Full-year results from the Human Screen

Imagination Technologies has the lowest unlevered post-tax earnings yield recorded so far by the Human Screen, because its an out-and-out growth stock.

Highlights

• Operating profit up 75.5%
• Return on tangible assets: 17%
• Net profit of ''20.5m compared to net cash flow of ''27 (''19m after net capital expenditure)
• Net cash up 41% at ''61m
• No dividend

The Human Screen comments:

The Human Screen’s technical know-how ends at the point you start disassembling technology, but it looks like Imagination has a similar business model to ARM. Both companies design integrated circuits and license the designs to other companies who manufacture and embed them in consumer electronics. Imagination has a roster of impressive licensees and one of its customers, Apple, is also a shareholder.

Imagination’s second division, Pure, is known for its range of digital radios, which the company bills as a showcase for its chip designs. In terms of revenue Pure is a third of the size of the technology licensing business, and it’s losing money. The Human Screen, who owns three digital radios (none made by Pure), thinks the market is competitive. Armour, which makes consumer electronics including digital radios is in distress.

Like ARM, Imagination’s profits have exploded on the back of the smartphone and tablet boom, although unlike ARM, pre-boom Imagination had been making losses for six years. The Human Screen’s guess is the increasing processing power required for video and graphics by smartphone manufacturers, strengths of Imagination, mean its technology is suddenly very valuable.

There’s no doubt Imagination is in a growth phase, and the company quotes industry forecasts that the smartphone market will triple in size by 2015. The Human Screen can’t imagine what a reasonable valuation for such a company might be, but for the record the market thinks it’s an unlevered post-tax earnings yield of less than 2%.

More on Imagination

LON:IMG

HS+ (worth watching for improvement in price)