Oleeo: 155-Word H1 Statement Could Strangely Mark The Low Point For Earnings As £13m Market Cap Compares To £11m Net Cash Position

07 May 2019
By Maynard Paton

Results verdict on Oleeo (OLEE):

  • A terse 155-word statement revealed an unsurprising 50% profit plunge as OLEE extends its “capacity to suffer” to four years.
  • At least revenue continues to inch ahead and might even be growing at a reasonable pace if the largest customer is excluded.
  • Recent client installations include all four Welsh police forces — cementing OLEE’s 50%-plus share of supplying UK police recruitment IT.
  • A lack of guidance for the full-year could strangely mark the low point for earnings. 
  • A £13m market cap is almost entirely supported by the £11m net cash position. I continue to hold.

Contents

Event link and share data
Why I own OLEE
Results summary
Revenue and profit
Financials
Valuation

Event: Interim results for the six months to 31 January 2019 published 30 April 2019

Price:
170p
Shares in issue: 7,628,054
Market capitalisation: £12.9m

Why I own OLEE

oleeo olee hy 2019 results company infographic
  • Founder/executive chairman enjoys 71%/£9m shareholding, ought to ensure long-term management consistency and may have the “capacity to suffer” to deliver long-term returns.
  • A £13m market cap could be very inexpensive given the £11m net cash position and any forthcoming improvement to current minimal earnings.

Further reading: My OLEE Buy report | All my OLEE posts | OLEE website

Results summary

oleeo olee hy 2019 results summary

Revenue and profit

  • Oleeo took the maximum three months (AIM Rule 18) to publish these results and a terse 155-word management narrative. 
  • Revenue gained 1% while operating profit dived 50%:
H1 2017H2 2017H1 2018H2 2018H1 2019
Revenue (£k)5,1044,7445,0634,9185,139
Costs (£k)(4,434)(4,642)(4,674)(4,835)(4,945)
Operating profit (£k)67010238983194
  • Revenue set a new first-half record and management “expected to see some improvement in sales during the second half”.
  • Turnover for the full year is therefore very likely to top £10m for the first time.
  • Total revenue progress could have been hindered by lower income from HRMC, Oleeo’s largest customer. 
  • The 2018 annual report (point 3) revealed sales excluding the group’s largest customer gained 6% last year (versus a 1% overall advance).
oleeo olee hy 2019 results brochures
  • The £194k operating profit for the half compares relatively well to the £83k profit registered during the preceding second half.
  • During 2012, 2013 and 2014, first-half operating profit actually surpassed £1m.
  • Subsequent heavy expenditure to bolster products, marketing and staff has since depressed earnings to minimal levels.
  • Optimistic shareholders may view this investment phase as management’s “capacity to suffer” — a tolerance of significant expenditure with no near-term return but the potential for high long-term rewards. 
  • OLEE has not said when the current rate of expenditure will recede (if ever).
  • A possible straw to clutch: OLEE did not provide any guidance (woeful or otherwise) for the full year.
  • In contrast, the previous four results statements issued the following gloomy forecasts: 
  • November 2018: “…a highly challenging and uncertain outlook for sales and, more particularly, profits, which are expected to be substantially lower in the current year than in the year which has just closed”.
  • April 2018: “[W]e expect profits for the second half of the year to be lower than the first half and for this to be reflected in a lower profit for the full year than we achieved in 2017”.
  • November 2017: “[W]e expect to see a further significant fall in profits.”  
  • April 2017: “I expect the profit for the full year to be significantly reduced compared to last year and for our investments to have a material adverse impact on our results for 2018.
  • The absence of further bad news this time around could mean the £83k generated during the preceding second-half marked the low point for profit.
  • The 2018 annual report revealed the board taking a pay cut (point 4). I wrote at the time: “Wishful thinking perhaps, but I would like to think when directors cut their own pay, a greater focus is soon applied to lifting sales and profit.

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Financials

  • OLEE’s accounts are still in acceptable shape.
  • Cash in the bank remains the leading attraction at £10.9m or 143p per share. 
  • The balance sheet carries no debt and no pension complications.
  • Cash flow consumed £115k during the six months, due entirely to working-capital movements that are typically reversed during the second half. 
  • Margins, return on equity and other ratios remain at pitiful levels due to the depressed level of profit.
  • All development expenditure is expensed as incurred and not capitalised onto the balance sheet (other software companies should take note). 
  • Finance income during the half came to £41k — a significant 17% of pre-tax profit.
  • The 2018 annual report (point 6) showed OLEE utilising short-term deposit accounts earning between 0.75% and 1% for part of the company’s cash position.
oleeo olee hy 2019 results software display

Valuation

  • OLEE remains a tightly held share with a minimal free float and wide bid-offer spread.
  • Everyone else therefore owns 8%.
  • A 170p offer price values OLEE at £13m and the free float at £1m.
  • Subtract the £10.9m cash position from the market cap and the underlying business could arguably be valued at approximately £2m.
  • OLEE has always operated with significant net cash, and perhaps the presence of such cash is required to keep clients happy and therefore is not really ‘surplus to requirements’.
  • OLEE reported earnings of £1.9m during 2014. A return to that level of profitability could make the present valuation very inexpensive.
  • Mind you, OLEE’s shares have always seemed cheap. 
  • My initial investment was influenced by an apparent P/E of 7 — and the shares have halved since then.
  • Earnings for 2015, 2016, 2017 and 2018 were lower than those reported for 2014.
  • Profit retained by the business since 2014 has therefore not created any value to date.
  • May be one day OLEE’s software products could re-exhibit the attractive returns of yesteryear — or at least something close to them. 
  • Between 2011 and 2014 for instance, the operating margin topped 21% and return on equity topped 23%.  
  • Shareholders can only hope OLEE’s significant expenditure since 2014 will eventually pay off. 
  • Shareholders have been waiting for four years now.
  • OLEE has never declared an interim dividend. The annual payout is likely to remain at 3.5p per share for the fourteenth consecutive year.
  • The yield at 170p is 2%.

Maynard Paton

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Disclosure: Maynard owns shares in Oleeo.

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