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Vislink — Update 17 December 2015

Vislink — Update 17 December 2015

Vislink

Analyst avatar placeholder

Written by

Vislink

Orders for new IP products slipping into FY16

Trading update and potential acquisition

Tech hardware & equipment

17 December 2015

Price

25.0p

Market cap

£31m

Net debt (£m) at end June 2015

1.2

Shares in issue

122.6m

Free float

90.4%

Code

VLK

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(29.1)

(46.7)

(33.3)

Rel (local)

(28.5)

(45.5)

(32.3)

52-week high/low

60.9p

25.0p

Business description

Vislink is a global technology business specialising in the collection and delivery of high-quality video and associated data from the field to the point of usage. These are used in the broadcast, surveillance and public safety markets.

Next events

Prelims

March 2016

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Vislink is a research client of Edison Investment Research Limited

Vislink has announced that the timing of some VCS (hardware division) orders may slip from FY15 into FY16. It has also announced that is in the advanced stages of a small software acquisition. While it is still possible that our previous FY15 revenue estimates may be achieved, we take a prudent stance, revising our estimates and indicative valuation.

Year end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

59.9

4.7

3.3**

1.25

7.6

5.0

12/14

61.9

7.6

5.1**

1.50

4.9

6.0

12/15e

54.2

4.7

2.9**

1.60

8.6

6.4

12/16e

58.6

6.9

4.2

1.70

6.0

6.8

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments. **Normalised for tax.

Hardware sales more “back-end” loaded than usual

While the global broadcast hardware market remains subdued, Vislink has excited customer interest by launching new products based on IP technology. Given the timing of the product launches, orders for these new products only began ramping up in Q415 and there is a risk that some orders expected for delivery in FY15 may slip into FY16. FY15e revenues attributable to the Pebble Beach Systems (PBS) software division remain in line with management expectations. Management guidance for group FY15 revenues is now in the range of £54.0m to £58.0m. Taking a prudent view, we reduce our FY15 estimates, which were previously slightly above the top end of this range, to the lower bound of this range. We also reduce our FY16 estimates to reflect year-on-year growth from a lower base.

Potential software acquisition at advanced stage

Vislink has also announced that it is in the advanced stages of discussions to acquire a provider of software to broadcasters. This small bolt-on acquisition is expected to be highly complementary to PBS’s existing offer. It is in line with management’s strategy of developing the software business to reflect a switch in broadcast equipment expenditure from hardware to software. This strategy is also bringing better visibility of revenues and strengthened margins.

Valuation: Share price multiples lagging peers

The share price has declined by 54% since the interims in September. Our comparison of Vislink’s prospective EV/EBITDA and P/E multiples against those of its peers in the broadcast and surveillance sectors shows Vislink trading at a significant discount to the mean. Applying a 12% discount for the relatively small market capitalisation gives fair value at 52p (formerly 75p). This excludes any benefit from the small potential bolt-on acquisition, or from an FY15 result towards the upper end of management guidance. Management appears keen to continue with a progressive dividend policy, which at this share price level represents a very attractive dividend yield.

Changes to estimates

Exhibit 1: Changes to estimates

FY14

FY15e

FY16e

Actual

New

Old

Change (%)

New

Old

Change (%)

VCS revenues (£m)

53.6

43.9

47.9

(8.4)

47.0

48.8

(3.7)

VCS EBITA (£m)

5.9

3.9

6.5

(40.0)

5.5

6.9

(20.3)

PBS revenues (£m)

8.3

10.3

10.8

(4.6)

11.7

11.3

(3.5)

PBS EBITA (£m)

3.3

3.1

3.7

(16.2)

3.6

3.7

(2.7)

Central costs (£m)

(2.0)

(2.5)

(2.6)

(3.8)

(2.7)

(2.7)

N/A

Exceptional costs (£m)

0.9

(2.2)

(1.7)

27.4

0.0

0.0

N/A

Amortisation of acquired intangibles (£m)

(2.6)

(2.4)

(2.4)

N/A

(2.4)

(2.4)

N/A

Reported EBIT (£m)

5.5

(0.1)

3.3

N/A

4.1

5.5

(25.5)

Group revenues (£m)

61.9

54.2

58.7

(7.7)

58.6

60.2

(2.7)

Adjusted PBT (£m)

7.6

4.7

8.1

(42.0)

6.9

8.7

(20.7)

Adjusted EPS (p)

5.1

2.9*

5.3

(45.3)

4.2

5.7

(26.3)

DPS (p)

1.5

1.6

1.6

N/A

1.7

1.7

N/A

Source: Edison Investment Research. Note: *Normalised for tax.

