Corum Style

Been running the ruler over the Corum Group. This is a company that develops Ehealth Software and Point of Sale software. Has experienced a huge surge in it's share price this year and I'm curious as to why.

Firstly the positives. Huge cost savings (and reduction in debts) have increased the Net Profit ratio from 12% to 23% in the last year. The company reports Net Income to be around $6 million, however $1.1 of that income appears to be a reversal of a provision regarding a court case. So not sustainable earnings in my opinion. Call it $4.8 million sustainable profits.
Then we have ROE of 45% (which is also the Sustainable Growth Ratio as there is no DPO) and a ROA of 32% (up from 17% in 2011)

Now to the negatives

1. While average sales growth is around 3% pa over the last 5 years, revenue has decreased for the last three years (at -3% and - 0.8%). While cost cutting can help you in the short to medium term, it is sales growth that gets you long term value.
2. Sales growth reduced, but Accounts Receivables (with provisions for bad debts removed) increased by 20%
3. Property Plant and Equipment increased 18%, yet depreciation expense decreased 19%
2. There are around 14,000,000 in the money (at $0.08 strike price) American style call options that could be exercised at any time. This makes up around 6% of the shares on issue.
3. No dividend has been paid for years
4. Other Assets (and trade payables) include $5 million of "Rental Payments awaiting clearances" basically other peoples money that can not be used or monitorised
5. Litigious history. 3 court settlements over the last three years totaling $2 million not great.
6.Accumulated losses of $67 million
7. ROE while high, has reduced due to the removal of leverage.
8. At the mature end according to the Cash flow life cycle. So opportunities for growth in the future limited, especially with no increase in development costs in 2012.

Conclusion: I think there is a bit of froth and bubble regarding the Corum Group. Even with some optimistic earnings growth assumptions of 45% next year, then 30%, 10%, 10%, 10%, 3% and a Terminal rate of 3% and a Cost of Equity at the average bond rate of .0485 (as Beta of Corum Group is -0.65), I have a price target of $0.07 a share ($0.06 if I include the 14,000,000 options as converted to shares). So the current price of $0.16 is a bit of a premium for mine. (even though P/E of 8 and a P/FE of 5.5 on these figures doesn't appear too far out of the ballpark at first glance).

Someone clearly thinks there is more to Corum than meets the eye

Disclaimer: Not a recommendation to invest/not invest in Corum Group. Please see your financial advisor.