Every little contract helps Crimson Tide grow profits

Small cap Crimson Tide (AIM: TIDE) has produced good interims today, showing a rise in both profits and revenues.

For the 6 months to June 30, 2015 pre-tax profits increased 140% to £60k from £25k for the same period in 2014. Notably, this was achieved on revenue growth of only 10% with turnover of £673k (2014: £614k).

Net cash balances increased from £239k at the end of 2014 to £499k at 30 June 2015 partly assisted by asset finance from Lombard for new hand-held devices purchased for new contracts.

Gross margins are now over 90% and being operationally geared, the increasingly large contracts that are being signed for its MPRO5 software service (average term 3 years) are delivering steady and predictable profit growth.

It’s got blue chip clients across a range of industries. In the first half it won a contract for mpro5 to distribute The Evening Standard (it already does the Metro nationally). It addition, its deal with Nestle is continuing well: following initial roll-out in Australia, it has now being used in German and Brazil.

Another major contract for a major UK supermarket was signed following a long pilot during the first half.

In addition, it will be targeting opportunities in healthcare as well as food health and safety, where executive chairman Barrie Whipp sees ‘tremendous upside”.

Potential

I’ve been a fan of this company for a while, and admittedly its progress has been slow but steady – still that is the kind of company that wins the race and delivers great returns for early investors.

I’d strongly recommend that any investor looking for a combination of profitable growth that will drive share price appreciation take a good look at Crimson Tide.

Currently, its share price trades between 1.75p-2p. However, I expect it to burst through this range as soon as the market cottons on to this growth story. (In the meantime, it can be picked up fairly cheaply).

Analyst Eric Burns  at house broker WH Ireland expects full year pre-tax profits of £177k for 2015, rising to £421k in 2016 and £921k in 2017.

He commented in a note out this morning: “TIDE remains a cash cow with a £361k cash inflow from operating activities (against EBITDA of £198k) taking cash balances to £500k. A building level of recurring contracted revenue also adds weight to theinvestment case. We retain a Speculative Buy rating and 2.25p price target. “

Personally, I think that with increased marketing effort and a steadily growing reputation in the market it could well beat these targets in fairly short order.

Executive chairman Barrie Whipp isn’t given to hyperbole, quite the reverse. Thus the bullish tone of his comments accompanying these results is worth noting: “The Board and I feel that we are now seeing the benefits of the substantial gearing that we have generated. We are confident that the new channel strategy will result in greater opportunities and look forward to the future with ever increasing optimism. “

Of course, small caps are inherently risky and any investor should do their own research.  Still, I’m expecting that regardless of the macroeconomic scene this will be a multiple of its current price within 2-3 years.

The writer holds shares in Crimson Tide

Seeing Machines driving forwards

AIM-listed Seeing Machines is making great inroads into its target markets, yet the year end figures alone don’t really give much indication of this. Hence the price at around 4.5p has remained static. However, at this level it appears undervalued.

For the year to June 30, 2015 revenues grew 20% to A$21.2m, although this Australian company produced a thumping loss: A$10.2m (approx £4.7m), which was significantly up on the previous year’s A$2.7m. Moreover, cash outflow rose to A$21.5m, offset by a fundraise of A$10.8m, leaving net cash of A$14.4m.

Still this loss has to be seen in the context of a growth company that is investing heavily in R&D, sales and marketing while making good progress in cracking markets for its innovative driver safety software products aimed at 6 key global markets.

These markets are:

  • truck and mining equipment
  • commercial haulage fleets of trucks
  • cars
  • rail
  • aviation and simulators
  • consumer electronics.

Mining

It has successfully cracked the truck and mining equipment market with an alliance with Caterpillar, the largest manufacturer of such vehicles. Post the year end it announced that it had signed a US$17.5m deal with Caterpillar whereby Caterpillar will take over responsibility for manufacturing, marketing and sales of its DSS off-road product. In addition, to this payment (US$9m of which Seeing Machines will receive by January 2016), it will also receive royalty fees for DSS hardware, software licensing, monitoring and analytics services.

