Report from Zamano's 2016 AGM

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Zamano (LSE:ZMNO) shares are down 12.5% to 10.5p in the middle after the publication of an Interim Management Statement to coincide with the company’s AGM. I think this represents a buying opportunity for new and existing shareholders, despite the clear risks.

[Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ADVFN). I have no business relationship with any company whose stock is mentioned in this article. I may buy or sell the stocks mentioned in this article at any time.]

As a shareholder in the company since last year, having been attracted by its strong cash flow generation and exceptionally low earnings multiple (on an enterprise value basis, i.e. adjusting for the company’s huge cash reserves), I took the chance to attend the AGM this morning in Dublin.

A strong turnout of perhaps 20 or more shareholders made an appearance.

After the Acting Chairman, Colin Tucker read out the statement, the floor was opened for questions and a healthy discussion took place across a range of topics.

Chief Executive

It did not take long for a question to be raised in relation to the position of Chief Executive: the position was vacated in May and has yet to be filled.

The answer to this question was straightforward: the Board has been waiting for the findings of the company’s Strategic Review. Now that it has been completed, they can choose someone to take the company into the next stage of its development.

The new non-executive director, who led the Strategic Review, was unfortunately unable to attend today’s meeting.

Core Services

My biggest concern on reading today’s statement was that the company seemed to be giving up prematurely on its core text message services – but these services have produced fine results in recent years. Post-tax profits have been recorded in the past three years of €2.1 million (2015), €1.9 million (2014) and €1.7 million (2013).

We were reassured that the company is not giving up on these markets, and indeed the profitability of existing capabilities will be pushed as hard as possible.

However, the Board believes that the threat of regulatory change means that the company cannot count on these opportunities remaining available for the long-term, and so there needs to be a change of direction.

Acquisition Strategy

The company is now planning to pursue bolt-on acquisitions in related industries: mobile advertising, payments, and e-commerce.

As a cautious investor, I tend to shy away from situations where revolutionary change is taking place – they are just too unpredictable.

However, I am cautiously optimistic that any deals pursued by Zamano will be relatively small and will have clear symbiosis with its already-existing capabilities as a direct billing partner with major network carriers and with its B2C messaging products.

Shareholders were very keen to find out more but naturally, the Board could not make detailed comments on any potential deals.

Balance Sheet Management

The company had €6.3 million of cash in December and this balance has continued to grow, providing considerable firepower for any deals (while also making the company itself a highly palatable acquisition target).

All resolutions were passed, including special resolution 9 to restructure the company’s balance sheet. This has the effect of eliminating retained losses, enabling the Board to consider making distributions to shareholders.

My view is that Zamano shares are themselves likely to be undervalued from a fundamental point of view, so that it would make great sense to for the company to invest in itself through a share buy-back (either a tender offer or open market purchases). For example, €1.8 million, representing perhaps a quarter of the current cash balance and approximately one year of recent profits, could be used to take out 10% of the existing shares – even if 15p was paid per share.

It has been impossible to sell any shares at 15p since 2010, so a buyback at this level would provide a potentially attractive exit for some investors, without overpaying for the shares and at the same time increasing the per-share earnings power of those which remain outstanding.

Current Trading

Despite the lack of a CEO and the lower margins reported this morning due to higher customer acquisition costs, revenues have continued to grow and there were no concerns raised in relation to current trading. The existing team continues to perform very well, and due credit was given to them for their excellent results achieved. I think the fall in today’s share price is perhaps attributable to some shareholders misreading the statement as a profit warning.

Conclusion

I continue to hold Zamano shares. At 10.5p in the middle, the company is valued at £10.4 million or c. €12 million. The cash balance was not disclosed today but I estimate that it is now in the region of €7 million, so that the enterprise value of the operations, ex-cash, is around €5 million. Given that current annual net earnings power is perhaps still around €2 million, the company would only need to avoid being dramatically impacted by regulatory change for a couple of years to achieve a cash balance that matched the current market cap.

The new non-executive director is key to the acquisition strategy: he currently owns no shares in the business, and so my confidence would be vastly strengthened by the announcement of substantial voluntary share purchases.

But on balance, I think that the risks are more than fully priced in at the current share price, and so I rate the shares as a Buy.

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