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Where to find good value on AIM?

With much of the market looking quite fully valued it’s increasingly tricky to uncover decent value opportunities. Many high quality (and highly priced) small caps continue to deliver excellent results, seeing their shares climb ever higher and pushing up valuations. Continue…


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Solid State (AIM:SOLI) – a ‘not so Solid’ trading update

The AIM listed supplier of specialist industrial/ruggedised computers and electronic components has issued a profit warning with suggestions that not all is going to plan with their large Ministry of Justice contract!

The update starts brightly enough and “despite some softening in Solid State’s markets as widely reported by industry peers, the Company has made a satisfactory start to the year.” However, the fact that for the six months to 30 September 2015 turnover of approximately £21m (2014: £17.13m), being 22% higher than the comparable period, is only set to deliver pre-tax profit of £1.50m (2014: £1.55m), being marginally lower, suggests problems!

The big issue surrounds the ‘material contract’ which we assumes means the contract with the Ministry of Justice for the supply of monitoring hardware for GPS offender tagging. Following a customer meeting on 27 October 2015, delivery expectations for a material contract have apparently been “varied” which will impact the second half of the year. The statement continues how “The contract is high profile and a high priority for the customer and Solid State is confident that it is fulfilling its obligations to the customer.” It is hard to gauge exactly what is meant by this but the defensive nature of this statement suggests some differences of opinion between SOLI and customer!

We arrive at the usual ‘second half weighting’ warning with revenues and profits in the second half now anticipated to be significantly lower than expected and, as a result, revenues and profits for the year as a whole will be below market expectations.

With pre-tax profits for the full year previously forecast to be £5.23m, only £1.5m delivered in the first half and the second half now anticipated to be significantly lower than expected, surely this suggests full year profit will also be significantly below expectations.

Revised broker estimates

The house broker has now reduced PBT and EPS forecasts to show a broadly flat y-o-y outcome. Revenue forecasts for the year ending March 2016 are reduced from £57.0m to £44.0m with pre-tax profit reducing from £5.3m to £3.2m.and eps coming back to 36p (from 56p). The dividend is also reduced to 12p resulting in a yield of 2.5% at the current share price. The broker has withdrawn estimates for March 2017.

SOLI has been progressing quite serenely over the past few years boosted by the material MoJ contract so this is clearly disappointing news, let’s hope it’s only a minor blip!


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Trakm8 Holding (AIM:TRAK) – very much on track

The other (check out Quartix as well) high flying AIM listed telematics and data supplier has announced an agreement to supply a major USA based data company with its T10 BLE (Bluetooth™ Low Energy) devices.

The Trakm8 T10 BLE communicates with mobile phones via Bluetooth relaying real-time journey data to the registered device.

This new client is expected to purchase over 25,000 devices during the first two years of the contract agreement and is a further sign of the small group’s growing global presence.

There is no change to forecasts with the house broker forecasting pre-tax profit of £3.4m and adjusted eps of 11p for the year ending March 2016. This suggests a fairly rich 22x current year multiple, falling to approx. 16x for March 2017, however, this little business continues to impress


team

Stephen Drabwell

Stephen is a Co-founder and has been involved in the financial services sector since 1990. He was formerly with UBS where he was employed as a sales trader on the portfolio trading desk and at Washington Financial Group where he was senior trader and a key member of the management team of the Washington US Fund, a successful US equity small and mid cap long/short fund.


team

Chris Boxall

Chris is a Co-founder and qualified as a Chartered Accountant in 1989. He was formerly with Deloitte & Touche, senior adviser with a specialist business consultancy and more recently at Washington Financial Group where he was a key member of the investment management team of the Washington US Fund Ltd, a successful long/short equity fund.