Belgravium Technologies

Belgravium Technologies (company website) builds rugged mobile computing devices and also develops software that runs on these devices. Belgravium is listed on the AIM in London (ticker: BVM).

The company is active in three main markets:

• Warehouse and Logistics: mobile computers and bar code scanners make it easier for companies to keep track of inventory and reduce human mistakes.
• Fuel distribution: Belgravium hardware and software is used by most of the large fuel suppliers around the world. It helps drivers of fuel trucks with scheduling, communication, navigation and proof of delivery.
• On-Board retail: Belgravium offers mobile Point of Sale (POS) solutions to the travel retail industry (primarily to airlines).

To better understand some of the products and services Belgravium offers, I recommend watching a few “Case study” videos the company has uploaded to its Youtube channel.

Belgravium has been hit by the struggling UK economy. The company showed weak sales for the first 6 months of 2012. Customers were delaying orders. Management expected sales to improve in the second half of the year. The stock dropped from 7.28 GBX to 5.88 GBX on the day of that announcement, September 6, 2012. On December 7, 2012 the company posted a trading update. More bad news: the expected recovery in the second half of the year was “unlikely to materialise within this time frame”. The stock dropped to 4.38 GBX.

Since then the stock has slipped a little further and is currently trading at 3.80 GBX. At the time of writing Belgravium has a market cap of £3.84 million.

Cyclical companies

I avoid investing in cyclical companies, because generally I don’t think I can get the timing right. There is tremendous upside when you can figure out were the bottom is and buying when many investors are selling their shares in disgust, because of falling earnings and a poor outlook. But it also requires good insight into the industry and a lot of knowledge about the company involved. A company that has one or two bad years might still be acceptable as an investment, a company that has a poor decade can be a disaster. I am a novice investor and need to keep my picks very simple.

I decided to look closer at Belgravium anyway, because the company has remained profitable in 2008 and 2009, although sales and earnings were depressed. My main question was how were they able to stay profitable? When I read that Belgravium made mobile computer devices, my initial thought was that these products seemed like a commodity. Companies that produce products that can be viewed as commodities tend to do very badly in a recession and show losses.

Acquisitions

Belgravium made a large acquisition in 2005 when it acquired Touchstar Technologies for £10.75m. In 2006 a smaller acquisition was made: Novo IVC was bought for £1.3m. The company issued shares and took on some debt to make the acquisitions. It has over the years retired the debt and is currently debt free. These acquisitions have put Belgravium in a position where it can offer both the hardware and the software to a customer.

From the 2011 Annual report:

“Inhouse hardware manufacture combined with application software gives the business the opportunity to create bespoke solutions, a significant differentiating factor over much of the competition.”

Nature of the products / services and competitive position

After reading the most recent annual report and the reports from 2008-2010 I have changed my mind about the nature of the company’s products and services. Here are some quotes from those annual reports:

“As has been the case for some years, customers remain reluctant to commit to what are perceived as significant capital projects but appear more willing to agree projects of a profit and loss account nature. Our success has been largely down to our ability to develop sales opportunities where we have been able to demonstrate the economic benefits of using Belgravium’s complete services, which include hardware, software and increasingly support services as part of a ‘wrapped’ solution. Often, as a result we are able to provide a solution, which gives customers better value and added functionality, which we believe will be a continuing feature of our success.” (Annual report 2011)

“In the year, the Group actively worked alongside its strategic partners to capture a greater market share, particularly in the on-board retail sector where its system is now consistently being chosen over competing products. As a result several significant new contracts have been won in the period and there is a healthy pipeline of new prospects. Belgravium now provides a retail solution system to over 50 airlines in the world.” (Annual report 2011)

“A large French energy company and a customer that Belgravium has worked with for several years awarded the replacement contract to equip 1,200 vehicles with the ‘Raven’ mobile tablet device and associated software. This contract will continue during 2012 with a total contract value of approximately £3.3 million. This contract requires on-going sales and technical services to ensure that the customer’s changing needs are met.” (Annual report 2011)

“Historically, Belgravium has been thought of as a hardware supplier but increasingly the contracts we gain tend to centre around software and the other elements of a complete system. Licences, upgrades and maintenance are all essential in a system and all differentiate the overall product and provide repeat revenues. In addition the Group has been successful in offering web hosted services attracting healthy and recurring revenues. In particular, we have added vehicle tracking and telematics capability to our core fuel distribution system. The company also seeks to gain repeat revenue from GPRS data contracts and software licencing. We have successfully added accredited “chip and pin”, Wi-Fi on-board and GPRS data transfer technology to our portfolio providing wider recurring revenue, as well as being able to offer “virtual” on-board products to the airline passenger such as tickets to theme parks and other major city attractions.” (Annual report 2010)

“The contraction in our market and the operational gearing inherent within the Belgravium business model is very obvious when these results are compared with 2007 when the Group achieved revenues of £10,637,000 and made a profit before tax of over £2 million. A sustained improvement in market conditions would quickly enable us to return to better profits.” (Annual report 2009)

“Airlines, in particular, have been under serious pressure in the past two years and have sought ways of increasing their margins, which has brought more interest in in-flight retailing services. Whilst we have a long-established presence in this market, we have, until recently, been unable to supply all the functions that the operators now require. As a result of strenuous developments in hardware and software, some involving specialised partners, we now have the most complete product range in the business. This created a great deal of fresh interest as the year concluded, with excellent prospects for 2010.” (Annual report 2009)

