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I recommended Bond International Software (LSE:BDI) on a website I now do not name at 73.5p in July 2009 in a belief that modest economic recovery would see sales and margins rebound from their then levels. The shares hit highs of nearly 90p later that year but subsequently suffered as economic recovery failed to emerge as originally hoped – hitting a low of 32.75p in January of this year. They have now recovered somewhat – to a current 52.5p – though I am unimpressed by recent results for the first half of 2012. I apologise for having called this one wrong. There are better homes for you cash than this provider of software for the international recruitment and human resources. I’d sell now and this is why…
The recent half calendar year results showed an adjusted pre-tax profit of £0.951 million on revenue down 5.1%, at £17.44 million. This resulted in a more than 27% decline in earnings per share to 2.07p. The company emphasised that it “continues to invest a significant proportion of revenues in enhancing its product portfolio” – and this saw £0.396 million more than depreciation & internal development amortisation of capitalised capex and, together with a £1.5 million working capital outflow, saw net debt increased by £0.995 million to end the period at £1.98 million.
Net current liabilities totalled £1.56 million at the half year end, with net tangible assets increased by £0.184 million to £1.46 million – helped by a £0.8 million reduction in ‘trade & other payables’. Bond is not particularly second-half weighted – in 2011 there was almost an exact revenue split between the first and second halves and the company’s house broker, Cenkos, is forecasting the second half to comprise 52.5% of the total revenue this time round.
As such, we have an evenly weighted company which has last recorded net tangible assets of £1.46 million and added just £0.184 million to them in its most recently completed half year, capitalised, at its current 52.5p share price, at £19.2 million. Whilst the company stressed the results partly reflect an on-going change in business model from traditional licence sales to Software-as-a-Service and emphasises it has significant recurring, and fast growing Asia Pacific, revenues, it also admits that “the staffing software market remains challenging”, that it “remain(s) cautious about the UK and USA” (by far its two biggest markets) and that “there is much uncertainty surrounding the prospect for the global economy”.
There are some bullish points here and Cenkos adds “the take-out multiple of Workplace Systems (workforce management software), which was recently acquired by private equity and management for nearly 4x sales, offers a further indication as to potential upside”. However, on the basis of hard cash generation (or rather lack of it), I am less bullish. The risks to earnings look to be firmly on the downside. I am not convinced that the Asia-Pacific region (notably China) will be fast growing in the next 18 months. In fact I would argue strongly that if it achieves any growth at all that will be a miracle. As such, with flimsy asset backing a 2012 price earnings ratio of 12.7 looks more than generous.
This is not a stock to short. But if you own the shares, I apologise if that is down to me, but I’d sell now and switch to a company with greater visibility of earnings and on a lower rating. If you wish to remain in the tech space I think you could do a lot worse than switch into this stock.
