Alternative Networks - Interim results

Written 9/01/2014 - originally posted on Stockopedia + UPDATES at the end and today's figures.

Bought Alternative Networks (LON:AN.) back in mid October 2013 after booking a 40% total return on Animalcare (LON:ANCR). This was done via a limit order after it drifted back post a positive trading update at the start of that month. It had come up on my screens and offered a decent yield, with the company stating later in their final results that they were going to grow it by 10% in 2014. It also had cash on the balance sheet of £17 million or so which was around 10% of the market capitalisation at the time which effectively lowers the valuation placed on the underlying business. They said they were looking for acquisition to utilize this cash. 

Today they have announced an acquisition of Intercept IT Ltd for £12.95 million which they say they expect to be earnings enhancing in the first 12 months and beyond - not surprising given you get so little on your cash these days! At first glance it looks a high price, but they mention £5 million of contacted but unrecognised revenue, which if you factor that in makes the likely EV / sales versus the indicated margin look more reasonable. They also talk about "cost synergies" and this acquisition broadening their range so all seems sensible enough.

Again another one that has been re-rated quite nicely so not so cheap now on a headline prospective PE of 18.5x before any upgrades from this acquisition. The yield is still however a satisfactory 3.2% growing by at at least 10% although it is only covered 1.7x by earnings, but the cash flow is strong. On balance another I'm happy to hold for now, but may not be worth chasing at the moment.

UPDATE 24/1/14

The shares had been strong and saw yesterday that they have done another earnings enhancing acquisition for cash - which is probably ideally what you want a company with decent returns and cash to do if they can find suitable opportunities. I see they have had around an 8% upgrade since the last time I wrote, presumably from factoring in the first acquisition. It looks like this one could lead to something similar but lets say 31p for 2015 to be conservative. That would leave it on 18.7x very similar to the last time I wrote except that the shares are now about £1 or 20% higher and the yield is now only forecast to be 2.7%, although this could also be upgraded I guess.

On balance a nice move up, justified by the acquisitions / enhancement, although they will have to bed them in and deliver so not without risks on this rating. Would probably expect some profit taking to kick in soon.

UPDATE 10/04/14
In line trading update issued today highlighting market share gains and good growth across the group. Good cash generation and reducing debt to £30 million  by year end. They also reiterated 10% dividend growth target for the year which is a bit less than is already in the forecasts, although the 15% they suggest for 2015 is a bit more so it averages out. They also keep saying throughout the statement that profits will be more second half weighted. So watch out for interims that might look disappoint and could throw up a buying opportunity.

I reduced my holding in January at 560p as they had gone exponential but they are looking better value now on around 15x and 3.5% yield for 2015 at around 475p, so happy to run the balance.

UPDATE 04/06/14
Interim Results announced which showed  a fall in diluted earnings on the back of extra shares and acquisition cost which I had been worried about and which they had, to be fair, flagged in the April trading update. However, they highlight adjusted figures which show a rise - so you pay your money and take your choice on that. But the company say on this "This analysis is provided as the Group considers it provides a truer reflection of the underlying performance of the business, and is common practice in the investment analyst community." 

They are still talking about a stronger second half than normal thanks to a good pipeline of cross selling opportunities from the acquisitions mentioned above and recent installations that are due to come on stream. Thus the market seems to have taken the results well and sent the shares up a little today in a weaker market. So probably still OK if not great value on around  16x and a 3.5% yield for 2015 with the good growth of 10 to 15% in the dividend forecast, but generally good quality with some decent momentum. So it might be worth a look if you found RPC too dull earlier today.