“We rarely have to convince operating management of these advantages but it has proved increasingly difficult, in the current economic climate, to gain financial authorisation for what are usually seen as capital projects. This is currently the nature of our market; slow moving and frustrating. Margins are still healthy, and we believe that revenue growth will be restored once confidence returns.” (Annual report 2009)

“All of our markets have experienced slowdowns and delays. We believe that most will gradually show recovery, as product advantages overcome financial caution. It is important to note that Belgravium’s products currently in the field have a finite lifespan and, at some stage, the increasing cost of maintenance and repair will necessitate customers upgrading to the latest products and software. Our experience has shown that this represents an opportunity to the Company, as customers typically upgrade with Belgravium.” (Annual report 2008)

I think these quotes provide a reasonable answer to the question why Belgravium has remained profitable in 2008 and 2009. The company is certainly not immune to a recession, but it seems to be able to maintain the revenue levels required to keep it profitable. This has to do with the type of products and services Belgravium offers. When you think about it, Belgravium offers products and services that enable their customers to increase revenues (on-board retail) or to work more efficiently (fuel distribution, logistics). These types of products and services are not the things customers will cut back on the most in a recession. For example: airlines will probably try to sell more high-margin products to passengers during flights in times of recession to help them overcome their large fixed costs. Belgravium has seen customers delay expenditures and therefore revenues have declined again in the most recent recession (I believe we are currently in our triple-dip in Europe). Eventually customers will need to upgrade though and some maintenance and service revenue will still be required even for these customers.

Additionally some of Belgravium’s products seem to be the preferred choice for customers. Belgravium noted in 2011 that their on-board retail product is chosen above competing products and that in fuel distribution their products are used by many of the large fuel suppliers worldwide.

The downside is that Belgravium will need to keep a certain number of people employed to provide customer service, to further develop existing products and to develop new products. They can not easily cut back on this and it is the main reason why you see a big hit to earnings when revenues decline. If revenues decline significantly below the levels seen in 2008 and 2009 the company will show losses and start burning cash.

Insider ownership

The Executive Chairman, J.P. Kembery, owns 9.1% of the outstanding shares. Other board members don’t own a significant amount. I prefer companies where the management and board members own a larger percentage of the outstanding shares.

There was a director, R.D. McDougall, who owns 5.8% of the shares. In January 2013 the company announced that McDougall had resigned as part of a cost reduction program. In general it is bad news to see a significant owner resign from the Board of Directors, but in this case I can understand it. The company wants to reduce costs and the Board of this very small company had five members. McDougall is 69 years old and might have stepped back at some point in the coming few years anyway.

Capital allocation

The company paid dividends in 2007 and 2008, but then decided to eliminate the dividend as sales remained depressed. Management focused on paying down the debt incurred in the acquisitions of 2005 and 2006. Looking at the balance sheets of 2007-2010, the situation actually looked a little worrisome: the company carried some debt, had no cash and sales and profits were depressed. The cash flows stayed healthy though and this helped Belgravium to slowly clean up the balance sheet. The debt is now gone.

If the company maintains the depressed earnings of 2008-2009 in the current recessionary period, it should still have more cash available to distribute to shareholders in the form of dividends and share repurchases, since cash will not be needed for debt retirement anymore. Financially, the company is in much better shape now than it was in 2008.

The current stock price could be an excellent opportunity for management to repurchase shares. The balance sheet shows £1.6m in cash and the company has generated a substantial amount of cash in the last five years. I read in the annual report that the company is looking at possible acquisitions to grow the company. At the current price I think that would be a big mistake. If management is confident about maintaining solid free cash flows in the coming years, the best use for the cash at this price is surely a share repurchase. Perhaps a few larger shareholders are looking to get out of the stock and the company can buy back their shares. It should be noted that Belgravium is an illiquid stock and that repurchasing a substantial amount of stock in the open market looks difficult.

Conclusion

Belgravium is not a typical Ben Graham stock. The balance sheet does look solid with a cash balance of £1.6m and no debt (but keep in mind £0.9m in operating lease commitments). A large part of book value consists of goodwill though (£9.1m). For me this is not a reason to dismiss the company. A margin of safety can also be found in the nature of the business and its position in the industry. I believe Belgravium will see reduced revenues in times of recession, like today, but I also think the company will catch up when the economy recovers a little. This happened in 2011 when sales jumped to £11.2m from £8.2m in 2010 and the company earned £876k vs £282k the year before. Because of the company’s structural costs (personnel), a recovery in sales results in a dramatic improvement in profitability. The share price tends to follow.

In a “normal” year I think Belgravium should be able to make around £1m. Of course, when the company actually posts these improved revenues and profits, the company is probably not selling below £4m like it is today. With a company like Belgravium you need to figure out if the price is attractive in times of recession. I believe it is and have bought a small position. If the company continues to post depressed earnings, the share price is likely to decline further. I would not be surprised to see a share price below 3.00 GBX, a level that was also reached in 2010. If the company is still reasonably profitable at that point I will probably increase my position a little.

Disclosure: long Belgravium Technologies