Anite finals due tomorrow

Anite is a global provider of hardware and software solutions, systems integration and managed services within its core markets of Wireless and Travel. I have a holding in my growth portfolio (epic code: AIE).

Anite was  not originally amongst the candidates for a growth portfolio, but as I pointed out in my post of 22 May 2013 they missed the cut due to weak one year relative strength.  Since then the market has declined about 5% and Anite's SP has improved about 5%, so that now it would rank as a growth company candidate.

The company will announce their full year results to the end of April tomorrow, which should provide some further insight into order intake levels, business opportunities, the market generally and trading in the new year.  As background to this, the last few announcements can be briefly summarised as:


Interims (04.12.12)
Revenue was up 9% to £61.2m, operating profit up 21% to £14.3m and the operating margin up 2.4% points to 23.4%. Diluted EPS up 31% to 3.4p with net cash of £16.8m (October 2011: £12.6m; April 2012: £16.9m). Interim dividend increased by 53% to 0.575p per share. Order intake though was down 15% to £53.9m and the closing order book at £107.2m although higher than the interim last year of £92.5m, was below the order book at the beginning of the year of £114.5m.

IMS (11.03.13)
As they discussed at the half year, Group order intake remains behind that of last year, mainly reflecting the lumpiness of orders in Travel, which received some significant orders in the first half of the prior year. Trading since the end of Q3 has continued these trends. Overall, the Board remains confident about the out-turn for the year as a whole and anticipates that full year adjusted profit before tax will be in line with market expectations.

IMS (09.05.13)
Overall trading in the final quarter was strong, slightly ahead of that predicted at the time of the Group's Q3 IMS. As a result, Group adjusted profit before tax for the full year will be towards the top end of market expectations. Revenue will be slightly below market expectations, but margins in the final quarter were strong across all three businesses, continuing the positive trends seen in the first half of the year.

Anite operate within two divisions - Wireless and Travel.  The Wireless division is the most important in size and growth potential and is further sub-divided into Handset Testing - enabling manufacturers to design efficient chipsets and mobile devices and test them against industry standards, while meeting customer requirements and, Network Testing - providing mobile network operators with tools that analyse their network coverage and performance. Travel - providing Enterprise Resource Planning (ERP) systems to the travel industry.

Click on chart to enlarge

The Wireless division is the engine of growth for the company with people throughout the world moving from desktop computing to mobile devices.  The volume of data traffic generated by mobile devices has increased 33 fold over the past 5 years and is projected to grow 18 fold over the next 5 years.  The number of handsets sold each year are expected to reach 3bn by 2020, up from about 1.7bn today.  The roll out of LTE 4G offers further opportunity for Anite, most especially since a 4G device requires 20-25% more testing than a 3G device, as devices require backward compatibility and need to work on different frequencies around the world.  As the chart below testifies from 2012 sales, Anite has a wide international spread and have locations around the world to support this.

Click on chart to enlarge

  
 Over the past 3 years Anite has improved its operating margins from 15.1% in 2010 to 23.5% in 2012.  With the interims showing operating margins at 23.4% up 2.4 bps on the prior year and comments from the most recent IMS that margins were strong in the 4th qtr. and continued the trend from the half year, we should expect further improvement here; a sure sign of a company with a durable competitive advantage.

At the current SP of 137p this values Anite at just less than 15x 2014 expected EPS of 9.22p, for a company that is expected to grow future earnings for some years at double digit levels, if it keeps pace with the expansion of its end customers and their markets.

Over the past 5 years to April 2012 Anite has grown book value per share by 8.1% pa and returned 5.45p in the way of dividends per share, to produce an owner's earnings return of 11.6% pa, not outstanding although the free cash flow returns have been a more impressive at 21.2% pa.  With high operating margins, return on equity of close to 20% and good cash generation from a growing market, Anite looks a promising candidate for a growth portfolio.

Based on last year's free cash flow of £16.5m and assuming this grows by 12% pa over the next 10 years and then settles in to 2.5% growth in perpetuity, this would imply an intrinsic value of 178p an almost 30% undervaluation on today's price.  I have used a discount rate of 9% reflecting Anite's low beta value of 0.75.

Tomorrow's announcement should be looked at for confirmation of the growth story, or whether there is any caution conveyed by management that may temper expectations.