This is quite an achievement given the state the global mining industry is in and shows that even in markets hit by macroeconomic turmoil, the benefits of its products are unquestionable and it can deliver growth.

Commercial fleets

Caterpillar will also distribute its ‘Fleet’ product, which was launched in April. Given that the company is estimated to have over 3m vehicles in this area it bodes well for future growth in this segment.

The fleet product is essentially a cheaper version of its caterpillar driver monitoring system designed specifically for trucks, busses and other commercial fleet vehicles. It provides drivers and supervisors with real-time notice of when a driver is either tired or distracted. It has already made its first order for 750 units in South Africa and has put in place distribution networks around the globe.

Cars

It’s perhaps the development in the car industry that are really going to grab headline over the next couple of years and hopefully increase its profile among the general public. Here it has been working with a Tier 1 automotive safety supplier Takata. Its first product in this market is likely to be launched at the Los Angeles Car Auto Show in November. It will be in the Chevvy Super Cruise from General Motors, which will be on sale in 2016.

In addition, it is working with a number of other auto-manufacturers on safety and entertainment systems so the prospects for further launches appear excellent.

The quality of its partnerships is also quite staggering for a £45m small cap. In the area of aviation it is working with Boeing to develop a pilot monitoring system. One has been installed in a Boeing Flight Services 737 Flight Simulator at the Brisbane International Airport. They are also working with a subsidiary of Caterpillar, EMD to develop a train driver monitoring system. Lastly, in consumer electronics they are working with Samsung on televisions that can monitor audience reaction. Most companies would probably be viewed as a bright prospect working with these alone.

Analyst view

Lorne Daniel, analyst at house broker finnCap has forecast a small adjusted pre-tax profit of A$0.8m in 2016 on revenues of A$43.2m. Revenues are anticipated as falling slightly in 2017 to A$43.2m with an adjusted pre-tax loss of A$9.1m as the exceptional boost from the Caterpillar deal falls out of the figures. However, he sees the business taking off in 2018, forecasting sales of A$65.8m and an adjusted pre-tax profit of A$8.3m.

Despite the company investing almost £15m a year, it appears fully funded for profitability. Of course, given the scale of its ambition it is just possible that it could raise more to finance another ‘transformational’ partnership.

When I spoke with Lorne Daniel he was certainly very enthusiastic about the company. Indeed, in a note issued on September 22 he estimated the mid-term value of the company at £480m based purely on a sum of the parts valuation on the prospects for the Caterpillar/DSS, OEM auto and fleet businesses.

I’ll quote his concluding paragraphs to explain how keen he is on the company. “This is not a blue sky valuation. There is little if any credible competition in its markets, and revenues are already flowing from them. There evidentially little risk in the CAT business; there is a strong pipeline for the automotive OEM opportunity; and straightforward execution risk in the commercial fleet business. We have ascribed no value at all to the rail, aviation or consumer electronics market opportunities at this stage.

Even discounting the above £480m valuation of a mature business by 75% for the risk and time needed to achieve these sales levels would suggest a £120m value or 12p per share target price at a minimum.”

It is hard not to agree that Seeing Machines is terribly undervalued, particularly if you look at the valuation of a peer called Mobileye. This US-listed, Israeli company develops vision-based advanced driver assistance systems providing warnings for collision prevention and mitigation. Its systems appear less impressive than Seeing Machines and fortunately non-competitive, although the company is already making solid profits and is valued at US$10bn.

Prospects

Seeing Machines’ technology is proven, as are the deal making skills of its management. Coupled with the realistic prospects for the future this seems as close to a multi-bagging one-way bet as you could wish for.

Of course, it may get taken out by a bigger company long before then. Market Eye certainly has the cash to do it and acting soon would mean paying a fraction of the price it would cost to buy this Aussie innovator in a couple of years.

