Tuesday, February 8, 2011

PIC.L - PACE - A growth stock at value prices

Google describes PIC as:
Pace plc, formerly Pace Micro Technology plc, is a United Kingdom-based developer of digital television technologies for the pay television industry. The Company's principal activities are the development, design and distribution of digital receivers and receiver decoders for the reception of digital television and the reception/transmission of interactive services, telephony and high-speed data. It also provides engineering design, support services and software applications and support services to multiple service operators, broadcasters, telecommunications companies and retail markets worldwide. Each of these services may be delivered over satellite, cable, terrestrial and Internet protocol (IP) network transmission systems. In October 2010, the Company acquired 2Wire, Inc. and its subsidiaries. In November 2010, the Company acquired Latens Systems Ltd.
It is currently trading at 206.6p, at a PE of about 9. It has a ROE of 26%. In its final results to y/e 2009, it had positive interest, so it didn't have to worry about interest cover. As another way of looking at debt load: it had net profit of £51m (2009), long term debt of £36m, and positive net current assets. So it had a debt to net profit ratio of 0.7, which is in my books is "excellent"; as I like to see a figure less than 5.

But this is not cigar-butt value company. It has a good growth story to tell.

I originally bought shares on 18 Dec 2009 at 200p per share. A year later, on 31 Dec 2009, they were at 182.7p. A loss of 8.7%. I still hold, because I believed that the company had good prospects. Since then, the good news has kept getting better. As of right now, its share price is 206.5p, an increase of 12.8% since the beginning of the year. It is still in deep value territory, and if you believe the exciting growth story, I think it will deliver an excellent return on your money.

If we rewind to end 2009, management were issuing some very positive trading statements. The market seemed disinclined to believe them. PIC has had a very rocky history, and been a serial disappointer. Although the management were talking of good prospects for their technology, there was a fear that Apple and other rivals would eat their lunch.

Here are some highlights of 2010:

March 2010: Pace acquires Bewan Systems SA €12.5 for million, "... enabling Pace to offer converged gateway and digital TV solutions to payTV customers." If I interpret that correctly, it basically means that the plan is that users will have one box linked to their ISP and what-have-you so that you can watch telly, instead of a whole bunch of stuff that they have now. link

April 2010 statement: "Gross margins are expected to increase, with a focus on operating cost and efficiency generating further improvements in operating margin.  During the period Pace announced several new customer contracts, which included Astro selecting us for Malaysia's first HD service, a new Microsoft Mediaroom-based set-top box and second generation set-top box for BT Vision in the UK and a new range of Freeview HD products in the UK.  We also announced another new partner for Pace Networks, Space TV, to lead the rollout of MultiDweller® across Africa." There was other good news, too, see the link for more details.

June 2010, more good news at the interim stage: "The market demand for pay and subscription TV services continues to grow, and Pace's increasing penetration, technology capability and geographic reach give the Board confidence in Pace's platform for sustainable future growth. " Very good numbers are reported, too. link

Oct 2010: Pace complete acquisition of 2Wire, estimated at £306m. In a statement in July, "Following the completion of the Acquisition, Pace, already the number one global digital set-top box company, would also become the number one provider of telco residential gateway devices in the US and the number three globally. ... This acquisition will strengthen our Americas business, extending Pace's US market coverage with entry into the tier one telco market.  We have built a strong position in the US with cable and satellite operators and 2Wire, with its expertise in the broadband residential gateway market, will enable us to address a full range of US operator requirements.  2Wire's software and gateway expertise will further drive development of our home entertainment convergence strategy.  The transaction introduces deep client relationships with important customers including AT&T and further develops our platform to deliver ongoing sustainable growth." link 

It's amazing to think that with so much positive news, the share price actually managed to end down on the year. Remember, it started the year cheap, and then got cheaper. This brings us on to 2011.

Feb 2011: A Telegraph article reports:
Pace plc has confirmed that it is talking to a satellite operator in India about launching a new digital service there. ... It has been reported that Pace is looking to supply set-top boxes to Tata Sky, an Indian pay-television provider which is a joint venture between Tata Group and Rupert Murdoch’s News Corp. ... If the talks in India open up new markets on the sub-continent it will continue the remarkable expansion that has seen Pace grow tenfold in the past four years to become the world’s number one set-top box supplier. ...  In November it bought Belfast-based specialist pay TV security software company Latens Systems for £28.7 million. That company has offices in India and the United States.
Kudos to the Telegraph for being able to put things much more succinctly that I could. Grrr. A career in journalism is obviously not for me.

We're a little ahead of ourselves, of course. "Talks" isn't a guarantee of anything, of course. Still, the company seems to be firing on all cylinders. If you were ultra cautious, you might want to see what emerges from the talks. Notwithstanding that, the company is doing some really positive things, so even if the talks amount to nothing, this hardly makes PIC a dustbin job.


Will said...

I agree this is an attractive name but I worry about it being a perputual 'dog'.

It came up on a greeblatt-type magic formula screen I ran on UK stocks and I bought it in November '10 so i am sitting on a small gain. The valuation is screamingly attractive as you point out. In my view there are two main concerns: i) they become technically obselete as we all move to 'over the top' content delivery and they don't have the scale to match samsung et al's R&D. Hopefully the Bewan and 2wire acquisitions are a good hedge against this but there is a concern that this is a technology stock and is thus outside my 'circle of competence'.

ii) that the stock just keeps chugging along at a juicy multiple but with no catalyst to drive a rerating. I found it pretty easy to find someone there to talk to but I have seen comments elsewhere which suggest that they aren't investor friendly.

Still I think this valuation for Pace's growth profile there is enough of a margin of safety and so I'm happy to keep owning. There is also a bit of a chart level at around 215p which I hope gets taken out.

Mark Carter said...

Thank you, Will, for commenting on my blog.

It may interest readers to know that the Interative Investor recently posted an article on Pace today. link