Vislink transmitting mixed signals

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Having reaffirmed my commitmenHaving reaffirmed my commitment to deep value, buying shares at very cheap prices so long as I reckon companies have a profitable future, I’ve picked the company at the top of my newly cleaned-up bargain shortlist as the next company to research. Vislink (VLK) makes satellite systems, wireless cameras, and microwave radio transmitters and receivers for broadcasters mainly, and law enforcement agencies. These products enable the transmission of live video and radio. The market values Vislink at just 73% of the value of its current assets (mostly cash) less all liabilities on 31 December 2010, but the situation has changed since the end of its financial year, and there’s less cash now. New chairman and interim chief executive John Hawkins is reviewing the business, which was restructured just last year through the sale of HERNIS Scan Systems, a company that makes CCTV for oil and gas installations. The sale explains all the cash and so far Vislink has used it to repay its debts, buy loss-making Gigawave (£3.75m in instalments) and buy back lots of shares in a tender offer (worth £5m). Paying off debt reduces risk. Buying back shares creates value if the shares are cheap, and that’s true if the company recovers from here. The same might be said of Gigawave. Vislink says it can return Gigawave to profitability this year, and if it does it’s probably a shrewd investment. But we don’t yet know if Vislink’s new and future investments will be money well spent, the man in charge while the company searches for a permanent ceo is a bit of an unknown quantity, and his record at Thrifty 30 graduate Anite until 2003 does not inspire confidence. He was ousted as chief executive after an acquisition fuelled boom turned sour and controversy about the size of his pay packet, money, perhaps, not so well spent. I take some heart from this statement in the annual report: Following the announcement of further cost reductions at the start of 2011 the Group intends to continue to contain its operating costs. No further immediate expansion is planned; our regional sales offices are appropriately staffed and the major planned investments in information technologies have been completed. The rest of the report reveals Vislink is loss-making, the result it seems of belt-buckling by broadcasters and public bodies during the recession and the end in 2009 of a US Government programme requiring broadcasters to convert to digital equipment and relocate radio transmissions to a higher frequency. Its middling F_Score of five out of a possible nine belies a decline in the most important statistic, return on assets, from –2% to –10%. HERNIS, the bit Vislink sold, made a profit of about £2.7m in 2010, but it and the £21m profit Vislink made on the sale, are excluded from the adjusted loss because it’s no longer part of the business. It looks as though Vislink has sold a profitable (and presumably more marketable) division to save its unprofitable (and presumably less marketable) businesses. That may not be as mad as it seems. Perhaps it couldn’t find any buyers for its other businesses. If it could not get a fair price for the rump but is convinced it has a future, then keeping the undervalued assets actually makes sense (to a value investor like me). And finally, I’ve experienced this before. Johnson Service did the same thing, and it’s still with us. An update in May, before payments of just over £2m for Gigawave, revealed Vislink’s cash balance had fallen £5.5m from net cash of £22.2m in December to £16.7m, and it was still loss-making although it aims to be operating profitably by the end of this year. The strategy is to reduce the number of products and services, while increasing its geographical spread. So Vislink’s moved out of marine safety, but intends to sell more in Asia, Africa, and the Middle East (already 40% of sales are from outside North America and Europe). To be very good at a few closely related activities, package products up with expertise and consultancy, and expand globally, is part of the generally successful hidden champions strategy, so I approve, although to do that profitably is little more than an aspiration at this stage. I like companies like Vislink, even though most investors think they’re scary. Statistically they make good investments, and I think that’s because once a company has been touched by the spectre of insolvency, the risks are apparent. If management is more conservative, cutting costs as Vislink is, by rationalising its operations, switching manufacturing to lower-cost factories in Asia, withdrawing old products, and restructuring the business along more modest, sustainable lines, then the level of risk is falling at the same time as the share price. Since the less you pay for an investment the higher your future return (other things being equal) a falling price (higher return) and less risk breaks the bond between the two and offers us the prospect of a relatively low-risk-high-return investment. That’s the holy grail of value investors, so I’m going to push on and see what its ten year record shows.


Big spread on this one.

Should be interesting to see how this turns out. Best of luck.

I've help Vislink for about a year now and for most of that the management has continued the restructuring and turnaround efforts. Not sure how much longer it will take but if you get in now you might save yourself that year of waiting.

I'm actually looking to get out as this is, like you say, deep value whereas I'm looking for quality value. My 'sensible price' is only some 20% or so above where it is now so it will be interesting to see how your thoughts differ from mine.

[...] methodology is everywhere. Over at iii and Valuhunteruk, we see the same question being asked - in the first case, of Vislink trading at [...]

Not that big, compared to some in the Thrifty 30! I have a different view of spreads to many people. They're a cost of course, and I don't like big spreads, but they're a function of low prices and general disinterest in the share. High spreads are the opposite, a function of high prices and popularity. As I'm generally trying to position the Thrifty 30 in value/contrarian shares, I have to embrace high spreads. The pain is an immediate paper loss (because in practice you pay significantly more than the mid price (even though the Thrifty 30 is a virtual portfolio I check the actual buy price with my broker and use that as my cost, plus £10, plus stamp duty), but the pleasure is a greater return in the long run (if I'm right).

Hi John, I just did a quick trawl of your blog but don't think you've mentioned Vislink except in general portfolio roundups so I don't know how you came up with your 20% 'sensible price' - would be interested to know though. I will come up with an earnings yield figure as a by-product of plugging ten years of data into my spreadsheet but I'm not sure how much weight I'll put on it. Vislink seems to have had some exceptional years over the last ten years (arguably counterbalanced by some pretty awful years recently).

I guess I might not have to wait as long as you because kit wears out, goes out of date. If broadcasters have been deferring purchases then demand should pick up again. And of course, it has another year of cost cutting under its belt. But waiting is what I'm signing up for by buying deep value.

Vislink was one that I didn't blog about (yes, very bad I know). My valuation is based on what I think the share price could reasonably be in 5 years and backtracking from that to a price today that gives a 50% return minimum. I just checked my spreadsheet and my guestimate EPS is about 3p forever, i.e. I'm not expecting long term growth. Based on the average PE of around 10 that gives a price of 30p, then add in dividends of around 1p a year. All that lot means a price of around 24p would give me a return of close to 50% assuming everything worked out as expected (which of course it never does).

They are next in my sights for a sale, probably next month as this month I've just sold Creston (media company), which is another I failed to cover. I'll do a full review when I get the post up.

Can't wait to see what you come up with on Vislink. It's always more interesting when people disagree. Also, if I sell at 24p I will only make a tiny profit since I have slightly changed my method of valuation which can give loads of grief if you're not careful.

ATB, John

Thanks John, well I'd better get on with it!

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