AREM, very interesting play imo, here are recent comments from cruttendon Roth
<<CRUT: AREM: Erroneous Information Creates Buying Opportunity
10:05am EDT 12-Apr-00 Roth Capital Partners, Inc. (P. Bloom 415-782-5027) AREM
ROTH CAPITAL PARTNERS, INC.
Paul I. Bloom (415)782-5027
04/12/00
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AremisSoft Corporation (AREM-NMS-$25.00)
Erroneous Information Creates Buying Opportunity / Reiterating STRONG BUY
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Current Rating: Strong Buy 12-Mo. Price Target: $50.00
Previous Rating: LT Debt(mil): $0.00
Shares Out.(mil): 16.6 Debt/Capital: Nmf
Mkt. Cap.(mil): $414.9 Est. 3Yr. EPS Growth: 40%
Avg. Daily Vol.: 173,830 Disclosures: a,b,c
Yr.Dec 1998 1999 -----2000E------ -----2001E------
EPS($) Actual Actual Current Previous Current Previous
1Q $0.02 $0.08 $0.14 $0.14
2Q 0.16 0.20 0.30 0.29
3Q 0.13 0.23 0.40 0.38
4Q 0.17 0.33 0.51 0.49 _____
YEAR $0.52 $0.90 $1.35 $1.30 $1.80 1.75
P/E 48.1x 27.8x 18.5x 19.2x 13.9x
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SUMMARY: (STRONG BUY)
Recently a financial analysis newsletter published a report on AremisSoft that
called into question aspects of the sale of its Cyprus operation to a
soon-to-be-public company GlobalSoft.com. The newsletter effectively asserted
that AremisSoft engaged in a related party transaction that had the effect of
reducing its accounts receivable days outstanding by 19 days ($4.9 million) for
Q4:99. The implication was that AremisSoft was using this related party to
either improve its balance sheet or even worse, off-load questionable
receivables. While the balance sheet analysis in the newsletter is correct, they
failed to research the essential information about GlobalSoft.com that clearly
indicates the appropriateness of the transaction. Currently, AremisSoft is in
the process of developing a major business base in emerging markets and is
exhibiting accelerating growth in revenue and EPS. The stock is currently
selling at a modest 18.5X P/E on 2000 EPS-made all the more ridiculous by the
two quarter plus visibility, while our secular growth expectation has risen to
the 40%+ range. We are raising our 2000 EPS from $1.30 to $1.35 and reiterate
our STRONG BUY rating on AREM stock.
The Center for Financial Research and Analysis(CFRA), a well-regarded
financial analysis newsletter, recently published a report which looked at the
AremisSoft Q3:99 and Q4:99 financials. The key numerical conclusion they draw,
which is correct, is that as part of the sale of the Cyprus subsidiary to
GlobalSoft.com, approximately $4.9 million of receivables was transferred to
GlobalSoft.com, being an asset of the Cyprus subsidiary of AremisSoft. They
then question whether the transaction was "arms length" based upon erroneous and
incomplete information. CFRA asserts that the transaction looks like a related
party transaction, confusing the position of the AremisSoft CEO as the chairman
of GlobalSoft.com, which is not the case, and asserting that he controlled both
parties(He is now the non-executive Chairman but had no position nor executive
control at GlobalSoft.com at the time the transaction was agreed to in September
1999. GlobalSoft.com did not exist at the time the transaction was approved in
September 1999 to a group of third party investors.) Subsequently,
GlobalSoft.com was formed with its own management and board of directors. In
addition, CFRA, by not contacting AremisSoft first, did not know that the
receivable for $2.6 million that Aremissoft received when they sold the
subsidiary was collected in Q1:2000.
* In our opinion, AremisSoft acted in the best interests of shareholders. They
have so far received $2.6 million in cash for the Cyprus subsidiary and have 4
million shares of GlobalSoft.com stock, which is valued on their books at the
private placement value of $1.8 million. These shares should have at least a
$10 million value within two weeks based upon the IPO pricing. The IPO is well
over 100x oversubscribed and should take place within the next two weeks.
* GlobalSoft.com is a collection of eight small software companies in Cyprus
that have joined together to create a larger entity to tap the Cyprus stock
market. Aremissoft contributed its Cyprus business which consists of
approximately 1,000 small customers who purchased turnkey applications from
AremisSoft over the past 20 years as well as approximately $4.9 million of
receivables which were on the books of the unit at that time. By virtue of its
4 million shares, AremisSoft has a 10-12% ownership position in GlobalSoft.com
prior to its IPO. GlobalSoft.com has completed a private equity financing and
has some $70 million in cash. With a planned IPO it is hard to imagine why any
entity would acquire questionable receivables. In addition, we understand that
the receivables in question are being collected in the normal course of business
and GlobalSoft.com has a days sales outstanding of approximately 90 days which
is perfectly normal. These facts clearly call into question the work of CFRA,
which incorrectly asserts that the AremisSoft CEO has control over
GlobalSoft.com.
* In a separate section CFRA makes a comment about a decline of $132,000 in
allowance for doubtful accounts implying that the company is using this to also
bolster earnings. This appears to be misleading information considering the
magnitude of the $17.8 million of operating earnings in 1999. In addition,
management received a $600,000 discretionary bonus in Q4:99 while the Company
handsomely exceeded Wall Street expectations. The Company could have easily
flowed that $600,000 through to earnings.
* From a valuation perspective, based upon the private placement
value-AremisSoft did a fair trade selling the Cyprus assets(including the
receivables). The Company booked a gain of $42,000 in Q4:99 which represented
the difference between the net assets disposed and the value of the note and
stock(at private placement value). Accordingly, both sides received fair value
in the transaction.
* We believe that AremisSoft is continuing to execute ahead of our expectations.
This is due to their capability to deliver cost-effective enterprise wide
Internet enabled solutions in an increasing number of emerging markets. Based
upon the strong backlog and pipeline, we are raising our 2000 revenue from
$110.0 million to $112.0 million and our EPS from $1.30 to 1.35. We have raised
our 2001 EPS estimate as well from $1.75 to $1.80. We think even these figures
are conservative, considering the strong business base.
* The stock is relatively cheap at a valuation of 18.5x our current 2000 EPS
estimate of $1.35. Our 12-month target price of $50.00 is based upon a P/E of
27.8x our FY2001 EPS estimate, is a historically conservative valuation for a
company growing EPS at a 40%+ rate, while experiencing business and EPS growth
acceleration, and strong earnings visibility.>> |
