FAIR VALUE FOR APSG ?
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As a long term holder of APSG (and one who is presently sitting on a small loss)
I thought I'd try and update my thoughts on APSG.
At the time I write this, APSG is trading on no volume around $6.75. The company
has just published it's Q1 '99 figures, which was the weakest quarter for
two years. APSG is still nicely profitable but did not meet market expectations,
and has paid the price for this.
Given that the market is never known to over-react to bad news (!), I thought I'd
try and work out what might be a fair price for APSG in order to see whether the
present levels represent a buying opportunity.
(Note that I am NOT close enough to the company or their market to know whether
there have been any fundamental changes in their business outlook. This is a
significant consideration, and I haven't even attempted to address it. The
following assumes that APSG will continue to have a market, and that they will
offer competitive products and services to that market).
Some facts and figures
Based on the last Report and Account (recently released) and the recent first
quarter statement, APSG presently has -
a) Book value of $ 6.45 per share (Shareholder equity of $56.7m*)
b) Sales of $12.35 per share (TTM revenues of $108.6m*)
c) Earnings of $ 1.05 per share (TTM earnings of $9.4m*)
* Average number of shares - 8.79m (diluted)
Like most product/development companies, APSG's profits are geared quite highly
to sales - i.e. a modest increase or decrease in revenues about a break-even
point produces significant increases or decreases in profits. Assuming that
APSG have hit a rough patch, and that their sales are temporarily in decline,
we can't expect APSG to be as profitable as they have been over the last 18mos
(where net profits were running around 8% - 9%). The most recent quarter had
net profits at 6.2%. However, APSG have averaged about 5% over the last 5 years,
so they are doing quite well on an historical basis.
The company has achieved revenue growth over the last 4 years of about 16% pa.
It seems very unlikely that APSG will achieve that this year (in fact it is quite
likely they will see a decline). However, even if APSG closes the year 10%
down on last year (at about $100m in revenues), they will still have achieved a
5 year growth rate of 10.5% (per annum).
A high proportion of their book value is current assets. Furthermore, most of
these are quite liquid. In effect, APSG is holding about $4.40 in cash per share.
($1.37 is cash, the remainder is in short-term investments and receivables net of
payables).
Valuations
OK, how do we value APSG ?
- PE Basis.
Let's assume that the company achieves a 5% margin, and that underlying
(long term) revenue growth is about 10%. Based on guesstimated revenues of
$100m for this year, they'll have $5m in earnings, and 57c in EPS. Based on a
PE of 10 (their growth level), the shares would be worth $5.70........
OK, so it's no wonder the shares are going down !
HOWEVER, that doesn't really do justice to the "value" in APSG. So let's try
PSRs, which probably have more relevance when revenues are going backwards.
- PSR Basis
APSG has historically (last 5 years) traded on a Price-to-Sales ratio
of between 0.4 and 1.76. Its average PSR over this period has been 0.72. If
we assume sales this year of $100m ($11.37 per share) then, on an average PSR
basis, the shares should be worth $8.19.
Well, that's better than the PE figure, but it still seems a little low to me
as it doesn't make much allowance for the cash situation. So let's look on a
takeover basis.
- Takeover Basis
What would an acquiring company realistically pay to buy APSG ?
Well, the first thing to note is that the company has "cash" of around $4.40
per share, which could be released almost immediately to the buyer. The
company has no basic debt, so this comes straight off the purchase price.
At the current price of $6.75, the company could effectively be bought for
$2.35 a share ! (i.e. $21m would buy you an established company with sales
revenues of > $100m, earnings of > $5m, and all the fixtures, fittings,
technology, reputation and some great employees - Bargain !).
If the acquirer were you or I, we would expect to see a certain return on our
investment. APSG doesn't seem like too high a risk, so let's assume that
the return we are looking for is around 20%. On this basis, we would
be prepared to pay about $5 for every $1 of income. If APSG make 57c this
year, then that's worth about $3 to the buyer. Together with the $4.40 in
cash, that makes a buyout price of about $7.40.
However, $7.40 is an absolute minimum because a likely purchaser wouldn't be
you or I buying the company as an isolated activity - a buyer would likely be
a large defense or telco player who will buy it because it augments their own
activities. This has several effects.
Firstly, APSG's activities could be run more efficiently due to the economies
of scale provided by a synergistic acquirer. At a distance, it is impossible
to tell how much this would be, but at an absolute minimum I'd expect APSG's
typical profit margins to go well above 10%. That would easily double my
estimate for APSG's '99 EPS to around $1.20. Furthermore, it is not likely that
a synergistic acquirer would view the purchase of APSG with the same risk as
you or I, so they'd probably be content with a 15% ROI (i.e. they'd probably
pay $7 for each $1 of earnings). This would value APSG's anticipated revenue
stream above $8. Adding the cash element gives a basic MINIMUM buyout price of
around $12.50.
Secondly, the revenue growth of APSG (and therefore the revenue growth of
it's acquirer) could be accelerated by it's association with a larger company.
This would help it to move into new markets and to get contracts that it
might not win as a smaller company. This would accelerate the rate of growth
and justify a higher price.
Finally, APSG has significant skills and resources. In a market which is
severely constrained on both counts, an acquirer would probably find that it
could apply some of these to some highly profitable new activities which
would provide further joint growth opportunities. This again justifies a
higher price.
It is impossible to judge what value these last two aspects would have on the
purchase price - the price of anything is only defined by what someone is
prepared to pay. However, I've recently had two other companies bought out
- QUAL & SEEQ. Neither of these was in as good a shape as APSG. SEEQ was
in the better shape of the two and sold at a PSR of about 4. Whilst APSG is
the healthiest of the three, I don't think it could command that high a PSR.
(SEEQ had particular value to its acquirer). However, it is not unreasonable
to believe that APSG could command a PSR above 1.5, which could value them
above $20.
Conclusions
I already have a holding in APSG at around $9, and am tempted to buy more. If
I didn't currently have any shares, and I was taking a long term view, then I
would probably take a small stake at $6.75. As I am already a holder, I will
remain happy with my $9 investment, and average down if I can get a "bargain"
price (anything under <$5.50 - i.e. PSR of 0.45). My investment would be
based on the expectation that APSG is in a rough patch, that the management are
basically sound, that they have the resources to turn things around and that
they are in an area of growing need. I would not expect the company to be
bought out, but would expect the possibility of this to provide longer term
support for the price.
Any observations, thoughts or suggestions ?
Mark |
