Shares of market research provider BrainJuicer performed well since I bought them in February this year. Market concerns about the company’s growth prospects seem to have abated in the meantime. Numbers for the first half 2016 being released on Friday confirmed that view. After two years of revenue stagnation, topline grew nicely by 12%. Gross profit was up 15% and earnings per share increased 41% over the same period last year.
As I discussed in my initial analysis, the company’s product mix has been changing over the last years with growth in new so called “Juice products” substituting for declines in conventional “Twist products”. With 85% of revenues now coming from new “Juice products” and demand for “Twist products” stabilizing, the drag effect from “Twist products” has vanished. In addition to that and as a side effect of the proportional increase in “Juice products”, the portion of recurring revenue (sole supplier and regular usage) as opposed to “ad hoc” (one-off projects) is increasing. For the first half of the current fiscal year the share of recurring revenue increased to more than 30% which has a stabilizing effect on revenue visibility.
Like two of my other investments including City of London Investment Group and JZ Capital Partners, BrainJuicer also profits from the current weakness of the British pound. More than 70% of revenue is generated outside the UK and almost 40% in the US. While a large part of the costs base is driven locally, bottom line profitability should be enhanced by the currency effect in the second half of 2016.
Cash generation remains healthy with a cash conversion rate of almost 80%. The company is returning excess cash to shareholders following a mix of dividend payments and share repurchases. Over the last 18 months ending in June 2016 the company generated GBP 3.5 m of free cash flow, repurchased shares worth GBP 3.0 m or roughly 7% of shares outstanding and paid dividends to shareholders totaling GBP 1.0 m. Another GBP 1.6 m of dividends will be paid to shareholders in the second half of 2016. Overall, I do believe that the company’s capital allocation policy is too a large extent aligned with shareholder interests.
However, there are two issues that mitigate the benefit to investors from the share repurchase:
First, part of the deployed capital is being used to repurchase shares which were just handed out two employees via options as you can read for instance in the semi-annual report:
“During the reporting period the Company transferred 187,478 Ordinary Shares (“shares”) out of treasury to satisfy the exercise of employee share options at a weighted average exercise price of 41 pence per share for cash consideration of £77,000. The weighted average share price at exercise date was 361 pence per share. The Company subsequently repurchased 119,677 of these shares at a weighted average price of 361 pence for cash consideration of £432,000. The Company also purchased 422,762 shares for cash consideration of £1,412,713. Following these transactions, at 30 June 2016, the Company had 13,223,762 shares in issue (31 December 2015: 13,223,762) of which 864,229 were held in treasury (31 December 2015: 509,268), and the Company had 1,174,606 stock options outstanding of which 583,486 are fully vested.”
Second, John Kearon, founder, CEO and largest shareholder of BrainJuicer used the share repurchase to reduce his stake in the company from 31% to 27%. In April 2016, he sold 500,000 shares at GBP 332.5 to the company.
Assuming that the business continues to perform that well for the rest of the year, the company should be able to earn net profit of GBP 4.0 m in 2016. With a market cap of GBP 58.1 m, no debt and net cash of GBP 5.2 m, shares are trading for 13 times earnings (adjusted for net cash). I believe this valuation remains attractive. However, market expectations have increased since the time of my investment. Moreover, Brainjuicer is currently representing 5.2% of my portfolio. Therefore, I decided to realize some gains and to reduce the position to 3.5% of my portfolio. Assuming that I made this transaction on Friday after the release of the half year numbers at a volume weighted average price of 460 pence, I realized a total profit of 54% and an IRR of 111%.
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