Brulines is a small-cap firm that deploys machine-to-machine communications across several niche applications. Its largest market, pubs, is currently suffering a severe hangover with one of its key customers, Punch Taverns, struggling with heavy debts. That is causing big trouble across the industry for suppliers of capital equipment.
Although Brulines’ flagship systems can save pub-owners lots of money, equipment sales have been hurt by customers adopting a wait-and-see approach until the Punch situation is resolved. Installations have also been delayed by numerous pubs being put up for sale and the severe winter weather. The upshot was a profits warning on 4 March.
However, against this moribund backdrop, the group is stuffed full of tried-and-tested solutions that solve real-life practical problems. For instance its cutting edge i-Draught system measures beer volume, temperature, flow rate and liquid type dispensed at the pump. That helps clients maximise sales and service, as well as reducing waste and improving quality. The systems have been installed in around 21,000 pubs – 80% of the turnover is under long-term contracts.
But that’s not all. Brulines also has excellent overseas prospects, especially in America and France, where its systems are being tried out. Separately, the company has branched out into monitoring vending machines, petrol pumps, electronic bill-boards, rail equipment and National Lottery terminals. All in all, these exciting applications could easily double the size of the business a few years down the road.
Brulines (Aim: BRU)
In relation to the numbers, the City is forecasting 2010/2011 sales and underlying earnings per share (EPS) of £20m and 9.6p respectively, rising to £21m and 10.8p a year later. Consequently, the shares trade on a price/earnings (p/e) ratio of less than ten and offer a frothy 5% dividend yield. Personally, I would value the stock on an eight-times EBITA multiple. After adding back the estimated £2.5m of net debt, that delivers an intrinsic worth of about 125p per share.
One possible problem would be the existing beer-tie between pub tenant and landlord being overturned. This may change the way publicans are allowed to meter beer flows. That said, with the shares at all-time lows, don’t be too surprised if a predator comes knocking in order to leverage Brulines’ machine-to-machine communications offerings across a much wider geographical remit. Preliminary results are scheduled for 7 June.
Recommendation: SPECULATIVE BUY at 90.5p (market cap £25.4m)