This company quadrupled in seven months. Is its recent fall another opportunity?
When I last wrote about Psion (LSE: PON) a year ago, I thought the shares to be a contrarian bargain at 32.5p. The fact that the shares almost quadrupled in the following months had more to do with fortuitous market timing than individual company performance. The time the article was written coincided almost exactly with the overall market's low point.
That said, things were looking particularly bleak at the time for the rugged hand-held computer specialist due to tough trading conditions and litigation issues between the company's Japanese subsidiary and its trading partners -- and uncertainty over how deep any associated liabilities could run.
Value hunter's delight
But then there was some very heavy director buying in the Spring and the shares generally ticked a lot of boxes for the value hunter; a rare treat with a tech company. Psion had bags of cash and other assets relative to its market capitalisation, paid a decent dividend, and the share price was down on what looked like a classic case of short-term overcooked pessimism and a temporary blip in performance.
Since then, the news has been much better. The management strengthened Psion's market position and made swingeing cost cuts.
The shares reached their recent peak of 122p in October, when investors were understandably optimistic. This optimism then seemed to have been justified with November's strong interim management statement, which spoke of improving market conditions, and "several large new orders" won in Europe and North America.
Share price pullback
The share price responded to this all-round good news by tanking to 80p in fairly short order. Last week's final results for 2009 didn't do much to help the shares which currently sit at 88.75p, valuing the company at just under £125m. This is understandable; the headlines didn't look great.
Sales were down to £170m from almost £200m the previous year, on which the company made an operating loss of £3.1m, and a loss from continuing operations of £7.8m.
On the other hand, net cash stood at £45.3m (over 32p per share); up from £39.9m at the end of June, and the Board felt confident enough to bring the annual dividend up to 3.8p. We also learned that the current year has started in line with management expectations and the company is confident of achieving a "satisfactory outcome" for 2010.
Quite what that means isn't exactly clear, but the stated target is to achieve 10% operating profits. The brokers seem to think this can be achieved, with consensus forecasts for pre-tax profits of £11m this year rising to £14.5m for 2011. This doesn't look overly demanding against an enterprise value of less than £80m.
Now what?
Psion's track record in delivering savings and making its "change programme" mean something real is admirable. This inspires confidence that targets can be achieved and the share price could gradually respond accordingly.
You may be forgiven for thinking that the value has been outed, the shares consequently sold and that's that for now. And there's a lot of truth in that. My own shares were sold far too early as usual. But for those who prefer to look at a company's individual prospects the recent pullback in price may be a buying opportunity.
Admittedly, the shares aren't the screaming bargain they were 12 months ago and there may be no immediate hurry to buy. But it's definitely one worth keeping an eye on again.
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