Full-year results from the Human Screen

The Human Screen admits to bias, Sepura is based in his home town of Cambridge although it reports in euros and supplies markets around the world with superior walkie talkies.

Highlights

• Adjusted operating profit up 99%
• Return on tangible assets: 13.5%
• Adjusted net profit of '9m compared to net cash flow of '15.5m ('13.5m after net capital expenditure)
• Net cash flat at '6.5m, '2.5m after deducting undiscounted future lease obligations on Cambridge HQ

The Human Screen comments:

Sepura designs and supplies TETRA digital radios used by engineers, soldiers, security patrols and emergency services personnel to communicate.

TETRA is the incumbent standard for ‘mission critical’ digital wireless personal mobile communication in Europe, but the Human Screen wonders if Sepura’s adoption of the less well specified DMR standard in 2010 is an indication cheaper competition is making inroads into some of its markets or is more likely to be adopted in markets yet to settle on a standard. Sepura says adopting DMR doubles the size of its market.

Sepura is trying to secure market leadership around the world through technologically superior products and the Human Screen wonders if the combined effect of competing for tenders, often from increasingly hard-up governments,and investment explains why profits have contracted while turnover has grown in the years since Sepura’s flotation.

Cost reductions and the launch of higher margin products often into commercial sectors reversed the decline in profitability this year though, and perhaps a successful IPO in 2007, followed by rapid disillusion may have lead investors to neglect the company.

Deducting cash from Sepura’s market valuation gives a market price (enterprise value) of ''93m against tangible assets of ''74m ('92m) for a company currently earning a 13.5% return on those assets.

NB: After the year-end Sepura bought 3T, which designs and implements small TETRA systems, for up '8m in cash plus another '5m contingent on performance which will bring up to ''11.5m in goodwill onto the balance sheet. With 3T, Sepura says it will be able to create a complete TETRA solution for companies.

Cost reductions and the launch of higher margin products often into commercial sectors reversed the decline in profitability this year though, and perhaps a successful IPO in 2007, followed by rapid disillusion may have lead investors to neglect the company.

Deducting cash from Sepura’s market valuation gives a market price (enterprise value) of ''93m against tangible assets of ''74m ('92m) for a company currently earning a 13.5% return on those assets.

NB: After the year-end Sepura bought 3T, which designs and implements small TETRA systems, for up '8m in cash plus another '5m contingent on performance which will bring up to ''11.5m in goodwill onto the balance sheet. With 3T, Sepura says it will be able to create a complete TETRA solution for companies.

^HS++ (The Human Screen is considering May Gurney for the Thrifty 30 portfolio)