Stockpedia Small Cap Value Report - 6th SEPT 201927 Dec 2019 18:17
This previously high-flying shares was on a lofty rating, but it disappointed investors with a profit warning at the end of June 2019, which I reported on here. Sales growth seemed to have ground to a halt in H2.
The share price has settled at a lower range of 1700-2000p, having previously peaked at 3436p in Oct 2018. Is this previously highly rated share now a bargain or not? Actually, it's still highly rated, with Stockopedia showing a forward PER of 35 - which seems very high for a company whose earnings growth seems to have stalled, at least in the short term.
As you can see below, from the first few highlights points, despite the profit warning this is still a very respectable set of figures;
5d723a6dac5dfCRW_highlights.PNG
As mentioned in my report in June 2019, I ignore EBITDA for this company (and most software companies) because Craneware capitalises so much development spending.
Outlook - comments are key, because the PE rating is still very expensive - which can only be justified if the outlook is very strong;
5d723b2565463CRW_outlook.PNG
Balance sheet - looks solid. Note that the $47.6m cash has mainly been derived from up-front fees from clients, of $37.8m (called "deferred income"). Therefore, looking at it conservatively, the company's own cash is really only $9.8m.
Cashflow statement - there was a big drop in cash generated from operations (see note 11), down from $33.1m to $15.1m. This was entirely due to adverse working capital movements of $7.8m this year, as opposed to positive moves of $11.5m last year. This should just be swings & roundabouts from one year to another, but does look unusually large swing, so would need further investigation before making a decision to buy the shares.
Capitalised development spending hugely increased, and is now a big consideration, at $9.8m (up from $4.3m in the prior year). Don't get me wrong, I like development spending, as it should sow the seeds of future progress. However, in this case bear in mind that the amortisation charge of $2.9m is much smaller than fresh capitalisation of $9.8m. This has the effect of boosting profit ahead of cashflow, by $6.9m - a material sum when you consider that operating profit is $18.0m.
Another way of looking at it, is that the amortisation charge will increase each year in future, causing a drag on future profitability.
I'm just flagging up this issue, so that readers can do your own research & form your own judgement on it.
My opinion - I do like this company a lot. It has the feel of something special. However, that is reflected in the still sky-high PER valuation.
That said, PER isn't everything. It wouldn't surprise me if someone were to bid for Craneware, given that it operates in USA. That said, personally I couldn't justify paying a PER of 35, just on speculative hopes of a takeover bid. A PER of about 20 is the maximum I would personally be prepared to pay. On valuation grounds therefore, it's too ex
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