E-invoicing firm Tungsten (LSE: TUNG) this morning released its annual results for the year ended 30 April. Unfortunately, I see nothing to change my longstanding view that this is a stock to avoid.
Despite processing invoices of £140bn, including 70% of the FTSE 100 and 72% of the Fortune 500, Tungsten generated revenue of just £26.1m and made an EBITDA loss of £18.7m. Net operating cash burn was £21.6m, deteriorating from £9.3m in H1 to £12.3m in H2.
Tungsten reckoned in May that it could “become cash flow positive by the end of FY17”. However, today it said it’s “committed to achieving monthly EBITDA breakeven during calendar 2017,“ (my emphasis).
While there’s no immediate threat of a cash crunch (the board expects to have “cash in excess of £20m” at 30 April 2017), a share price of 44p, giving a market cap of £55m, looks too rich to me for a company where cash break-even is a relatively distant and uncertain prospect.
Profitable and cash-generative
UK brickmaker Michelmersh Brick (LSE: MBH) is a similar sized company to Tungsten — having a market value of £46m at a share price of 57p. It generates a similar level of revenue, being £29m for the trailing 12 months (TTM), following half-year results released today.
There the similarities end. Michelmersh is profitable and cash-generative. Statutory operating profit works out at £4.6m (TTM), with net operating cash flow also £4.6m. Earnings per share (EPS) is 4.54p, giving a reasonably attractive price-to-earnings (P/E) ratio of 12.6. And with a 1p annual dividend expected to rise to 1.2p this year, the forward dividend yield is a useful 2.1%.
The Brexit result has created some uncertainty, and housebuilders may become more cautious in building. However, with a chronic under-supply of housing, and brick imports falling as sterling has weakened, I rate Michelmersh a buy.
Growth and income
Vodafone (LSE: VOD) released an encouraging Q1 trading update on Friday with organic service revenue up 2.2%, ahead of the analyst consensus of 1.9%.
This result was achieved despite a 3.2% negative drag in the UK, where teething problems with a new IT system carried on from the previous quarter, leading to continuing problems with customers’ bills and a flood of complaints. However, the situation is already improving and the company reiterated its financial outlook for the full year to March 2017.
Analysts expect EPS to rise 30%, giving a P/E of 36 at a share price of 236p. That’s a high multiple, but the price-to-earnings growth (PEG) ratio is a reasonable 1.2. Furthermore, the dividend yield is forecast to be comfortably above 5%, and could be boosted when translated back to sterling because Vodafone is switching to euros as its reporting currency this year.
I’m not concerned that the dividend isn’t covered by ‘paper’ earnings, because free cash flow is on the rise after a period of heavy investment. Indeed, Vodafone has guided on free cash flow of “at least €4.0bn” (before M&A, spectrum and restructuring costs), while a modestly increased dividend will cost €3.9bn.
Vodafone looks set for a period of strong growth, and with the add-on of a highly attractive dividend yield, I rate the shares a buy.
