Globo growth portfolio candidate

GLOBO

A technology innovator delivering mobile, telecom and e-business software products and services. I have a holding in my growth portfolio (epic code: GBO).

Market/Index	AIM/FTSE AIM100	Industry	Software & IT Services
Sales	€58.1	Earnings	€17.8m
Market Cap	£146.1m	Share Price	43.25p
Norm. EPS	5.3c	Historic P/E	9.63
Est. 2013 growth	13.2%	Prospective P/E	8.43
Est. 2014 growth	43.3%	Prospective P/E	5.93
Rolling PEG	0.31	SGR	24.0%
PBV	1.96	Historic Yield	n/a
ROE	24.0%	Operating Margin	32.8%
5 yr BV + Div return	23.9%	5 yr FCF return on BV	0% #

€1.18=£1

The third company from the growth screen, produced in my post of 3 May, is Globo a small fast growing technology company. Sales and earnings last year grew by 28.3% and 89.4%, but if you exclude discontinued operations (they sold 51% of their Greek operations last year) they grew by 67.3% and 52.8% respectively. Over the last 3 and 5 years they have grown turnover at a compound annual growth rate of 35% and 39% respectively.

As I mentioned in my post on 29 April they have an important footprint in the BYOD (bring your own device) market. The market size is about $68bn and expected to grow at about 15% pa over the next 5 years, with North America representing approximately 36% of the total market.

By most metrics they would appear to be good value: low historic & prospective P/Es, a low P/BV and an earnings yield (operating profit/enterprise value) of 12%. The one fly in the ointment is the lack of free cash flow (FCF)#. Last year was the first time that they had generated any FCF, but even that small amount (€1.5m) was lost as the Greek subsidiary took €6.7m cash with it when it was sold.

Globo has net cash on its balance sheet amounting to €14.2m; it raised €11.4 net through a placing in April 2012 this followed a placing of €19.4m net in 2011.

The business will need to demonstrate good cash flow, before a major rerating occurs, but that may come quite soon if there are positive benefits from two recent agreements. In February of this year they signed a contract with one of the largest electronics distributors in the US – Ingram Micro (NYSE: IM) and in April signed an agreement with Fujitsu, to enable their products to be sold through the Fujitsu Cloud Store, targeting the UK & German markets.

So in summary, Globo is an exciting growth company in an expanding market at a cheap price. The risks are - that it has yet to turn results into FCF; that a much larger competitor such as Cisco affects their growth aspirations, or causes them to enter a price war and they then spend inordinate amounts of expenditure on R&D or marketing to protect their position – with the result that substantial FCF is never generated.