Junior software developer Prophecy International Holdings Limited (ASX: PRO) jumped to a 10-momth high today after management told shareholders to expect record results when it turns in its first half report card next month.
New software sales is expected to jump 85% for the six months to end December last year when compared to the same period in 2013 and the company's cash position is tipped to hit a multi-year high of $5.9 million.
Shares in Prophecy International surged 13.3% to 51 cents in afternoon trade.
The pleasing result is largely attributed to sales of its new security software, Snare, and management has declared a two cent interim dividend. If sustained, this would imply a yield of close to 8% before the potential of any franking credits.
Prophecy International has not paid taxes and cannot distribute franking credits, but the company said this will change for the first half of this financial year.
If the earnings momentum continues, it will mark a reversal of fortunes for Prophecy International as its 2013-14 net profit fell 28.5% to just over $900,000 due in large part to a $370,000 write-down in goodwill.
Shareholders will be keeping their fingers crossed that there won't be further write-downs given that the company still has a large intangible asset of around $3.5 million on its books.
What's more, the company doesn't "expense" development costs but "capitalises" this as part of its asset base. It's not uncommon for tech companies to capitalize such costs, although I would prefer to see this taken off the profit line instead as it is a more conservative accounting approach.
More importantly, capitalizing development costs means Prophecy International must maintain its sales growth or it would be forced to make further write-downs.
While the stock looks attractive on yield, it won't appeal to value investors given that it is trading on a 12-month trailing price-earnings (P/E) multiple of around 30 times. Even if we ignored the write-down, the stock would still be on a P/E of around 20 times.
That's not necessarily expensive if it can deliver robust full year growth, but Motley Fool has identified a more attractive option in the tech sector.
