Aircraft leasing group Avation (LSE: AVAP) and digital banking technology specialist Monitise (LSE: MONI) both published full-year results this morning.In this article, Ill look at the latest figures from these popular small-caps and ask whether the outlook offers potential for big gains.
Significant progress
Sales fell by 24.7% to 67.6m at Monitise in the latestyear, in line with guidance. But the groups EBITDA loss was reduced by more than half to 19.6m, and Monitise reported an EBITDA profit of 0.6m for the second half.
Performance improved significantly during that half as cash from operations turned positive, rising to 400,000. However, the business remained heavily lossmaking, reporting a pre-tax loss of 32.6m for the period.
Net cash fell from 88.8m to 42.1m during the year, but cash consumption was reduced to 11.9m during the second half, from 36.4m in the first half. As Monitise is lossmaking, this is a key metric for investors. A lower rate of cash burn will give the group more time to become profitable.
Monitise hopes that its FINKit digital services solution will replace many of its legacy licence-based contracts. But persuading clients to agree new long-term contracts is taking longer than we had anticipated according to chief executive Lee Cameron, who says that Monitise remains a business in transition.
I was initially encouraged by todays figures, but the groups outlook statement has left me uncertain about the future. Group revenue is expected to decline and no mention was made of EBITDA guidance for the current year. This suggests to me that Monitise may not maintain the EBITDA profitability seen over the last six months.
Record profits boost dividend
Avation reported revenue of $71.2m last year, a 25% increase on the previous year. Operating profit rose by 35.6% to $45.6m, lifting the groups operating margin from 59% to 64%.
Earnings per share rose by 42.5% to 34.2 US cents and the dividend rose by 8.3% to 3.25 cents. This gives the shares a trailing P/E of 6.2 and a dividend yield of 1.5%. The stocks valuation looks cheap relative to earnings, even though the yield is low.
The main reason for this is Avation carries quite a lot of debt. When its aircraft are all leased at profitable rates, this isnt a problem. However, in the event of a sector downturn, debt repayments could become problematic.
Avation added nine new aircraft to its fleet last year, causing net debt to rise to $567.5m at the end of June, up from $319.5m one year earlier. The groups loan-to-value (LTV) ratio remained almost unchanged at 74%, up by just 1% from last year.
This stability is reassuring, but I think that 74% is quite high. Id rather see LTV closer to 50%. This would reduce financing risks in a downturn and enable Avation to return more cash to shareholders Avation paid $26m in interest payment last year, but just $1.6m in dividends.
In fairness, Avation appears to be executing well. The shares have risen by 25% so far this year. Growth is expected to continue and the shares could deliver further gains if market conditions remain favourable.
A better alternative?
Despite both companies’ improved performance, I’m not convinced that Monitise and Avation are the best growth buys in today’s market.
However, one stock that has caught my eye is the company featured in 1 Top Small-Cap Stock From The Motley Fool.
The company concerned is delivering strong growth in its home market. Our expert analysts believe it has the potential to rerate to a significantly higher valuation.
1 Top Small-Cap Stock contains full details of this opportunity. It’s free and carries no obligation.
To receive your copy today, simply click here now.
Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
