The second half of 2010 has been characterised by many Western governments tightening the strings on the public purse. It’s hardly surprising, therefore, that Promethean World, a provider of electronic teaching aids to schools and universities, has languished towards the bottom of its class.
The latest profit warning came at the start of December and sent the shares plummeting from its March floatation of 200p. Yet from an investment point of view, the business is not as close to life support as the recent 70% share-price dive suggests. Here’s why.
Promethean is the world’s second-largest maker of interactive white boards (a digital replacement for the blackboard) behind Smart Technologies of Canada. It’s the world’s largest maker of dedicated handheld learning devices, which are now used by more than three million students. The company also runs an online teaching resource called Promethean Planet, described as the “YouTube of teaching”. It offers a vast array of free and paid-for content to its 775,000 members.
What’s more, regardless of cutbacks in education, there is still plenty of gas left in the tank – not least because in overseas countries, adoption rates for this type of equipment are still very low at less than 10%, compared to Britain’s 70% uptake. Promethean also has £14m of net cash in the bank, so it should be able to withstand a fair degreeof turbulence while waiting for frozen budgets to defrost.
Promethean World (LSE: PRW)
As for the figures, the City is forecasting 2010 revenues and EBITA of £234m and £27.8m respectively, falling to £226m and £23.8m in 2011. The shares also pay a 3.3% dividend yield. I would value the group on 0.8 times 2011 sales. After adding back the cash pile, that creates a fair value of approximately 97p per share.
So what about possible hiccups? The biggest worry is how long it will take before education spending gets back to normal and how this will affect future volumes and pricing. Next, with all its major markets – North America (65% of revenues), continental Europe (13%) and Britain (9%) – contracting simultaneously, shareholders will need to be thick-skinned for the immediate future. Finally, the firm is also exposed to the usual concerns over currency movements and price deflation.
All the same, Promethean is not losing market share to rivals, and given the significant upside potential, the stock rates as a long-term recovery play.
Recommendation: SPECULATIVE BUY at 60p (market cap of £120m)