Here's the lowdown on a cash-rich company which operates in two interesting growth markets.
I like cash-rich companies -- especially if they're profitable. A cash cushion means the company shouldn't be overwhelmed by debt in the near future, and it also reduces the chances of a dilutive share issue at a bargain price.
Dmatek
(LSE: DTK)
, an Israeli electronic tagging company, is just such a business. It's just announced a decent first-half profit, and has a net cash pile of $18.1m (£9.7m). That's a strikingly large figure for a £28.6m company. The company also operates in two interesting growth markets. But is the business growing fast enough?
Dmatek is best known for the electronic tagging of lawbreakers outside prison. Given the costs of incarcerating an adult for a year (around £40,000 in the UK), any product that can help keep prisoner numbers down looks attractive. Dmatek has won contracts for this kind of business all round the world. What's more, Dmatek is now moving inside the prison walls too.
I recently met the company's CEO, Yoav Reisman, and he was very excited about the potential of "inmate tracking." Traditionally, prisons have regular roll-calls to make sure that no prisoner has jumped over the wall or is up to no good. If the movements of all prisoners are tracked, roll-calls are no longer required and prison governors can reduce costs by laying off warders.
And then there's Dmatek's second market: the monitoring of elderly people, primarily in nursing homes. The tagging of law-abiding people seems a little Orwellian, but it could mean that help is provided more quickly after a fall or other incident. The only problem is the elderly care business is growing at a pedestrian rate -- first half revenue only rose 6% to $1.8m.
I also worry that Dmatek is still a fairly small business; I think it needs to bulk up. There's a danger that it could get squeezed out by one or more bigger players in the security field.
That said, Reisman wants to grow the company and said the cash pile may well be used for acquisitions. What's more, one bigger US player, BI Incorporated, is now selling one of Dmatek's products. So the technology, some of which is patented, does appear to be valuable.
Valuation
Shares in Dmatek are currently trading at 126p. Once you've stripped out the cash pile, the company has an enterprise value of £18.9m. With forecast ebitda of £2.51m, the EV/ebitda ratio for 2006 is 7.5.
That's on the low side for a growth company, but I don't think Dmatek is a stunning bargain right now. Going back to the first half figures, overall revenue grew 18% to $12m while operating profit grew 15% to $1.25m. In other words, growth isn't stratospheric, and I think there's still a significant amount of risk here given the size of the company and uncertainties about its competitive position.
This is a business I want to get to know better, and I'll certainly keep watching. I'm curious to know what Reisman will do with his cash pile, and I'll also be looking out for a lower share price or signs that Dmatek is growing more quickly -- especially the elderly care side of the business.
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