Stock of the Month. A Misunderstood Tech Play

19th Aug '14 by AnonymousUser39518

7 comments 6596 reads

After mulling over how I would structure my monthly contributions to the fine community of stockopedia(!), I have decided to create "Stock of the Month" contributions where I will provide a summary of a company that I think the market has missed.

For disclosure purposes, I will seek an entry into this tech play within the next fortnight but do not hold any shares yet nor do relatives, pigeons or friends

Just to tease you a bit more I will say that this company does not have a record of providing news releases, but when it does and they are positive, the market wakes up, sits down and takes note. The stock price is near the top of its record trading range but is moving horizontally below 100p at the moment. Any snap through 100p could be large. Its share price is 86p.

Enough teasing! Pennant International (L.PEN) is the company I am talking about and I think there is a good chance that Pennant will show off half year results ahead of market expectations. Before blabbing about the pretty swirls and colours about Pennant's financial future, I will say that the shareholding structure is not to everyones taste because the Chairman Powell and Chief exec Snook hold 45% of shares. Outgoing CFO Waller (who is 66) also dumped £1.12m into the laps of institutions at 80p. There was a discount but only of 10% and there has not been follow up selling so the institutions are holding. The margin is too small now and the shares are too illiquid for an insti to offload so I am encouraged

Director selling? Uh Oh! Red flags ahoy! I would agree if he was not going to leave the company but it has been on a phenomenal run and the valuation is not high. There is a nice thing that keeps me interested and this is fascinating.

Chairman Snook was recently given options of 1.4 million shares at a vest price of 5p. But these are not any old options! Look at the conditions.

"conditional upon the ordinary shares of Pennant having traded on AIM at a price of 100p or more for 10 business days within a 20 business day period (1) the right upon an offer for all the ordinary shares of Pennant becoming or being declared unconditional in all respects or upon a scheme of arrangement to effect such an offer becoming effective, to sell…

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AnonymousUser39518

19th Aug '14

I would like to add a big thank you to those who left comments of all sorts on the last thread!

I2015

snickers

23rd Aug '14

This is nothing personal, but what is point of using terms like 'play' and 'taking a position': implying ongoing action and strategy? You either own some shares in a company, or you don't some, and (ramping aside) you can't do anything to improve the value of your handful. Have I taken a position in breakfasts by going for the toast-and-marmalade play? The company itself can talk about plays and taking positions: if it takes a risk on a new product, which might prompt a counter-move from a rival. Surely share-buyers are spectators, not players: your 'position' is your seat in the arena.

Anyway, I risk insulting you because I was passing Pennant's unit the other day, and drove in to do the car park test (this passes for original research with me).

car park: full.
signs of extravagance, water features etc: couldn't see any.
signs of neglect: none. a modest bit of carefully chosen planting around the front door was neat and weed-free.

All very reassuring.

shipoffrogs

"Have I taken a position in breakfasts by going for the toast-and-marmalade play?"

Well have you? More importantly - should we?

Fair dos :). I can use different terminology next time round. Thank you for the comment and it is nice to hear that the premises are good! I do not hold shares yet but will seek to buy some this week as I disclosed

I2015

Paul Scott

24th Aug '14

Interesting write-up, thanks!

I've had shares in this company before, and think it's probably priced about right at the moment, in a market that is generally over-pricing most small caps. I sold the shares when they spiked up to 100p on a magazine tip.

The growth here has been excellent, but I don't think you can dismiss the lumpy orders issue so lightly. The company is dependent on large individual contracts, and I'm not sure that the recurring fees element is that significant? So this type of company is always vulnerable to a gap opening up in the order book, causing a profit warning. Therefore to my mind, whilst things might be going well at the moment, there's no guarantee that earnings will continue to increase.

If management are considering a trade sale, then doesn't that tell us they think it's at or near a full valuation?

Turnover was static around £9-10m p.a. from 2008 to 2011, so I'd want to better understand why it has roughly doubled in the last 3 years, and how sustainable that is?

I really like the idea of Share of the Month, so keep it coming!

Regards, Paul.

Hi Paul,

Great to have a seasoned pro like yourself commenting on my post :)! Thank you!

Naturally, I do disagree though :P. The lumpy orders issue does not deter me at the moment because the company is in the early stages of the contracts. The one they signed in March '13 was for 5 years and worth £16m with contract extensions for up to another 15 years after that. These are long term lumpy contracts if you want to put it that way :) and that I think means you can look past a pe of 10 and more towards 15 because the growth is hitting the sweet spot.

I guesstimate that about 60% of the training services divisions' revenues are non-recurring and the bulk of operating profits actually come from the aftersales support, so having talked to management a number of months ago I think around 50% or the training services division operating profits are actually recurring. I will call that £0.89m from the results. The data services division is not lumpy to I will call the £0.31m as non-lumpy and the software services division is running like a steam train with great earnings characteristics so the £0.44m there is definitely non-lumpy.

I make it that 73% of total operating profits are from recurring or sustainable revenue streams and when the lumpy sales are secured for the next few years minimum, that is a really cosy place to be IMO and I don't see a profit warning being an issue. As I say, I am pencilling in a profit beat for this year! Even if you disagree and take an ultra conservative 30% as training services operating profit as recurring it is 57% of total op profits so still good.

As far as I am aware they are thinking of a trade sale because the directors are getting on a bit and they have such large holdings. It is the easiest way to depart a business and take their stake out and that lines up with the former finance director selling a part of his holding. They are at the age at which they need an exit strategy and Pennant is the sort of biz that could nicely fit in to a much larger player, maybe even BAE Systems themselves for cost savings.

Thank you for the upbeat comment :). I will keep it going! The above is why I think that Pennant is misunderstood by Mr Market!

3rd Sep '14

Results due Monday. Good luck to holders

Stock of the Month. A Misunderstood Tech Play

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