IMG - Let Your Imagination Run Wild

Well, the share price is now back to the heady 70s level it reached 2 years ago, after the good run achieved after the Sharp TV and TI OMAP2 deals were announced.

I'm sure that some traders will again be looking to try to ride the waves, picking the local peaks and troughs, but I've learnt that's pretty much a hopeless task. Others will be feeling that £150 cap for a company that is still making losses looks a little rich; after all, £150m divided by a growth p/e of, say, 40 would equate to a company generating profits of almost £4 million.

We have learnt that such thinking is far from foolish, and that risk-averse strategies do pay. The sensible fellow in the poker film 'Rounders' was a good example of this; he had cash in his pocket to pay the mortgage every month and, you might guess, a 50% short-term profit on IMG would be plenty enough for him.

It's certainly a hard nut to deal with and I wouldn't pretend that I don't worry that the current good run will begin to unravel itself; it could do.

But, having been sniffing around Imagination for so long now, the ever allusive raft a valuable royalty streams does finally now seem about to start arriving. Many of us failed to really allow for the 2 year gap between deal and first real product shipment but, hey, we are where we are. But we should not forget what is coming, specifically:

* Texas Instruments OMAP2 application processors, which are appearing now in products, and will also form the basis of TI's MobileTV solution;
* Renesas SH-Mobile application processors;
* Renesas CarNav chipsets;
* Sharp TVs;
* The Sammy-SEGA Aurora system (Renesas SH-4);
* SEGA's Series 5 development;
* Intel mobile graphics & video;
* Philips mobile graphics (& used in MobileTV base);
* Samsung mobile graphics;
* Freescale mobile graphics (& used in MobileTV base);
* Frontier Silicon DAB and MobileTV shipments;

...and that's just the 15 of so SoCs that have been publicly announced. There are at least the same number again that have yet to be declared, including another mainstream TV partner.

Ofcourse, further deal news would certainly help a lot in three obvious ways:

1. the initial license fees could easily push the current H2 reporting period into the black;

2. and, maybe more importantly, further deals serve to re-confirm Imagination's market position in the silicon IP market, which is an ongoing source of angst;

3. they re-fuel the royalty pipeline looking forward;

But the royalty story alone now looks increasingly solid, and even cold, sensible people must now be struggling to generate forward numbers much below £10-15 million and an awful lot more seems quite possible, if the other streams such as mainstream TVs and MobileTV generate anywhere near as much interest as PowerVR MBX has.

Anyway, the January to March period is normally Imagination's most active period in terms of newsflow (both new deals and product announcements) and we have the likes of Las Vegas CES and 3GSM in Barcelona to look forward to.

Anyway, l'm going to wait to see how Q4 unfolds before deciding to offload even my (paid for) trading shares. I accept that this is a risky strategy, but I feel that the risk / reward balance is now heavily stacked in our favour. Only time will tell...

David