Norkom :
I had an in depth conversation with Paul Kerley CEO and Liam Davis FD of Norkom about how the profit warning came about today. The message from them was unequivocal that the model is not broken and that they are winning more contracts than ever before. Norkom blame the profit warning on three events. An elongated sales cycle in the USA particularly characterised by a longer legal process between contract wins and sign off and they say this has led to customers having to have budgets re-approved and so a sales cycle which typically took 4 to 6 weeks now takes 4 months and a change of Government in Japan which delayed the introduction of regulations which would have had an impact on revenues. Costs are also higher as Norkom built up a cost infrastructure based on expectations of higher revenue and also there is a higher R&D expense. The cash balance being lower was explained as being the result of prepayments which were paid last year working their way out of the system and the overall impact of lower revenues. Cash is anticipate in the region of eur34m. The EBITDA outturn will be in the region of 3.m this year but that is expected to rebound towards eur7m next year as conditions normalise. The market is reeling about the falling EPS guidance for this year to 2.5c from 9.5c but the company anticipate a rebound to 5c next year. The message from the company is that the pipelines are strong and that the model is not broken and that the rate of contract wins has been accelerating. The performance of the stock today reflects the disappointment and the shock of the surprise announcement. It also probably reflects that the shareholderbase is quite concentrated so there was few willing to step into the breach today. The stock looks expensive now on a multiple base for this year but 43% of the market cap is in cash. The stock is trading on a 2011 ex cash p/e multiple of 10x. The market will look for re-assurance at the time of the results that the situation has stabilised and will be looking for evidence of that rebound in revenues. I think that it is hard to push the buy case at this point, the stock is probably at best a hold until clear evidence emerges of a rebound emerges.
Have a good evening
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Liam Boggan
Merrion Stockbrokers
Tel.: 353-1-2404171
Mob:353-87-2313505
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