Converged voice and data services provider NetServices has stemmed its losses and is set to make a full year profit.
Turnover dipped from £4.04m to £3.68m in the six months to February 2008, but gross margins improved from 39% to 44%. Around 90% of turnover is recurring. The company moved from a loss of £620,000 to a profit of £3,000. The profit figure is after net capitalised product development cost of £25,000.
The consumer broadband business was sold last year and that made an additional £125,000 loss in the six months to February 2007.
Net cash was £677,000 at the end of February 2008. Freehold and leasehold property assets of £708,000 at the end of August 2007 provide further strength to the balance sheet. There was a cash outflow in the six month period but related to the unwinding of the relationship with the consumer broadband business. Stripping that out there was a small cash inflow from operations.
There is a £1.6m provision relating to an onerous contract that came with a past acquisition. This is based on a contract that lasts another eight years. Last year the provision was reduced by £523,000. The company is hopeful that it can be reduced further. Even if that doesn’t happen the amount is spread over a long period of time so won’t have any significant short-term effect on the company’s cash.
There will be investment in equipment and systems but this shouldn’t differ significantly from the depreciation charge.
Having stemmed its losses NetServices is in a good position to build on this. It has developed partnerships with systems integrator and a video conferencing firm and this will help its services to reach a wider potential audience.
NetServices has also developed a cheaper connectivity product than the current market leader.
At 9p a share, NetServices is valued at £2.66m. The shares aren’t very far above their all time low of 7.875p. The property assets underpin around one-quarter of that figure and the cash shouldn’t reduce significantly. The fact that NetServices shouldn’t need to come back to the market for finance for its existing business is important.
Arbuthnot forecasts a full year profit of £100,000 and a 2008-09 profit of £500,000, which puts the shares on just over five times 2008-09 earnings.
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