Alternatively, given the progress this company is making in actually enabling computers to see and gauge human reactions, it would be no surprise if Google or Apple already have their eyes on Seeing Machines.

The writer holds shares in Seeing Machines.

You should always conduct your own research before investing.

Crimson Tide set for a re-rating

Small cap Crimson Tide (AIM: TIDE) seems set for a re-rating following news of its latest big contract win, a £1.1m revenue deal over 36 months with one of the country’s leading retailers, much of which should go down to its bottom line.

It’s a pity Crimson couldn’t name the company as it would most likely have set a rocket under the share price. Still, every little bit of revenue helps.

Given that rollout of the deal for its MPRO5 software service is expected to start by the end of this year, with invoicing building during a deployment process the impact should be felt most heavily in the 2016 financial year.

Analyst Eric Burns from house broker WH Ireland commented: “Whilst clearly positive news, we leave forecasts unchanged for the time being (FY 2015E estimated revenue £1.4m, pre-tax profit £177k, earnings per share (EPS) 0.04p; full year 2016 estimated revenue of £1.8m, pre-tax profits of £421k, EPS 0.09p) and will review our assumptions once the rollout dates become clearer. We reiterate our ‘Speculative Buy’ recommendation and 2.25p share price target.”

Much of Crimson Tide’s work delivers margins of around 80%. Even if one were to assume lower margins on the work, this deal should significantly boost pre-tax profit forecasts for 2016.

The news follows an announcement in June of a deal worth “at least £218,000 of contracted revenue” over its 4-year term.

More significantly its relationship with Nestle appears to be progressing well in Australia and it is apparently working on installing further systems in Germany and the US.

Given this is a minnow, with a market cap of only £8m, I’m expecting an upbeat interim statement at the end of September after which profit forecasts should be significantly increased.

As a debt-free, profitable company that is growing revenues and profitability, with increasingly good earnings visibility, it seems cheap at 2p.

In a year’s time, I expect that this will look very much like a buying opportunity regardless of how well the overall economy or stock market is doing.

Of course, small caps are by their very nature a risky play. Still, in this instance I’m very happy to eat my own cooking. I’m in good company as David Newton’s Helium Special Situations fund increased its holding to 20.45% in January this year.

Video interview

If you’d like to learn more about the company, watch my interview with executive chairman Barrie Whipp, from last year. It gives you the basics about the business.

The writer holds stock in Crimson Tide

Lies, damned lies and Corbyn as a beacon of hope

There’s no doubt that the US Fed should be trying to normalise interest rates. However, as only very few commentators have pointed out, it can’t. The financial sector in whose real interests it runs policy are dependent on ‘accommodative’ monetary policy: whether that continued low interest rates or quantitative easing.

They are clamouring for the Fed to hold off, joined by the IMF and World Bank.

That isn’t to say that a token (0.25%) rate rise is totally inconceivable. However, whatever the Fed does isn’t going to stop a ‘deflationary bust’ as Soc Gen analyst Albert Edwards and Professor Steve Keen have been forecasting for quite a while now.

The big lie

The biggest lie that is generally believed (by journalists, commentators and the public) is that the Fed, Bank of England, European Central Bank run policy based on what is good for the economy as a whole. They don’t. They run in for the benefit of their financial sector; banks, hedge funds etc. The ‘1% mafia’ or ‘political-financial ‘complex.

It is a point made very well by economist Michael Hudson in the following video when talking about the US economy and recent stock market volatility.

Of course, this is all going to end in tears as soon as the penny drops. The question for the Fed is: how can it avoid that penny dropping and keep the Ponzi scheme running, despite the lack of a real recovery in the US economy. Any token rate rise needs to be set in this context.

Evidence

As John Williams’ Shadowstats has written, the real unemployment rate in the US is roughly 23% but has been calculated in such a way to define it in such a way that many long term unemployed workers drop out. Moreover, in his his latest newsletter he points out that real monthly median US incomes are still below the 2009 headline trough of the formal 2007 recession.

