Stockwatch: BATM has a great story, but is there a bubble?

Our analyst compares the stock to the mighty Apple and asks whether now could finally be a boom time for BATM.

Assessing the current rally in £575 million BATM Advanced Communications (LSE:BVC) is similar to my analysis of Apple Inc earlier this week. 

Both are growth stocks with an attractive story, commanding high valuations while interest rates are so low and there is scarcity value for what few pockets of exciting growth exist. 

Momentum traders are captured by a sense of chart break-out, though anyone disciplined towards intrinsic value fears a classic bubble.

I fretted over Apple (NASDAQ:AAPL) on an historic price-to-earnings (PE) ration in the high thirties (possibly the low thirties if forecasts are fair). But at 131p a share BATM, listed on the All-Share, is currently on a forward multiple of around 115x if forecasts for a 30% rise in net profit to about £6.5 million this year, are fair, easing to £5.8 million in 2021. 

The valuation is also roughly 4x prospective sales and there is no dividend, although management is confident to restore these payouts as cash flow strengthens.

BATM could be at the early stage of a transformation where profit could soar from a relatively low base, thus bring an expensive PE down in due course. 

Mind you, there are 440.3 million shares issued, so quite dilutive. 

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The company straddles two exciting prospects. Firstly bio-medical testing, where it has made substantial investment in recent years to quickly provide diagnostic kits for any new pathogen, also devices such as instruments, ventilators and waste disposal.

Thus, BATM moved swiftly in response to Covid-19 such that by end-March 2020 it had achieved certification for its testing kit. Having shipped several hundred thousand, orders for over a million are underway. 

There has also been an order for 1,000 critical care ventilators. A 25 June update focused exclusively on this and triggered the stock from sub-100p.

Secondly, yesterday, BATM announced the signing of its first tier one customer (in Asia) for its ‘NFVTime’ virtual networking solution. 
Communications are investors’ main perception of BATM, which floated on the London market as an Israeli company amid the 1999-2000 tech-stock boom, specialising back then in photonics. 

Yesterday the stock rose 14% on BATM’s claim for a “substantial” potential market for NFVTime via hundreds of commercial operators globally. 

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Moreover, as a software solution NFVTime can be deployed remotely, is scalable and offers a significantly higher margin than the group’s traditional Ethernet products. 

Operating margins still well below tech supremo’s 

Margins are certainly something BATM needs to address to justify its high rating. The table shows low single digit operating margins at best, over recent years. First-half 2020 results highlighted the gross margin up from 23.3% to 31.9% and a big percentage rise in the operating margin, albeit from only 2.1% to 3.1%.

Even if you strip out research and development costs (taking a glass half-full view, and treating it as investment) the operating margin would be a modest 7.9%, rising to 8.1%.

Apple boasts a gross margin around 64% and though its operating margin has declined from a phenomenal 35.7% in early 2012 to about 24.5% lately, it remains impressive.  

I also recall microprocessor company ARM Holdings (since bought by the Japanese) enjoying an operating margin well over 30% in its heyday as a licensor. That points to potential upside for BATM’s margin, however a treble-digit PE arguably discounts this. 

A sense of déjà vu  

The present generation of stock traders may be unaware how BATM was a great market tease over 20 years ago.

I recall its stock distinctly as I tipped it several times as it rose on flotation, from 350p to 450p and higher. Zvi Maron, who remains chief executive, gave a May 1999 presentation on photonics that mesmerised the audience, and before long BATM was £10 then £20 a share. 

While those of traditional valuation mindset could not believe this extent of rally, as a mark of those crazy times I recall big-name US brokers raising capital over £50 a share, entertaining £75+. 

BATM’s share capital must have been re-jigged, as the all-time chart shows a plunge from over 750p (my guess was £75 in old money) all the way down to 8p in 2003.

Recalls the cynical insight of Jesse Livermore 

Despite the tech-boom hopes for photonics, the stock then traded in a circa 10p to 60p for 17 years before its current reincarnation, and a new generation of traders is chasing the price.

As the early 20th century trader Jesse Livermore observed:

“All through time, people have basically acted and reacted the same way in the market as a result of greed, fear, ignorance, and hope. That is why the numerical formations and patterns recur on a constant basis. Over and over, with slight variations. Because markets are driven by humans and human nature never changes.” 

I notice BATM’s chief executive being interviewed saying this latest, virtual networking licensing deal means that in five years’ time BATM will be a “big, very big” company. It is fair enough not to quantify but I feel like I am hearing the same as in 1999. Who knows this time around if the concept has longevity or is another technology liable to get surpassed?

Many traders will not fret over such fundamentals. Another growth stock boom is underway as central banks indicate ‘lower for longer’ interest rates, even at the cost of inflation.

BATM is arguably only replicating on a small scale the high valuations enjoyed by various US technology stocks, moreover its bull chart is at an early stage having turned up from 43p in April on the back of Covid-19 related news. 

Very well-positioned in terms of narrative 

The stock market is lapping up one story after another in terms of ‘the right product at the right moment’. Here we have Covid-19 testing and treatment to ultra-fast communication with extensive bandwidth: an operating system that runs on 5G. 

There is potential for high quality revenues from licensing, and BATM is already unique in ability to offer guidance on 2020: revenue to rise 32%, and EBITDA by 48%, both significantly ahead even of updated market expectations back in July.

The 17 August interims to end-June (reporting in US dollars) showed operating profit more than doubling to $2.4 million (£1.81 million) on revenue up 38% to $77.4 million, also $4.4 million cash generated versus $2 million previously absorbed. 

Balance sheet cash has soared from $16.9 million to $44.3 million hence confidence to reinstate dividends. Mind, the company has held double-digit cash balances going back e.g. to 2007 when net cash from operations jumped from $3.8 million to $12.6 million.

Sceptics may wonder if Covid-19 eases in severity, like some experts say is already underway. On the other hand, we could be looking at two years, possibly more, before the need for testing abates. 

Certainly it is hard to gauge competitive advantage when BATM has been well-positioned to respond to the viral outbreak, however diagnostics could soon be a crowded space. As to its latest communications offering: yes potentially a short to medium-term winner, but how sustainably so?

Sentiment favours further upside, but beware 

Having witnessed one boom and bust in this stock, I am realistic enough, after 20 years and in perfect conditions now for tech speculation, to recognise human behaviour can repeat.

I also know that despite top-drawer brokers asserting BATM had upside from a £1.2 billion value 20 years ago it paid better to heed one’s own common sense about market values inflating. 

This time I cannot recommend a purchase but those who do hold might strap in for the ride and at least ensure taking out their purchase cost. ‘Hold’.   

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.