Mon, 08/01/01, 13:14
PACE MICRO TECHNOLOGY good interim results, but shares still look expensive
This morning Pace Micro Technology, Europe`s largest maker of digital TV set-top boxes (STB) announced interim results for the six months to 2 December 2000. Turnover rose 31 per cent to £205.8m on the same period last year, but fell 6.7 per cent sequentially. Pre-tax profits rose to £17.9m from £12.7m (excluding exceptionals) for the same period in 1999. Earnings per share of 5.99p beat consensus forecasts and look set to beat full-year consensus forecasts of 11.8p. However, turnover growth in the UK slowed dramatically, growing just 24.2 per cent compared to the first half 2000, and actually fell by 11.7 per cent sequentially. This reflects increased competition from multinationals and new indigenous providers as well as a maturing of the UK market, which remains the world’s most developed. Worldwide turnover grew to £27.4m (1H2000: £13.5m). The fact that the group now derives 86 per cent of their revenues from the UK is an improvement on the full year when the figure was 92 per cent, but nevertheless shows too much dependence on a maturing market.
Gross margins have been maintained 20.5 per cent compared to 19.7 per cent for the last year. This was despite problems of component supply where shortages in the flash memory chip market forced the group to re-engineer their STBs to reduce reliance on this scarce resource. The component industry is cyclical however, and it is likely that the tens of billions of pounds that are currently being invested by chipmakers worldwide will mean that the industry will move from famine to feast around 2002. Margin pressure is also increasing as network operators look to diversify supply, and competition increases with Sony, Amstrad, Scientific Atlanta and Nokia all looking to increase their presence in the UK market.
Pace has now successfully broken into the US market and over the period signed deals with Bell South Corp and Comcast, the third largest cable operator. The importance of this expansion is manifold as it provides both a new engine for growth and acts as a reference for further deals with the global giants. However, the fact that revenues for the period were only £1.4m, representing less than 1 per cent of turnover, illustrate the considerable sales push required to mitigate loss of market share in the UK. The US represents about one third of the set-top box market and Pace is aiming to capture 10 per cent over the next two years. There are about 80 million analogue set-top boxes in the US, and to date only about eight million have been converted to digital. John Dyson, finance director, expects the US digital market to grow by 60 million units in the next three to four years.
The worldwide digital installed base is approximately 20 million units at present, with worldwide sales expected to reach 75 million per annum by 2005. This growth will not be driven, as it has been in the UK, by just offering access to many TV channels, but instead by the demand for a quasi-computer, or what is called the ‘home-network’ market. The convergence of broadband internet access, web-based content and software applications with the ubiquity and familiarity of television is an exciting proposition. Interactive television will inevitably brush aside sceptics as consumers become more accustomed to the new concept of television and the services become more captivating. Set top boxes will play a critical role in this metamorphosis and enabling browsing capabilities, email, banking, shopping, the facility to interact with programmes and the ability to record favourite programmes through ‘intelligent agents’ which know what your interests are.
Pace continues to offer a play on the growth of digital television with STBs fast becoming the dominant platform in Europe, with demand outstripping its satellite rivals. With orders increasing worldwide it is reasonable to expect a similar pattern of growth as has been experienced in the UK, which is one to two years ahead of Europe and the US in terms of penetration.
For the time being margins have been maintained, but it is important that Pace continues to offer technological advancement and the 41 per cent increase in engineers demonstrates the management is aware of this necessity. However, there is a real danger that Pace might become a commodity box seller for Microsoft’s or AOL’s software technology. The consequence of this would be that margins would become increasingly thin as the retail price is effectively capped by the buying power of the broadcasters, who give away the set-top boxes as a loss leader in order to gain customers. If Pace were forced to integrate other company’s technology into their hardware to remain technologically competitive margins would certainly be further reduced.
The decline in revenues from the UK is of more immediate concern, as despite the companies best efforts to expand overseas they have yet to gain a significant market share in any other country with overseas revenues still only representing 13.3 per cent of the total. In the UK, companies such as BSkyB still derive 40 per cent of their STB supply from Pace, and will be keen to reduce this reliance on one supplier as soon as the tight supply situation is alleviated. Revenues from the UK are falling at a disturbing rate with sequential growth in revenues falling from 117 per cent in the first half last year, to 40 per cent for the second half, and a decline of 12 per cent for the first half of 2001 reported today.
Despite the declines in revenues Pace has done well to achieve profit growth ahead of forecasts, however it is important to focus on future growth which currently appears uncertain. The US market in likely to be the main driver of demand over the coming years, and the fact that the UK has seen such impressive growth means formidable companies are gearing up production for similar adoption rates. This means that Pace must try and establish itself in a new market, whilst also competing against companies such as Motorola, Scientific Atlanta, Sony and Nokia. This is a tall order indeed. Even after upgrading full-year estimates by 17 per cent (to 14p per share), the current price of 530p means the shares are trading on a price/earnings ratio of 37x this year’s estimates. This compares to just 25x Scientific Atlanta, which is one of the most dominant suppliers in the US.
We last wrote on Pace following the full-year results in July when the shares were standing at 880p and we commented that “…investors would be wise to hold off until there is something more tangible than a good strategy”. Since then the shares have fallen 49 per cent - before today’s rise. The combination of declining UK revenues, lack of US penetration, falling margins and over valuation relative to peers, now means we are recommending shareholders SELL. The development of future revenue streams may one day offset these dangers, but until there is more evidence we would prefer to watch their progress from the sidelines.
|aus der Diskussion:||David Mbox: Gut im Rennen gegen die Goliaths Nokia, Panasonic, Microsoft usw. ?|
|Autor (Datum des Eintrages):||junkstro (13.01.01 10:41:34)|
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