Psion has had a tough year but it remains profitable and is valued only marginally above the cash sitting in its balance sheet.
There's an old Japanese saying "Nakitsura ni hachi" or "a bee to a crying face" which equivocates to "when it rains, it pours". And the rain has certainly been pouring on Psion (LSE: PON) in the land of the rising sun in the last 12 months.
The company specializes in making mobile computers for mobile workers.
Psion's final results for 2008 announced today show a pre-tax loss of £7.6m on a near £200m turnover. In 2007, the company made a profit of £10.8m on similar sales. But the headline figures mask the real story.
Yes, Psion is suffering from the worldwide slump in demand for -- well, pretty much everything except debt advice it seems! -- but the underlying figures weren't half bad. Adjusted operating profit for the year was £6m, the cash balance increased to £41.3m (though bolstered by sterling's weakness) and Psion has no debts whatsoever. That said, the outlook isn't great.
What's the problem?
The real culprit in damaging the 2008 figures is Psion's Japanese problem. This concerns "unauthorized transactions [which…] may have occurred in Japan, leading to litigation with a number of parties".
Psion strenuously denies any liability for the money allegedly owed and is defending itself through litigation and counter-claims. But it still had to make provisions totalling £13.9m and has substantially reduced its operations in Japan. Of course, this could take years to resolve and may hang over the company like a dark cloud.
A slightly more positive litigious development, potentially, is Psion's spat with Intel and Dell over the trademark "Netbook" -- though this could be expensive as litigation always is. The two giant companies have asked that Psion's Netbook trademark be negated. Psion owns the right to the word, having trademarked the term when it created the Psion Netbook handheld computer in the late 1990s.
Psion has launched a counter claim for up to $1.2b from Intel. Even a tiny fraction of such a potential settlement figure could be highly beneficial.
Looking to the future
All litigation is a potential distraction for a company. You get a strong sense from today's results that Psion is eager to leave these matters behind, understandably. The Chief Executive, appointed last April, has set about vigorously reforming the group to improve profitability. Today we learn that the cost-cutting program will continue in 2009 and is on track to deliver between £14m and £16m of annualised cost savings by the end of the first quarter.
On the flipside, Psion thinks demand will be weak throughout the coming year as orders have reduced over the last five months and appear unlikely to rebound in the current year. No surprises there perhaps.
As you might expect, previous relatively low-margin trading, litigation issues and the economic storm clouds have combined to send Psion's shares tumbling over the last 12 months from around 110p to today's 32.5p, which values the company at £46m.
But it's definitely worth keeping an eye on Psion given the longer term prospects and balance sheet strength. "Buy when there’s blood on the carpet" is a stock market adage that may apply here. The legal difficulties and associated costs will be resolved eventually and don't look big enough to bring Psion down. Meanwhile, the company's enterprise value (market capitalisation plus net debt or minus net cash) is just £4.4m -- not too demanding for a company making savings and that manages to deliver around twice this figure in pre-tax profits during more "normal" times.
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