Anite finals

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 released their final results yesterday, which as expected demonstrated a strong recovery in the second half :

Click on table to enlarge

Revenue for the full year from continuing operations was £109.2m compared to £113.1m last year and adjusted operating profit was £15.3m compared to £29.7m.

Adjusted diluted EPS was 3.9p compared to 7.1p last year and statutory diluted EPS was 2.6p compared to 5.1p last year.  Management proposed a final dividend 1.265p making a flat 1.84p for the year. 

The results for continuing operations above exclude performance from the Travel business that was sold post year-end in May 2014.

Network Testing had a reasonable performance during the year, but as is well known the Handset Testing business had a poor year, compounded by a £1.5m Chinese bad debt, the only bright spot which augers well for the current year is the 14.9% increase in the order book:

Handset Testing

Sales    £77.3m  -11.1%
PBIT    £10.8m  -58.9%
Margin 13.97% - 1626bps
Orders  £81.3m  -8.5%
O/book £30.8m +14.9%

Network Testing

Sales    £31.9m  +21.8%
PBIT    £6.0m  +7.1%
Margin 18.81% -264bps
Orders  £31.9m  +21.8%
O/book £0.1m  -





The closing order book that was up 14.9% to £30.9m should generate momentum for the current year and management have stated that current trading is ahead of the same period last year, although we do have a weak comparable.
 
Free cash flow (FCF) was strong at £17.8m compared to £15.0m in the previous year.  After acquisition, dividend and share buy-back payments, the year ended with net cash of £6.1m compared to a £0.9m net debt position last year; to this will be added the £45m (£43.3m on completion and £1.1m in escrow) from sale of the Travel business.  This places Anita in a strong position to consolidate its presence in its chosen markets by one or two acquisitions.

Anite estimate the current size of their addressable markets as £765m, split £320m for Handset Testing and £445m for Network Testing.  Management expect high single digit growth in Handset Testing sales as it experiences a year of recovery and mid to high single digit growth in Network Testing.  Management are now guiding analysts towards the lower range of expectations, which probably explains the slight fall-off in the share price.  This may be management being conservative and rightly so after such a poor year, much better to have upgrades during the year than more warnings on profit.

Management in their outlook have said "...Overall, we expect the coming financial year to be one of recovery with Group revenue percentage growth in high single digits and similar growth rates expected from both businesses.  With continued focus on cost control and the benefit of operational gearing, we expect a significant rebound in profitability in the coming year..." 

Anite operates in markets that have good growth potential in the medium to long-term and in many of those markets they are the leader or hold a strong presence.  The main competition comes from the likes of Rhode & Schwarz, Anritsu and Ascom.

What can we expect from Anite this year?  Producing a very rough estimate for this year (see below for the detail and assumptions), I arrive at an adjusted (excluding amortisation costs) EPS of 5.11p; that on today's share price of 91.8p equates to a P/E 18.  Not bargain territory, but reasonable if Anite returns to growth along with maintaining its strong cash generation.

Using a discounted cash flow valuation I arrive at a value of 112.8p, that provides a 22+% margin of safety.  Here I have taken the FCF of £17.8m for 2014 and assumed 7.5% growth over the next 10 years and 3% in perpetuity, discounted at 10.5% (Anite does have a low beta, but I have increased its cost of equity by 20% to allow for the equity risk of smaller companies).

Estimate detail for 2015: