This electronics business is out of favour but it still managed to grow its profits by 20% last year.
Good value, steadily improving performance and a reasonably healthy dividend stream are rare facets for most companies. This is particularly so in today's difficult economic environment – and even more so when applied to tech stocks.
But AIM-listed tiddler Intelek (LSE: ITK) ticks all these boxes. Intelek is a group of companies which designs and manufactures electronic systems for satellite and microwave communication and is a specialist manufacturer for the aerospace market.
A quick glance at the company's final results for the year to the end of March 2009 show sales up 9% to £39.3m, underlying profit before tax up 23% to £4.1m, and earnings per share up 19% at 3.32p – though the figures were flattered a little by favourable exchange rate movements. Strangely, though, the market didn't seem to like the results and the shares have fallen slightly to 15p, valuing Intelek at a miserly £13.1m, and placing the shares on a price-to-earnings ratio (PER) of 4.5.
Why the low valuation?
This is clearly too low. Perhaps, then the problem lies in balance sheet weakness? But no, not a bit of it. Intelek has a net asset value of over £18m, net tangible assets of £3.1m, and overall net debt of £3.8m. Cash isn't a problem either; a healthy £3.2m was generated from operations. OK, this isn't deep value territory on the balance sheet, but it's certainly not as weak as the rating suggests either. And £6m of the overall debt figure is for the pension scheme. Exactly how concerned you are about this aspect of the balance sheet will depend on your outlook.
Anyway, the company was feeling confident enough to increase its full year dividend to 0.465p representing a reasonably healthy yield of 3.1%.
Looking forward
Looking forward, Intelek's management expect a resilient year and expect profits to come in somewhere around the same as last year as things will be slightly held back by the aerospace division due to the small business jet market. The company expects the first half to be below last year's but the second to be stronger. Perhaps it was this aspect of the results that depressed the valuation a little, or maybe investors see Intelek as one of those "perma-value" type situations that takes an age to do anything.
Personally, I like to take a longer term view, looking in both directions. Historically, Intelek has an excellent track record of steadily improving profits despite economic woes from time to time. And looking further forward than the current year, the company looks well placed to build on its core strengths in satellite communications.
Two of its companies, CML and Labtech are based in the UK whilst Paradise Datacom has sales, design and manufacturing facilities in both the UK and the USA. It's the latter that accounts for almost half of all sales and the bulk of profits and it's probably in this area that the future excitement will come.
Future growth
Intelek has high hopes for both Labtech and Paradise Datacom, but is realistic about the need for patience before seeing growth in the current economic climate. Commercial contracts will be harder to come by for Paradise Datacom for a while, but the company is optimistic about winning contracts on government programmes where funding is increasing, saying: "We are currently bidding on an extensive range of programmes of considerable value." It already has in place a number of "significant" government product replacement programmes which will benefit the subsidiary for the next two to three years. Intelek will also look to supplement its own growth with acquisitions within its area of expertise.
I think Intelek is a share to keep for the long term once bought. It's certainly one for the more patient investors amongst us as it could take time to come good. But it certainly looks far too lowly rated given its track record and future potential. Any recovery in markets improves that potential still further, but even without it, Intelek still looks too cheap. The chart reveals that the shares were 23p last June. That would seem to be a fairer price and even that isn't too demanding -- but if achieved would reward investors today with a better than 50% return.
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