Behind the scenes
Vislink has been recommended to me by a few different people now and mentioned by a couple of bloggers (I know Pauly Pilot is keen and I’ve a hunch there’s someone I’ve forgotten..), so I thought I better check it out. The offer of a value opportunity shouldn’t be refused! I usually start with a sentence of two detailing what the company I’m looking at does, but recently I’ve been having a bit more trouble with this. It’s easy, as a layman, to understand how a company makes money renting vans or building houses. I don’t find it quite as easy to unravel exactly where companies sit in a supply chain that isn’t pointed towards me as an end-user, though; I’m no expert on the assembly of engines and other goods, for instance, and so the market dynamics are a bit more complicated. Bear that in mind when I talk about Vislink, then, because they occupy a rather lofty position – they provide broadcast solutions for some of the world’s most recognisable events.
There’s lots of pictures on their site of Vislink systems at F1 and football matches, for instance, or on news helicopters – and after some digging I ascertained (again, as someone completely uneducated in how the pictures on my television arrive at that television) that their equipment, and expertise, is essentially focused on the wireless transmission of that video/sound data from the point of capture to where it needs to be next down the chain of production. They talk about being ‘first on the market’ with practical digital wireless cameras, for instance, and they seem on the ball with new developments in growing markets – mobile news coverage, for instance. I can see how they make money – they’re an integral piece of a huge market, with wide-ranging applications. They talk about the growing surveillance segment, for instance.
They’re hardly small players, either. According to management, they hold what they think is about 20% of the global addressable broadcast market – a market that, they note (and I wouldn’t dispute) is growing, particularly on other continents, with the shift to HD in Europe and the US and from analog to digital in other parts of the world. At first glance, this seems like exactly the sort of stock I’m looking for. They’re market leaders in a growing segment, and not a huge segment either – they pick a niche and excel in it. This, hopefully, gives some visibility and continuity of revenues – small systems, links in a greater chain, become embedded and integral to the operation of that whole chain.
What’s the catch? There’s (nearly) always a catch – a reason the stock is cheap, or something that isn’t quite as attractive. For Vislink, it’s the relatively recent past. It’s been a rocky ride – and the graph top-right is almost meaningless given the restatement of their figures, the way the metrics I usually measure are calculated, and the effect of disposals and acquisitions on the group’s results. Suffice to say, they spent/lost a good deal of money reorganising the group, from one considerably more bulky than it is to today – most notably with the £32.5m sale of HERNIS, their marine and energy business. There’s a second – and crucial – element one has to think about when looking at a company like Vislink’s accounts, though; and it stems from the fact that the vast majority of their assets – what makes them money – is their intangibles. They make money from their developed systems – from providing a better solution than their competitors. This means capital expenditure, in this case, is development. If you’re being cynical, you could say the development money more or less vanishes – it’s not like a manufacturer, who spends £10m on equipment for the factory but then has the hard, tangible assets in front of him.
That doesn’t mean the things that are being developed don’t have value; far from it. Many of the most valuable things in business are precisely the intangibles – the systems, relationships, or propitiatory assets they’ve created. Simply because they don’t have an easily calculable, market-available price doesn’t make them any less pertinent. It just takes away one shortcut from an investor’s box of tricks. A case in point for this – Vislink sold HERNIS, the marine business, for £26.94m. This was a profit of £20.81m from its book value, and that’s after disposal costs and paying off management. Evidently the true value bore no relation to the book value. This chain of logical sort of cyclically gets right back to the core of what investing is all about – an analysis of a business that’s more than the sum of its parts (the safest, asset based approach).
It clearly makes it more difficult, and subject to more risk, particularly in a case like Vislink’s – the number of moving parts over the last few years obscure the underlying picture, and make it harder to estimate exactly what we can expect from the remaining business over the next few years. The rolling over and consistent nature of capex, and the amortisation of previous capex (as well as timing differences in the level), does fudge things around slightly. Given the rock solid balance sheet – no debt and £8m in cash – and my meandering musings on the operations, I feel pretty good about Vislink. Pending some further investigation, I think the current market cap might substantially undervalue the business.