Diary of a Private Investor

Petards – an overlooked turnaround situation?

There has not been much about Petards (PEG) to love in the past few years and its reputation as an underperforming business going nowhere fast kept the shares on a lowly rating. As a microcap, it then gets overlooked by most investors and even when it does appear on stock screens it can often be dismissed as a potential value trap. I made this call myself earlier in the year when I took a punt on PEG based on a Stockopedia Stockrank of 100. I didn’t hold for long, selling out the week before Brexit (along with the sale of many other shares I should add) as the share price had drifted since my purchase and it was not a conviction holding.

However, in recent weeks I have revisited the investment case for PEG and I have concluded that it could be on the cusp of a significant turnaround in fortunes. The half-year numbers reported on 7th September are good and the overall metrics are strong:

Market Cap £6.49m

Enterprise Value £6.05m

Forward PER 9.72 (and I believe there is every chance they will exceed full year forecasts – see below)

PEG 0.79

EV/EBITDA 4.43

Quality Rank 89
Value Rank 79
Momentum Rank 94
Overall Stock Rank 99

Piotroski Score 7/9

Magic formula A+

Return on Capital 20.1%

Return on Equity 27.4%

While metrics can become a little skewed when dealing with microcaps, it is still difficult not to like what the relatively new management team have achieved over the past couple of years. They seem to be doing a pretty good job of turning the business around. Incidentally, their business is supplying “advanced security and surveillance systems”  especially for “ruggedized” environments. This is way out of my area of expertise and therefore, I can only judge this company and the management team on the results they produce. So let’s scratch the surface of those results and why I believe PEG will exceed full year forecasts.

From the interims:

“Order book increased post 30 June 2016 by receipt of over £4 million of orders including £3 million received from Bombardier Transportation and Hitachi Rail Europe”

Total revenues increased 22% to £7.4 million (2015: £6.1 million)

EBITDA from continuing operations increased 27% to £776,000 (2015: £609,000)

Pre-tax profit from continuing operations up 48% to £526,000 (2015: £356,000)

Cash balances £2.0m (31 Dec 2015: £2.5 million) and no bank debt after acquisition of QRO

Basic EPS increased 32% to 1.36p (2015: 1.03p)

Diluted EPS increased 25% to 0.95p (2015: 0.76p)

Chairman comment, “With the strong results for the half year and the current orders scheduled for delivery in the second half year, the board is confident that the Group is well placed to deliver full year results in line with market expectations.”

And yesterday, PEG announced a new contract win to supply Great Western Railway with Petards eyetrain system in a deal worth approximately £6m to PEG, some of which will fall into the current financial year while also solidifying the order book for 2017 and 2018.

On digging a little deeper, it seems that the company’s eyetrain product is really gaining some significant traction with contracts being won via three major suppliers to the railway industry; Siemens Mobility, Bombardier Transportation and Hitachi Rail Europe. The one announced yesterday (via Bombardier) is the largest so far.

There is enough happening here to suggest that PEG could be beginning to deliver significant growth with good forward earning visibility, underpinned by decent current results. It seems to me that the current valuation has more to do with past perceptions or non-awareness than anything untoward and the market cap of £6.5m seems much too low in relation to the growth in sales and profitability that is being delivered. Therefore, I have increased my holding in PEG significantly and am now treating it as a core holding to see how things progress under this current management team. I think the valuation in 2017 and 2018 could be significantly higher than it is now and I am looking forward to watching how things develop here.

 

Disclosure – At the time of writing, I hold a long position in PEG

 

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