Possible chance for a niche growth story
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.