The Speculator

PORTFOLIO POINT: This stock’s price jumped after directors reaffirmed their upbeat profit forecast, but is still at just three times projected net earnings.
Here’s a stock that surged almost 50% last week after directors confirmed an upbeat net profit guidance forecast for the current 2008-09 year. What a bargain! For, despite the rocket under the share price, the stock, at 33¢, is still trading at just three times projected net earnings for the current year.

The stock is Entertainment Media and Telecoms Corp Ltd (ETC).

We added this fast-growing technology company to the Speculator’s portfolio last year ahead of a five-to-one share capital reconstruction last August, which resulted in an effective entry price of 45¢.

nThe portfolio (at last sale, April 7)
Company	ASX	No of shares	Bought	Purchase price	Current value
Viralytics	VLA	50,000	31/12/08	$0.040	$0.037
Laserbond	LBL	20,000	4/07/08	0.10*	$0.140
EMT Corp	ETC	20,000	1/08/08	0.24*	$0.315
Citigold	CTO	50,000	16/09/08	.274 avge	$0.190
Robust Resources	ROL	50,000	13/02/09	$0.130	$0.300
Quicksteps Holdings	QHL	20,000	16/03/09	0.1650	$0.2100
Total value of portfolio					$39,650
Cash at bank					$11,200
Total					$50,850
Portfolio change since January 1, 2009					27.13%
All Ordinaries change since January 1, 2009					-0.30%
*These shares were carried over from the 2008 portfolio, hence the 2008 purchase dates. However this price is the "beginning of year" value not the original purchase price. Disclosure: The author's family holds shares in Laserbond

Like just about every other listed company in the stockmarket slump, ETC’s shares fell away, from a high of 55¢ to a low of 17¢ before recovering to a low of 20.5¢ last week. Late in the week the company posted a business update presentation to shareholders.

It reaffirmed an earlier earnings guidance forecast for the current year of $48 million net profit after tax for 2008-09. That equates to earnings of 11.2¢ a share on the company’s 429.2 million issued shares. At its low of 20.5¢ early last week, the company shares were sitting on a lowly multiple of less than twice forecast net earnings/share.

Little wonder trading in the stock went wild with more than 27 million shares turned over for a rise to 32.5¢ at week’s close. On Monday of this week they traded up to 33¢ on a turnover of almost one million. That still leaves the shares cheaply priced on a multiple of just three times forecast earnings for the current year.

There should be some red faces at Queensland Investment Corporation, which was once a substantial shareholder in ETC, with just over 8.5% of the stock. That body began selling down in January and early this month posted a notice that it was no longer a substantial holder. That selling helped keep a lid on ETC’s share price but now the barrier has been removed.

Entertainment Media and Telecoms Corp listed on the ASX in March, 2007, as a consulting business focusing on security and control applications based on mobile phones. That’s a market the company claimed last year to have global sales of $US13 billion a year with annual growth of 25%.

At the time of the float, the company comprised a subsidiary in Malaysia (EM & T Sdn Bhd) and a smaller one (Sapio AB) in Sweden, which between them delivered a revenue of $7.1 million for the half-year to December 31, 2007, and a maiden net profit of $5.1 million.

In calendar 2008, the company completed the takeover of Malaysian company NexBis Sdn Bhd (Nexbis) for a total of $A60 million, financed largely through share placements. On June 5 last year the company revealed that the Malaysian government had signed a five-year agreement to buy the Nexbis product NexCode, a forensic level national security solution to be used by the Malaysian Immigration Department to track foreign workers and illegal immigrants in that country. ETC then forecast the deal would generate revenues of $60–80 million (on a full-year basis) once the solution was fully integrated. Negotiations continue to extend the use of the code to both the Home and Transport Departments.

It was also on June 5 last year that the company released its forecast net profit after tax of $48 million for the year to June 30, 2009, up from its forecast of $10.8 million for 2007-08. (As it turned out, last year’s forecast was conservative: the net for 2007-08 came in at $11.65 million). Since then, ETC has:

• Signed a $US200 million contract over five years with China’s Administration of Quality Supervision, Inspection and Quarantine to monitor the usage and safety of the LPG gas tank market throughout China’s 31 provinces. ETC’s role involves the issue and tracking of customer usage through authentication tools involving mobile phones and electronic ID cards. China has 130 million gas tanks in service with 35 million new ones entering service each year.

• Signed a letter of intent with the Road Administration Department of Vietnam to replace drivers’ licences with an ID card that can be read on a mobile phone to identify unlicensed drivers and past infringements.

Other negotiations involve potential security projects in the UK, Thailand and the Middle East.

The directors: ETC’s board boasts a combined 60 years of experience in mobile telecoms. Executive chairman John Houston ran operations as chief operating officer (COO) for Orange Thailand, Switzerland and Sri Lanka. Chief executive Dato Sri Johann Young spent 15 years with Orange and Hutchison, including a directorship with Orange World Asia. Australian chief financial officer and company secretary Peter Dykes was a founding member of KPMG’s technology advisory practice.

Holders of ETC shares at current prices should have every confidence that there is little downside risk, and that a re-rating to a modest P/E multiple of five times projected earnings would gave them an early target price of 55¢.

David Haselhurst writes a monthly column for Money magazine.