Imagination Technologies Group (LSE: IMG) returned to profit last year, with a pre-tax gain of £2.4m. An 82% increase in licensing revenue helped to lift total sales up by 19% to £145.2m in 2016/17.
The good news sparked a 7% rally when markets opened this morning, but in reality any turnaround may be too little, too late. The big problem facing Imagination is Apple’s decision to stop using the firm’s graphics chips in new devices over the next two years.
The US tech giant accounts for about half of the firm’s revenue. Losing Apple is likely to be a blow from which the UK business can’t easily recover. That’s why the board recently put the entire company up for sale.
Today’s results didn’t contain any new information about the sale process. But for shareholders and potential investors, I think the only way to view the stock is as a potential special situation. Is the company’s current £437m valuation a fair reflection of its value? Or is there an opportunity for significant upside, if and when it’s broken into pieces and sold?
What’s under the bonnet?
When hunting for value, the balance sheet is usually a good starting point. Today’s accounts show a net asset value of £119.4m, based on assets of £235.9m and liabilities of £116.6m. Given the firm’s market cap of £437m, Imagination doesn’t look cheap based on the book value of its assets.
The other way of valuing a company is on its sales, earnings and cash flow. With a turnaround apparently underway, Imagination might look cheap enough to consider buying on a 2018 forecast P/E of 17.
However, Apple supplied £65m (45%) of the firm’s revenue last year. Given that this revenue was previously described as having “minimal” direct costs, I believe it probably accounts for a large part of the group’s profits.
The potential loss of this revenue from 2018/19 onwards means that Imagination is impossible to value accurately, in my view. I can’t see any reason to believe that the shares offer hidden value at current levels.
Investors could strike gold
Tanzania-focused gold producer Acacia Mining (LSE: ACA) has been losing around $1m of revenue per day since March. This painful loss is the result of an export ban placed on the firm by the Tanzanian authorities.
Acacia has been accused of under-declaring previous exports and thus avoiding royalty payments. The firm denies the allegations and is hoping to enter into discussions about these issues with the government, but as yet discussions haven’t started.
The stock has now fallen by 25% this year and trades at a forecast P/E of 8.5, at a 20% discount to its book value of around 350p per share. Net cash stood at $165m at the end of May, although this is falling fast due to the deferral of export sales.
If Acacia can resolve its dispute with the Tanzanian government, then I’d expect the shares to rebound sharply. But this could come at a cost to the firm that’s hard to predict.
Because of this, I’d argue that while Acacia does offer potential value, it’s too speculative to be a sensible buy.
