £122.5 million. The total dividend soars 43% to 1.5p, admittedly negligible in terms of yield although Anite paid out £21.6 million to settle a cross-currency swap liability, decreasing net cash by £10.8 million to £16.9 million.

The group’s activities comprise: handset testing, with operating profit of £9.0 million, up 68% year-on-year; network testing with profit of £2.6 million, down 28% after temporarily higher overheads; and travel booking systems with flat profit of £1.6 million. So the boost is very much coming from handsets’ work hence the question of its durability.

With smartphones becoming a much bigger aspect of the mobile devices' market, also leading data growth, it strains networks forcing global telecoms groups to invest in high-speed data technology. The follow-through is increased demand for testing, so Anite is in the right place at the right time. Management at least, is confident about these trends continuing, to have increased research & development spending by 32% to £17 million. With net operational cash flow soaring from £13 million to £24.7 million, this should underpin ongoing investment.

Conservative investors may be wary however, sales visibility is only about 3 months, so you have to broadly assume that “mobile devices” is where communications are heading. If so then there should be a vast amount of work for Anite and the company could end up becoming a bid target for global telecoms firms. There is a parallel with Open Reach, the BT-owned support services operation that deals with any phone or broadband issues at your home. The regulator obliges Open Reach to service all the telecoms groups, such as Orange and TalkTalk. In the same way BT sees it makes sense to be in control of this operation, Anite could become viewed similarly by the industry, and get acquired.

In the meantime, a positive aspect of this limited visibility is management giving conservative guidance to the city, helping to continue a trend of Anite beating forecasts – the kind of scenario which is supportive for shares.

Despite the price rise and a forward price-earnings multiple in the late teens falling to mid, based on forecasts for the 2013/14 years, Anite’s testing bonanza still looks rather early-stage. The evidence started to emerge later last year, for example the 8 November half-year trading update for the six months to end-October showing like-for-like handset testing revenues up about 60%, with similar performance expected in the second half due to an acceleration of demand in wireless testing.

The first half results then showed wireless growing to 84% of group revenue against 77% a year before, with the 4G phones element up from 24% to 45% of handset testing revenue. It was a bit confusing for long-term investors, how Anite’s first half-year growth rate was described as “exceptional” although the sense of a warning was counter-balanced by management adding: “our positioning in the wireless testing market as a whole... will provide the group with opportunities for sustainable growth in the coming years.”

Likewise the chief executive characterised the 2011/12 year as “exceptional” at prelims although Panmure Gordon is one broker raising its 2012/13 earnings per share forecast from 6.8p to 7.4p, and its target price from 146p to 161p – agreeing with Anite’s chief executive that “the fundamental drivers for all of our businesses continue to be favourable.”

Despite an aspect of blowing hot and cold like this, sales of mobile devices appear to have defied the post 2008-recession well enough, and their complexity evolves. So testing does look to be a fruitful area even if there is short-term variability, and its overall growth should in due course bolster Anite’s networks side as well as handsets.

In this context the travel systems side looks increasingly odd, so might be a disposal in due course – resulting in the group being slightly easier to understand, and a neater bid target.

If management’s reading of its market is correct, it can indeed be worth paying a P/E of 15-18 times – “growth at fair price” – as a stock-picking strategy. In future years the rating could also be maintained or squeezed higher as growth becomes scarcer to obtain in the stockmarket. Worries over revenue visibility may encourage profit-taking after the recent share price rise, and results, hence Anite merits watching for further buying opportunities.

The balance sheet is goodwill and intangibles-oriented, as is typical for this kind of business, representing 76% of £92.1 million net assets. At end-April the ratio of current assets to current liabilities was quite tight at 1.2 times, mainly reflecting trade payable up from £30.5 million to £37.7 million, while receivables only rose by £1 million to £32.9 million. Debt has been eliminated although new facilities have been arranged: a £20 million credit facility and £5.0 million net overdraft facility.

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