Thursday, August 23, 2012

Thu 23 Aug - pt. 2 - DLC, SMWH, ROL

Part 2 of this morning's report, as there are some more company results worth looking at.

Firstly, CAD software company Delcam (DLC), which is an old friend - I did quite well a few years ago on these shares, and know they have a good following on Motley Fool. The market seems to like their interims to 30 June, announced this morning, with the shares up 7% to 815p at the time of writing this, which is a mkt cap of about 65m.

Pre-tax profits rose a stonking 67% to 2.1m for the 6 months, and basic EPS up 77% to 26.2p. Very nice indeed. That is on turnover only up 15% to 22.9m, so it's a high margin business (gross margin is 67%), which is great when turnover is rising, but dangerous if sales prove sluggish. With software companies one also has to be very careful about one-off licence sales - how much of the revenue is recurring? The answer needs to be, "the vast majority" to interest me in the shares. From my cursory look, Delcam does seem to be heavily dependent on licence sales, which is a big risk factor. Someone who knows more about the company may be able to comment on this, and whether they are going down the more stable SaaS route, or not.

Strong cash balance of 12.6m, although as usual with software companies, some of that is up-front payments by customers (shown as a creditor called "deferred income"), therefore knock off that 6.4m to arrive at a true cash figure of 6.2m. There seems to be a pension deficit too, which is surprising for a tech company (as they are usually too young to have ever had defined benefit schemes) of 4.0m, so offsetting that against cash brings it close to net cash neutral, which is a more prudent way of viewing their balance sheet in my opinion.

They "remain optimistic for the full year", and according to Morningstar that means forecast 47.4p EPS for the year, so putting the shares on a fairly warm PER of 17.

However, what looks really interesting, is that they are spending a huge amount on R&D - which can often be a precursor to seriously good/better performance in the future, once it feeds through to actual sales.

If I'm reading this right, they say that they spent 5.6m on R&D in H1 (that's 2 & a half times their profit!), and it doesn't seem to have been capitalised. If that's correct, then the profit before R&D is enormously higher at 7.7m for the 6 months, which would make the shares look really great value.

The crux is whether that R&D really is R&D, which will reduce over time, thus boosting profits. Or, whether it's just a normal cost of running the business, which they happen to call R&D. I suspect it might be more the latter, as software companies have to run to stand still, constantly improving the products or they quickly fall behind, wither & die.

Also, if they were really expensing that much genuine R&D, then surely the tax figure should be negative (due to R&D tax credits)? Which it isn't. So at this stage, on first glance, I'm a bit sceptical about that R&D figure.

So overall, I'm intrigued. But on balance won't be buying any, as it wouldn't take much to trigger a nasty profits warning here - you know the type of thing, customers deferring buying decisions due to uncertain macro picture, which for a company heavily dependent on high margin licence sales, makes it quite high risk in the current wobbly macro situation.

Moving on, WH Smith (SMWH) has put out a surprisingly bullish trading statement. I just don't understand how it is that WH Smith are doing so well in a downturn - this should be the type of business that is moribund, selling declining things like books & newspapers, cards, etc. But it's doing remarkably well (they also have a big travel agents operation - but again, not exactly a booming sector).

It's got to be down to management & strategy, which against the odds are working well. Anyway, they expect results for y/e 31 Aug 2012 to be at the "top end of market expectations", so that's around 60p EPS, so even after gapping up 4% this morning, at around 600p they're on a PER of 10. Not bad for a business which is defying the gloom to out-perform. 4.5% divi yield not to be sniffed at either.

I've not looked at Rotala (ROL) before, but it's a small (16m mkt cap) regional bus operator on a PER of 8 and 3% divi yield. Profits are flat, but buses has to be a long-term growth area, and potential bid target. I see Nigel Wray holds 12% too, who is a very smart investor. Might be worth a look?

OK, that's it for this morning, mental capacity reached its short term limit!

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