His explanation is that: “Discussed frequently here, actual U.S. economic activity has not recovered from its collapse into 2009; it is not recovering, and it is not about to recover. Despite all the gimmicked and upside-biased GDP reporting, underlying economic reality is weak enough to have begun to surface in recent, downside headline reporting.”

Among other factors hurting economic activity, US consumers remain constrained by currently intractable liquidity woes, which prevent sustainable real or inflation-adjusted growth in personal consumption and residential investment, areas that account for more than 70% of broad, domestic economic activity.”

This conclusion vindicates Professor Steve Keen’s analysis years ago that the US/UK recoveries would be hampered by high levels of private debt, leading to a Japan like scenario.

To avoid this stagnation Steve Keen recommended only last year that goverments should be: “Writing off much of the private debt, and changing laws relating to mortgages and share ownership would be a good start. A certain amount of debt-financed investment and consumption is actually desirable in a growing economy, but while debt levels are as high as they are now thanks to the Ponzi Schemes of the last four decades, that debt-financed investment and consumption will be weak. They should also realise that a government deficit is a sensible policy most of the time in a growing economy.”

With the election of Jeremy Corby as leader of the Labour Party, there now seems to be a realistic possibility that the voters of England will be able to hear the truth about what has been going on before the next election from a party that stands a chance of being elected through our present electoral system. (Although, they won’t get much help from much of the mainstream media).

Learn more

I’ve found the works of Professor Steve Keen, Mitch Feierstein and Michael Hudson invaluable in gaining a better understanding of what is really going on. Sadly, you won’t (yet!) see any of the them interviewed at length on prime time UK television.

SQS Software falls on profit downgrade

SQS Software issued a veiled profit warning when reporting its interims yesterday and promptly fell 15.7% to 480p.

It’s had a great run since December 2011 when its shares were only 146.50p and investors clearly decided to take profits. Given the balance of risks, that seems like a sensible move.

The cause of the fall was the revelation that: “We will further react, adapt and manage potential impacts on our clients from continued global economic uncertainties. For all these reasons we have to be more cautious and anticipate our profits for the full year to be slightly below the Board’s previous expectations.”

According to management, analysts had expected adjusted pre-tax profit for the full year to be in the region of €22.5 to €25m, but it has been downgraded to around €21m. It has been hit by lower gross margins in Regular Testing Services (RTS) business (34% of revenues), which have declined from 33.6% from the first half of 2014 to 26.4% in this half.

This news is hardly disastrous but, if you’re bearish on the prospects for both the US and German economies as I am, they could be in for tough times. Certainly, the balance of risk in the short term is to further downside.

For the six months to 30 June 2015, revenues increased by 16.1% to €150.3 with pre-tax profits of 5.2m against €3.3m for the same period a year earlier.

Although its two recent US acquisitions should drive up US business, paying for them has increased its net debt to €26.5m. Moreover, operating cash flow  was also negative to the tune of €5.2m, compared with an outflow of 2.6m at the same stage in 2014.

That said, the company explained: “we continue to expect receivable days to return to more normalised levels during the second half of the current year to

deliver strong cash generation resulting in a significantly strengthened balance sheet by the end of the current financial year.”

Management confirmed that, as payments are weighted to the second half, by year end it expects positive cashflow to the tune of €26m — as in 2014.

In a note issued yesterday, Canaccord Genuity reduced its price target from 730p to 650p and maintained its ‘Buy’ stance. Analyst Arun George commented: “We downgrade our full year 2015 adjusted pre-tax profit forecast by around 7% to €22.8m and full year adjusted pre-tax profit by around 6% to €27.7m. Given the uncertainty on the timing and path of margin recovery, we reduce our price target to 650p (previously 730p). This implies an estimated calendar year EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) of around 8 times.”