Anite passes test, just

Backing VHS

Looking back, I was somewhat reluctant when I added Anite (AIE) to the Thrifty 30 portfolio in October.

The company seemed to be financially strong, but a valuation based on past earnings was hazy at best because it’s not the company it was. Having sold off disparate software businesses, it now focuses exclusively on developing and licensing software for two markets: testing mobile ‘phone networks and handsets, and managing travel bookings, administration, accounting and marketing.

Anite’s Financial position has deteriorated since then. Its F_Score is 6 out of 9 and including exceptional items the company made a loss in the year to April 2010, as it invested heavily in its new mobile testing suite and sold less software and fewer licenses due to slowdowns in its markets.

Nevertheless, the shares have done well. They’re up 27% and Anite has paid a small dividend, with the final dividend to follow.

Directors bought nearly a million shares between them in April at about 32p, 3p less than the price when I added them to the Thrifty, with a further purchase of 85,000 shares in July. In August, Michael Kingswood, managing director of Anite Travel, sold 50,000 (about half his shares) at 42p.

Their (aggregate) enthusiasm, and investors’, is probably related to the adoption by mobile network operators of a new standard for mobile broadband, 4G LTE, which requires new handsets and networks, and therefore major investment in testing.

According to Anite, most of the major mobile operators have pledged to adopt 4G over the next three years, but there is a competing standard, WiMAX. Having covered both bases since 2007, Anite has decided LTE will dominate, and closed its WiMAX business, incurring a large part of this year’s exceptional losses. Neither does the adoption of 4G mean it will dominate its predecessors in terms of subscribers for the foreseeable future. According to this chart in the Economist, 4G will only account for a small fraction of 6.5bn or so global mobile subscriptions in 2014. Anite’s strategy is to grab a bigger piece of the market than it has with 2G and 3G, by being early with the testing software and gear.

A cursory search of the Internet vindicates Anite’s decision to back LTE. Although WiMAX gained an early lead in Taiwan and the USA, LTE now seems to be the favourite. Last week the FT reported large numbers of operators adopting, switching, or considering LTE and Intel, which makes WiMAX chips for mobile handhelds, has closed its WiMAX programme office in Taiwan. The company, which championed WiMAX, now at least sees the standards co-existing. Reportedly there is little to choose technologically between the two standards but LTE is favoured by most of the big handset makers like Nokia and Sony Ericsson. Most of them, says Anite, are customers.

While this is comforting news, and speculation that LTE will do a ‘VHS’ on WiMAX may be a factor in the company’s recent popularity, it’s all in the future. WiMAX currently has 4.7m subscribers to LTE’s 10,000.

Chief executive, Christopher Humphrey, must be sweating a bit. In addition to options on just over a million shares, most of them currently “in the money”, he stands to gain up to 3m shares by 2012, or 1% of the company (which has a market capitalisation of over £100m), if he meets his targets, and a further 1m shares in a Share Matching Scheme. As with so much about Anite, I’m in two minds about these payments. He’s well incentivised, but I wonder if they’re contingent on his skill, or the outcome of the battle between the two standards and the adoption of 4G generally. Also, the industry is cyclical, at least to a degree, as new standards bring waves of new investment. If so, periodic growth is almost inevitable, and doesn’t necessarily justify big incentives.

I haven’t warmed to Anite. In this year’s report there’s no mention a previously mooted disposal of Anite Travel, where consolidation means fewer customers, but I’m assuming its future lies in its mobile testing, the bigger of the two businesses and where the company is investing most heavily. It’s a technical and fast changing market and rather like Chime, I got into Anite before I really knew enough about it. But we’re in now and I’m loathed to dispose of a holding until the numbers prove me wrong (or right!). The shares cost ten times average earnings over the last ten years, so numerically at least it’s cheap and relatively strong.

It’s a company to own if you have a strong conviction about mobile broadband and I don’t even own a 3G ‘phone. My work-issue mobile gets such little use, the mothership once cut it off because it thought the account was inactive. Being a cheapskate, I take advantage of the fact that there are free wireless networks in most of the places I go, and the Little Chefs in between.

I’m keeping Anite in the portfolio, but it will be first to go if I find a more typical Thrifty-30 style company and I have no free berths for it.

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