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Edmond Jackson's Stockwatch: Andor Technology
By Edmond Jackson | Fri, 14th December 2012 - 01:00
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
The AIM-listed shares in Andor Technology (AND), a developer of specialist digital cameras, are in a consolidation phase after a 2009-2011 growth run evaporated, although the reasons could be temporary. Quite often, technology-oriented growth shares achieve a high rating, then investors sell at any sign of the growth rate slowing, this trend being exacerbated by trailing stop losses.
Yet issues such as component supply and customers deferring orders can be regular features of high technology, which managers and investors alike have to bear along a growth path.
Andor took off in its financial year to end-September 2009 with normalised pre-tax profit jumping nearly £5 million and earnings per share (EPS) by 149% to 15p, prompting a share rally from about 60p that culminated in 685p by mid-2011, when profit reached £8.7 million and EPS 20p. Company REFS shows the annual average price/earnings (P/E) multiple rising from 13 times to 30 times during this period, then the shares declined (coinciding with the mid-2011 financial crisis) and slid nearly 300p last summer.
A 2 April trading update cited strong growth in Asia Pacific and Europe performing well, albeit weaker order intake from the Americas. The apology was "no significant business lost", just more prudent stock management by original equipment manufacturer (OEM) customers. Otherwise margins were improving and three new cameras had been launched, along with various software releases, all being well received.
|Year ended 30 September||2008||2009||2010||2011||2012||2013||2014|
|FRS3 pre-tax profit (£m)||1.5||4.6||5.8||8.7||8.9|
|Normalised pre-tax profit (£m)||2.2||5||6.2||8.7||10.8||12.2|
|FRS3 earnings/share (pence)||4.2||13.7||14.6||20||23|
|Normalised earnings/share (p)||6||15||15.9||20||25.7||27.8|
|Cash flow per share (p)||7.4||24.8||23.6||32.1|
|Capex per share (p)||3.4||1.7||5.4||8.4|
|Dividend per share (p)||0||0||0||0||0||3||3.4|
|Net tangible assets per share (p)||47.4||56.4||45.2||74|
|Source: Company REFS.|
Interims to end-March revealed a mismatch between turnover up 10% and normalised pre-tax profit up 22%, due to a slight fall in American revenues while Asia Pacific did especially well. Two OEMs were declared responsible for a £3 million shortfall in orders, hence a warning over second-half performance. By early October it was possible to reassure investors that the larger US customer had placed new orders worth $3.2 million (£2 million) for the coming financial year, with further orders expected.
This has meant the latest prelims show normalised pre-tax profit up just 3% to £10.0 million on turnover up 2% to £58.3 million, with management emphasising pre-amortisation EPS up 14% to 27.5p, although basic EPS rose similarly to 24.5p. So with diluted EPS a tad lower still, at 23.0p, there is scope to take different views of the P/E multiple with the shares priced around 400p to buy.
Brokers have tended to project £10.5 million to £10.9 million pre-tax profit for the current year, with only one extending to the 2013/14 year with £12.2 million; this scenario looks reassuring but only time will tell how realistic. If so, then the risk/reward profile likely favours upside.
While the OEM side of the business appears to be stabilising, global systems sales have seen a 15% reduction year-on-year, although management says long lead times and high values can anyway mean inconsistent year-on-year growth. I would however consider that scientific research spending may also be affected in this age of austerity - another uncertainty for the group.
Andor is still positioned to make the most of its markets, for example enjoying twice the share of its nearest rival in one and in another receiving a "Best in the World" award (albeit by a distribution partner). A record number of new products have been introduced in the 2011/12 year, with investment also in software support professionals. This should enhance long-term takeover potential.
A new global sales director has been appointmented to the board following a strategic review of the sales and support function. From October the sales teams have altered from being geographically structured to being focused around research, systems, OEM and software. "We believe this change will leverage our customer and product knowledge globally, creating a focus that we are confident will increase the rate of sales growth."
The company is introducing a dividend policy with a 2p-a-share payout to be proposed at next February's annual general meeting while brokers appear to have been guided to project 3p for 2012/13. This looks to be a shareholder relations effort after the de-rating and the prospective yield is less than 1%, so earnings will remain the focus for valuation.
Not surprisingly for a technology group, Andor's balance sheet has a strong element of intangible assets which represent nearly 35% of £45.3 million net assets. The cash balance has improved 29% to £18.4 million versus negligible debt under £1.3 million, which is substantial in context of a market capitalisation near £125 million. Being the kind of company it is, with an ownership base that presumably seeks capital growth, a higher or special dividend seems less likely. But management will need in its actions to justify why such a cash balance is maintained. Most likely the right acquisitions are a challenge in this specialist field and should not be made unless a sensible fit.
One director owns 3.7%, otherwise the board's holdings are insubstantial. It will be interesting to see if any of them buy now the company is out of its closed period, considering their bullish outlook.
If the government moves to allow AIM shares to be put in ISAs, as currently being considered, Andor looks a worthwhile tuck-away for these schemes, worth watching also by investors exposed to capital gains tax.
For more information see andor.com.