A small British company continues to prosper thanks to the sat nav boom.
Sales of satellite navigation units for cars are booming and I reckon it's not too late to profit from this growing market. My favourite way to invest in this sector is to buy shares in Itis Holdings
(LSE: ITH)
. It's a small UK company which supplies traffic information to a large range of sat nav units including those fitted in Ford and BMW cars.
In fact, I like Itis so much I own shares.
Today's interim results were certainly pleasing. Revenue jumped 41% to £8.9m while pre-tax profits soared by almost 300% to £1.8m. Those numbers illustrate one of Itis' biggest plus points -- its terrific operational gearing. In other words, the company's UK cost base is largely fixed, so once those costs have been met, further revenue largely drops down to the bottom line.
Itis was also upbeat today about trading for the full year, and house broker Altium Securities has upgraded its forecasts as a result. The broker now expects earnings per share to come in at 3.5p this year, rising to 4.7p in 2008. At 62p, that puts Itis on a forward price/earnings ratio of 13.
The company also has a £7.2m cash pile which means its enterprise value (market cap minus net cash) is only £55.2m. I think that's a low valuation given that pre-tax profits are now forecast to hit £4.7m in 2008.
And Itis has plenty of growth potential. Today's statement claims that only 8% of new cars in the UK are sold with fitted in-vehicle sat nav units; the equivalent figure in Germany is 24%. What's more, there's plenty of scope for international expansion. In the first half, UK revenue comprised 98.6% of total turnover.
The company's great hope for global growth is its CFVD (cellular floating vehicle data) technology. CFVD enables Itis to obtain traffic data by tracking the progress of mobile phones. This contrasts with the UK's FVD system which monitors the progress of probes fitted in vehicles.
Itis has signed a couple of CFVD deals in the US, but progress has been disappointingly slow. However, I'm not too concerned as Itis has a partner in the US which means that costs for Itis are low. I'm also comforted by the management's excellent track record in the UK, so I reckon there's a decent chance that the US will come good in time.
And anyway, at 62p, I don't think there's anything in the share price for the global business. I think you can happily justify the current price on the UK operations alone.
Are there any downsides?
Of course, this isn't a risk free investment. Itis faces competition in the UK traffic information market from Trafficmaster
(LSE: TFC)
, which appears to be a much better managed business now than two or three years ago.
Trafficmaster has several virtues, but Itis is still the UK market leader in supplying traffic information to sat nav units, both those fitted by car manufacturers as well as portable devices made by the likes of TomTom.
TomTom is also developing its own mobile phone traffic data business, so it's possible that the company may use its own data in UK units in the long term. However, a recent contract renewal means that Itis will continue to supply data to TomTom units in the short-term, possibly much longer.
There's also a chance that the sat nav boom could fizzle out, or customers might decide they're not interested in traffic information.
Still, there's much to like here, and I think the shares remain attractive. I'm happy to hold.
More:The Great Sat Nav Showdown | Telematics Lives Up To Its Potential
Ed owns shares in Itis.
