Brokers’ Views: Edison Investment Research

Tribal Group ‘oversold’

04/08/2009

Research house Edison serves up two undervalued AIM companies for consideration this month, including Tribal, the support services specialist helping improve public services delivery, whose shares are oversold at 83p in the opinion of Fiona Orford-Williams.

A recent half-year trading update from Tribal, which is reducing debt, indicated a company on track to meet full-year forecasts. Furthermore, ‘levels of committed income give good visibility and the bid pipeline is substantial’, according to Orford-Williams, who sees fertile growth opportunities in health and overseas.

Belt tightening
She also sees tighter UK public spending playing ‘directly into Tribal’s hands via contracts increasingly targeted on delivery of cost savings and value for money’.

Based on annual forecasts to December – improved profits and earnings of £21.5 million (2008: £18.6 million) and 15.4p (2008: 14.7p) – a prospective price-to-earnings ratio of 5.4 does look grudging.

Also undervalued is semiconductor wafer product supplier IQE, currently 9p, where it commands a modest £39 million valuation. Industry wide destocking was behind a decline in first-half sales to £20 million (2008: £30.2 million) and net debt edged higher, yet Edison points out that IQE ‘remained EBITDA positive even at the lowest point in the cycle in January and February’, and is trading profitably and generating free cash.

With Edison forecasting a return to form in 2010, pencilling in profits up from £2.8 million to £4.8 million and EPS of 1.1p, IQE sells for eight times next year’s earnings.

‘This steep discount to the sector,’ argues Edison, ‘represents a misappraisal of its competitive positioning, and the stock could rally strongly if handset volumes positively surprise in H2 09.’