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

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