Investment Column: Imagination's strength is no mere figment

Genus; Tikit

Nikhil Kumar
Friday 09 September 2011 00:00

Our view: Buy

Share price: 345p (+2.7p)

The rise and rise of the smartphone and tablet markets has proved rather lucrative for the UK's chip technology industry with companies such as Arm, CSR and Imagination Technologies all benefiting to varying degrees.

Imagination, which is based in Hertfordshire, put out a sprightly interim management statement yesterday which picked up where it left off following its strong performance during the last financial year.

The statement revealed that Imagination "continues to see high levels of licensing and design activities with both existing and new partners". There has been a particular interest in the group's next-generation graphics technology. Its chief executive, Hossein Yossaie, had previously predicted Imagination chips would be shipped in one billion units within five years, and yesterday it re-affirmed that ambitious target. Analysts at Peel Hunt said that would equate to a 25 per cent compound annual growth rate.

That said, the group failed to provide a particularly detailed view of its royalties revenues, although management expects strong growth next year.

There are no nasty surprises expected as "concentrated exposure to Apple and smartphones should isolate the company from the broader weakness over the remainder of the year," according to Peel Hunt. Analysts at the broker also predicted the company's 50.5 price-to-earnings multiple for the last financial year would retreat to 17.6 times in 2014.

One business that has failed to light up the bottom line is its Pure digital radio arm, set up as a "pathfinder" to show off the capabilities of its latest kit. Pure struggled last year, with revenues down 16 per cent; although there were some signs of life in overseas markets, it is likely to continue dragging on profits.

Also on the downside, the management noted that economic conditions have an impact on a market that is becoming increasingly cut-throat.

Yet it is important to note the robust licensing pipeline and management's comments on royalty revenue growth. There should be more to come from Imagination, in our view.


Our view: Buy

Share price: 1,014p (+24.5p)

Genus has been a star pick for us. We were buyers at 724p in May 2010. Since then the shares have shot up.

The company supplies breeding stock to farmers, selling bovine semen and live pigs. Selective breeding means its stock is far more efficient at producing food for human consumption than what's already out there (its dairy cows are twice as productive as the average European cow, and 14 times as productive as the average Indian cow).

Demand for protein has risen as the world's population has grown and people have got richer. But land resources are finite. Hence the need for more productive animals. Genus does not involve itself in the production of "frankenstein" food through genetic engineering. Instead it uses genetics to inform selective breeding. That's the medium- to long-term story.

But the shorter-term picture is also rosy. Group revenue rose from £285.3m to £309.9m in the year to June, while the dividend was up 10 per cent to 12.1p. Genus is also highly cash generative.

Still, at 19 times next year's forecast earnings, with a prospective yield of just 1.8 per cent, the stock isn't cheap. But Genus's markets, with the exception of Europe, are recovering rapidly and the outlook is favourable.


Our view: Buy

Share price: 267.5p (+12.5p)

Tikit, the legal software specialist, enjoyed some healthy gains yesterday, which makes sense when you look at the half-yearly numbers released in the morning. The company's pre-tax profits were up by 36 per cent, while the dividend was increased by 25 per cent.

The results also showed that the group had been making good progress in cultivating revenue streams that were linked to its own software. The business, which also works with the accountancy profession, continues to partner with Autonomy, but growing its own intellectual property boosts margins.

Aside from sales, the update also revealed that recurring revenues are doing well. All this, plus the strong balance sheet, means that we cannot fault the results. Adding to the attraction is the fact that, at around 13.5 times forward earnings, Tikit's shares remain affordable.

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