We have revised our FY15 estimates, which were previously slightly above the top end of management’s £54-58m revenue guidance range, to the lower bound of this range. Most of the reduction is applied to the VCS (hardware) division. Although the new products launched at a major trade show in September are attracting interest from customers, it has taken a couple of months for this to firm up into orders, resulting in a nail-biting finish to the year. The VCS order book for the 11 months ended November 2015 totalled £42.4m. Depending on whether sufficient additional orders land in December 2015 or early 2016, Vislink will either almost meet the revenue estimates in our September 2015 update note or fall short by around £4m. We have also shaved £0.5m off our PBS FY15 revenue estimates. These had previously assumed that divisional H215 revenues would be similar to H115, supported by sales in conjunction with Harmonic. While the recent trading statement from Vislink notes that the relationship with Harmonic continues to strengthen, Vislink’s partner had a difficult quarter ended September 2015, citing currency and macroeconomic headwinds, nearly two dozen material delayed orders and customers “wrestling with technology and business transitions” and noting that five of its top 10 customers had been affected by consolidation.

We expect top-line growth in FY16 to be driven by new products from both the hardware and software divisions. These include the Orca IP-enabled, software-defined integrated channel, which runs on a virtualised platform and the IPLink, which combines the features of a digital broadcast point-to-point radio system with the efficiencies of a high-capacity IP data microwave link. We reduce our FY16 estimates as this growth is starting from a lower FY15 base. We expect to see the full impact of the VCS restructuring programme coming through in FY16.

Financials

Since PBS adds a software offer to a group that historically has concentrated on broadcast hardware, its acquisition would typically be expected to enhance cash generation. However, this effect is masked during FY15 by several other factors, which collectively are expected to result in a switch from £0.4m net cash at end FY14 to £7.3m net debt at end FY15. The key factors are the £2.2m restructuring costs, an increase in inventories as stock is built for new products and an increase in receivables reflecting the high level of deliveries right at the year end. Our estimates show the high working capital position unwinding post the FY15 year end.

Exhibit 2: Analysis of adjusted operating profit

FY13

FY14

FY15e

FY16e

Vislink

Edison

Vislink

Edison

Edison

Edison

Reported operating profit (£m)

3.1

3.1

5.5

5.5

(0.1)

4.1

Non-recurring items (£m)

0.2

0.2

0.9

0.9

(2.2)

0.0

Amortisation and impairment of acquired intangibles (£m)

(1.4)

(1.4)

(2.6)

(2.6)

(2.4)

(2.4)

Share-based payments (£m)

-

(0.4)

-

(0.5)

(0.6)

(0.6)

Adjusted operating profit (£m)

4.3

4.7

7.2

7.7

5.1

7.1

Source: Edison Investment Research

Valuation

The share price has declined by 54% since the interims in September, weighed down by concerns about a challenging market environment for broadcast hardware sales in the wake of announcements from Comtech Telecommunications, Harmonic and Vitec. As a result, a comparison of Vislink’s prospective EV/EBITDA and P/E multiples against those of its peers in the broadcast and surveillance sectors shows Vislink trading at a significant discount to the mean. Given the enhanced margins and improved visibility of earnings that the PBS software acquisition brings to the group, the scale of this discount is not justified in our opinion, although we recognise the validity of some level of discount to reflect the modest market capitalisation. Taking our FY16e EPS as our basis and applying the year 2 mean P/E multiple with a 12% discount for the relatively small market capitalisation gives fair value at 52p (formerly 75p). (The number of companies in our sample has reduced since our April outlook note as a result of the pace of consolidation in this sector.)

Exhibit 3: Share price multiples for listed peers

Company

 

Market cap (£m)

Current EV/ EBITDA

Next EV/ EBITDA

Current P/E

Next P/E

Avid Technology Inc

 

167

3.8x

3.3x

6.1x

6.0x

Cobham PLC

 

3,248

10.6x

10.2x

14.2x

13.5x

Comtech Telecommunications Corp

 

212

3.3x

3.2x

14.8x

13.8x

Evertz Technologies Ltd

 

614

10.9x

9.4x

17.5x

15.0x

EVS Broadcast Equipment SA

 

299

13.9x

10.0x

22.0x

15.7x

GoPro Inc

 

1,169

5.1x

4.8x

14.5x

14.0x

Harmonic Inc

 

243

6.0x

4.7x

44.7x

26.8x

Harris Corp

 

