It’s about Chime
Posted on June 23, 2009 by Richard Beddard
Filed Under Companies |
In practice:
One that almost got away
Could Chime Communications (CHW) be one of many companies that traded at incredibly cheap prices in February and March, but have since rebounded so strongly the value has all gone?
The share price fell below 40p, briefly, and it’s now well over a pound, partly because doomsday was cancelled, or postponed, sometime in April, and partly because Chime did so well in 2008.
Its ten-year price earnings ratio is less than six, much higher than it was, but still well inside bargain territory. Chime’s results to 31 December 2008 reveal an increasingly profitable, less indebted company which combined with the low share price is enticing, especially considering its bullish update in May.
Rubbing the noses of its bigger competitors, chairman Lord Bell announced double digit rises in sales, profits and margins over the first quarter in 2008.
You’d expect a PR and marketing agency to come up with good reasons to be cheerful, and here they are, straight from the annual report:
- PR. The results confirm that public relations is weathering recession better than advertising and market research. Chime’s Bell Pottinger division brings in 55% of operating income, which offset weakening performance in other divisions in 2008.
- Fear. Chime says never have corporate reputations been more important than now, when so many lie in tatters. The answer, apparently is corporate responsibility, communicated by Chime 24/7.
- Government spending. Chime trumpets a number of Government contracts including Hepatitis C awareness and saturated fat campaigns.
- Foreign revenue. Chime also represented Zambia’s new president Rupiah Banda in the election he recently won, a demonstration of the international sales that account for 60% of revenues.
There’s no shortage of colourful clients for the company that once promoted democracy in Iraq and defended Greg Rusedski against doping charges, but, set against these stories, and the equally impressive numbers, is the possibility, some would say probability, of a ‘double-dip’ recession. We’ve already seen what can happen to a company like Chime’s share price when investors fear economic meltdown.
Most media companies suffer in recessions, yet Chime has done worse in stockmarket terms than the media sector in general, despite other constituents, like TV companies and newspaper publishers, facing unprecedented competition from the Internet.
The conventional wisdom, never to be trusted, but borne out by Chime’s results, is that ‘reputation management’, as the PR industry is rebranding itself, is a growth business in the Internet age.
Admittedly Chime’s grown by acquisition – a common way to blow shareholder’s money - taking over at least 19 companies since 2000, four as recently as 2007, and it was rebuffed in May by Next Fifteen, another group of PR agencies and related marketing companies.
Chime made three more very small acquisitions in 2008, and it probably owes about £15m over the next five years for past acquisitions. If they perform well enough, it could owe more than double that in cash and shares.
During the dot.com crash, it almost paid the ultimate price for its expansiveness when profits collapsed and high levels of debt forced it to renegotiate its banking covenants and sell-off one of its companies.
Perhaps memories of its flirtation with insolvency still linger with investors. But Chime had no bank debt at its financial year end and its financial director says it’s keeping cash and its £32m debt facility as a bulwark against more economic distress.
It may have learned, and since Next Fifteen’s price had collapsed from almost a pound to less than 30p earlier this year, Chime’s approach seems opportunistic. If so, we can hardly blame it for chasing value, when that’s exactly what a value investor would do.
Considering shares in a company that has recently trebled in price, as Chime’s have (almost) is a sterner test because we know much of the potential in its low-price has evaporated.
Remarkably, though, the value doesn’t seem to have boiled away completely.
Next Fifteen (NFC), and larger rival, Huntsworth (HNT), also look worthy of inspection.
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Surprise! Former Share Sleuth pick (PDF), Games Workshop (GAW) says that its profits are likely to be ahead of expectations, while Yell, not a favourite, could breach its banking covenants.
In theory:
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The Economist leads where blogging will follow, incredibly.
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