Pos­si­ble chance for a niche growth story

Financial Mail - Investors Monthly - - Analysis - Marc Hasenfuss

Alaris Hold­ings is prob­a­bly not in the sights of main­stream mar­ket par­tic­i­pants. Tucked away on the JSE’s AltX board, this spe­cialised counter first came to the mar­ket as Poynt­ing Hold­ings, amid the eu­pho­ria of the 2007 list­ings boom.

Its strat­egy went some­what awry not long af­ter list­ing, and the share dis­ap­peared off most in­vestors’ radars. Most ex­pe­ri­enced mar­ket watch­ers know that small new list­ings tend to be over­am­bi­tious and of­ten lose sight of fun­da­men­tals in pur­suit of growth. This of­ten puts a com­pany in a com­pro­mis­ing po­si­tion.

In the dark­est hours for Alaris, or Poynt­ing, PSG sur­pris­ingly stepped up. It helped the com­pany re­build its rav­aged bal­ance sheet and sim­plify its op­er­a­tional struc­ture. The share was trad­ing as low as 50c as re­cently as 2013, so some suc­cess has been achieved in terms of firm­ing up sen­ti­ment. The risk at Alaris, though, is its un­even rev­enue gen­er­a­tion — which might re­quire in­vestors to take a leap of faith dur­ing “quiet” re­port­ing pe­ri­ods. Of course, the big­ger pic­ture will show that on­go­ing in­vest­ment in tech­no­log­i­cally ad­vanced se­cu­rity and de­fence is of­ten non-ne­go­tiable.

The Alaris re­sults (to endJune) sug­gest that for long-term in­vestors there could be a chance for a niche growth story at at­trac­tive val­u­a­tions.

Alaris is made up of two main di­vi­sions — Alaris An­ten­nas and Co­jot. The an­tenna di­vi­sion man­u­fac­tures broad­band an­ten­nas as well as other re­lated ra­dio fre­quency prod­ucts for the com­mu­ni­ca­tion, fre­quency spec­trum mon­i­tor­ing, test and mea­sure­ment, elec­tronic war­fare and other spe­cialised mar­kets.

Clients are found mainly in in­ter­na­tional mar­kets, and are sys­tem in­te­gra­tors, fre­quency spec­trum reg­u­la­tors or in the home­land se­cu­rity space.

Co­jot, lo­cated in Fin­land, de­signs and makes an­tenna prod­ucts that serve mainly the mil­i­tary and pub­lic-safety mar­kets glob­ally. Its broad­band an­ten­nas im­prove con­nec­tiv­ity, cov­er­age and com­pet­i­tive­ness of ra­dio equip­ment.

The key take-out from the re­sults is that Alaris seems to be run­ning a tight ship. Profit af­ter tax in­creased 43% to R33m de­spite a gain of only 17% at the rev­enue line to R187m. Nor­malised earn­ings more than dou­bled to 30.5c a share. But more crit­i­cally, net cash flow from oper­a­tions was up more than three­fold to R44m — which equates to around 38c a share.

While the rev­enue growth is hardly pedes­trian, it is im­por­tant to note the break­down in Alaris’s top line.

The larger Alaris An­ten­nas di­vi­sion strug­gled with a slight de­cline in rev­enue to R122m and the af­ter-tax mar­gin drop­ping to 27% (28% in 2017).

There were more pre­ci­sion en­gi­neer­ing projects in the sales mix that slowed de­liver- ies and de­layed in­voic­ing. Mar­gins were hit by in­vest­ment in skilled staff and ad­di­tional project man­age­ment costs.

Co­jot, on the other hand, en­joyed a ro­bust first half to drive rev­enue up 79% to R65m fol­low­ing sev­eral large or­ders.

The most en­cour­ag­ing as­pect of Co­jot’s per­for­mance was the more than dou­bling of the af­ter-tax mar­gin to 23%.

At the time of go­ing to press, Alaris had just clinched a new deal to ac­quire US-based mWave In­dus­tries — a de­signer and man­u­fac­turer of var­i­ous pas­sive ra­dio fre­quency and mi­crowave an­tenna so­lu­tions.

It’s not a huge deal, with mWave earn­ing $420,453 (R6.1m) in the year to endDe­cem­ber 2017. The US op­er­a­tion will not only add to the op­er­a­tional span, but will hope­fully also help smooth out busi­ness flows for Alaris.

Ul­ti­mately Alaris is a longterm story. If ini­tial ex­pan­sion­ary for­ays work out, there is a prob­a­bil­ity that PSG will back more se­ri­ous global growth am­bi­tions. Mean­while, the share is trad­ing at a mod­est earn­ings mul­ti­ple that prob­a­bly ad­e­quately re­flects the cur­rent risk/re­ward equa­tion.

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