6769

9.5x

8.8x

14.5x

13.3x

PC-Tel Inc

 

54

4.2x

2.4x

40.3x

15.4x

Sepura PLC

 

243

15.0x

12.7x

19.2x

15.6x

ViaSat Inc

 

1,893

10.2x

9.1x

43.2x

31.8x

Vitec Group PLC/The

 

265

6.5x

6.0x

11.1x

10.2x

Mean

7.6x

7.0x

16.0x

14.1x

Vislink

 

31

3.4x

2.8x

8.6x

6.0x

Source: Edison Investment Research. Note: Grey shading indicates exclusion from mean. Prices at 14 December 2015


Exhibit 4: Financial summary

£m

2013

2014

2015e

2016e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

59.9

61.9

54.2

58.6

Cost of Sales

(35.5)

(33.5)

(27.6)

(29.7)

Gross Profit

24.3

28.4

26.6

28.9

EBITDA

 

7.7

10.7

8.8

10.8

Operating Profit (before amort and except)

4.7

7.7

5.1

7.1

Amortisation of acquired intangibles

(1.4)

(2.6)

(2.4)

(2.4)

Exceptionals

0.2

0.9

(2.2)

0.0

Share based payments

(0.4)

(0.5)

(0.6)

(0.6)

Operating Profit

3.1

5.5

(0.1)

4.1

Net Interest

0.0

(0.1)

(0.4)

(0.2)

Profit Before Tax (norm)

 

4.7

7.6

4.7

6.9

Profit Before Tax (FRS 3)

 

3.1

5.4

(0.5)

3.9

Reported Tax

0.4

(1.6)

0.0

(1.8)

Profit After Tax (norm)

3.8

6.0

3.5

5.1

Profit after tax (FRS 3)

3.5

3.7

(0.5)

2.1

Average Number of Shares Outstanding (m)

113.1

117.8

122.6

122.6

EPS - normalised (p)

 

3.3

5.1

2.9

4.2

EPS - normalised fully diluted (p)

 

3.3

5.1

2.8*

4.1*

EPS - (IFRS) (p)

 

3.1

3.2

(0.4)

1.7

Dividend per share (p)

1.25

1.50

1.60

1.70

Gross Margin (%)

40.7

45.9

49.0

49.3

EBITDA Margin (%)

12.8

17.2

16.2

18.5

Operating Margin (before GW and except) (%)

7.8

12.4

9.4

12.1

BALANCE SHEET

Fixed Assets

 

39.6

50.1

48.7

47.6

Intangible Assets

33.0

43.7

42.3

40.9

Tangible Assets

2.4

2.7

2.7

3.0

Deferred tax assets

4.2

3.7

3.7

3.7

Current Assets

 

26.7

37.2

34.8

36.0

Stocks

11.1

12.9

16.3

15.4

Debtors

11.9

16.0

17.7

16.4

Cash

3.7

8.4

0.7

4.2

Current tax assets

0.0

0.0

0.0

0.0

Current Liabilities

 

(13.5)

(22.4)

(20.4)

(18.5)

Creditors

(13.5)

(16.8)

(14.8)

(12.9)

Short term borrowings

0.0

(5.6)

(5.6)

(5.6)

Long Term Liabilities

 

(3.2)

(8.0)

(8.0)

(8.0)

Long term borrowings

0.0

(2.4)

(2.4)

(2.4)

Other long term liabilities

(3.2)

(5.6)

(5.6)

(5.6)

Net Assets

 

49.6

56.8

55.1

57.1

CASH FLOW

Operating Cash Flow

 

4.4

8.0

(0.6)

11.2

Net Interest

0.0

(0.1)

(0.4)

(0.2)

Tax

(0.1)

(0.1)

0.0

(0.5)

Capex

(4.9)

(4.6)

(4.8)

(5.0)

Acquisitions/disposals

(2.4)

(7.0)

0.0

0.0

Financing

0.0

2.0

0.0

0.0

Dividends

(1.4)

(1.5)

(1.8)

(2.0)

Forex

0.0

(0.0)

0.0

0.0

Net Cash Flow

(4.4)

(3.3)

(7.7)

3.5

Opening net debt/(cash)

 

(8.1)

(3.7)

(0.4)

7.3

HP finance leases initiated

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Closing net debt/(cash)

 

(3.7)

(0.4)

7.3

3.8

Source: Company accounts, Edison Investment Research. Note:*Excluding potential shares issued under 2015 Value Creation Plan.

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