Decisive action being taken
Given July’s profit warning, Vislink’s interims this morning were never going to be pretty. H1’16 orders and turnover fell 21% and 15% respectively to £22.3m and £22.6m, reflecting ongoing difficulties at VSC (where sales dropped -18.5% to £17.2m) as broadcasters continued to divert budgets from infrastructure to content and transition to IP technologies (re delayed orders). Accordingly this pushed group adjusted EBIT to a loss of -£1.1m (vs £2.2m LY) - excluding £2.2m of forex gains which were credited to reserves - with net debt rising to £8.8m from £5.75m as at December. £1.9m of R&D was capitalised vs £1.6m of amortisation charged to the P&L.
This was largely as anticipated, albeit since June, cashflow has remained tight with the business now fully utilising (vs 80% in June) its £15m RCF facility with Santander after paying a £1.8m dividend on 18th July, and is expected to breach covenants as the end of this month. That said the company is in constructive discussions with its bankers, and management are already lowering working capital levels (% revenues), capex, overheads and non-discretionary spend. A number of self-help measures have been kicked off, involving: a “root and branch review†of VCS with the aim of delivering annualised savings of £2-3m and returning the division to profitability next year by focusing more on newer IP related technology, cessation of future dividends until net debt falls below 1x EBITDA, re-examination of the Board and Group structure and moving the VCS finance function to Head Office to improve debt collection and overall cashflow. We think this strategy makes sense, and suspect too that it could include asset disposals and/or securing other “sources of finance†in order to temporarily shore up the balance sheet.
With regards to the numbers, although we have cut our forecasts, we estimate the software division on its own is worth a minimum of £34m (vs VLK mrk cap of £10.6m) - equating to a modest 2017 EBIT contribution multiple of 8.5x. Additionally, if we put VCS on a rating of circa 0.4x next year’s turnover – adjusting for net debt, forex and central costs – then the revised sum-of-the-parts price target for the entire group comes out at 20p/share (see below) vs 23p previously.
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