Buy Clarity Commerce Solutions (CCS) at 35.5p

Argues Tom Winnifrith of t1ps.com

Clarity Commerce was originally tipped on t1ps.com by Tom Winnifrith back in February at 31p. With the shares now at 35.5p investors who bought the shares are now standing on gains of 14%. But with an impressive set of full year results published in June, Tom believes this stock is still undervalued and a buy at up to 42p.

This view was confirmed last Thursday when Tom met Clarity CEO Ken Smith to ask him about the company's performance and prospects. To hear this conversation and three other CEO webcasts recorded last week, sign up for t1ps.com now.

This week, Tom will be revealing 2 brand new tips on stocks he believes offer great value right now. The first of these, a recovery play being led by a management team with proven expertise in the sector, will be published tomorrow – exclusively on t1ps.com. To find out what it is, and get another new tip on Thursday, click here .

And here's why Tom believes Clarity Commerce is still worth buying now:

AIM-listed Clarity Commerce Solutions was a loss-making basket case as recently as 2007…
However, a top-notch management team has moved in and turned the company around…
It is now cash generative and growing earnings fast…
And a dividend may not be too far away...

The Business

Clarity provides transaction processing software to the retail, leisure, entertainment and hospitality sectors. This encompasses numerous products - such as point-of-sale, loyalty card and online systems - which are used daily by approximately 5,500 retail stores, 300 cinemas and leisure attractions, 1,000 bars, restaurants and hotels and 450 leisure centres, with customers spread across more than 20 countries.

The product portfolio now all forms part of the ‘ClarityLive architecture' which enables the company to provide a flexible, modular solution suitable right through the scale chain. This structure enables add-on sales to be simply implemented and is aligned with the company's incremental upgrade approach. There is an evident emphasis on R&D – reflecting the company's target position as a more agile and innovative provider than an industry giant, whilst being more robust and credible than most other competitors. Recent technical enhancements include a cinema messaging and signage solution for use in cinema foyers and a performance scheduling module.

Financial Performance

Clarity recently impressed the market by beating expectations for the financial year to 31st March 2010. Driven by growth in all four divisions (retail, leisure, entertainment and hospitality) revenues were up by 8% to £19.1 million, 30% of which were recurring. Pre-tax profit was increased by 67% to £1.9 million and, ignoring a £0.7 million tax credit, earnings were 3.63p per share, rising to 5.68p if the credit is included.

Clarity ended the year with £1.3 million of net cash, this position being boosted by a £2.6 million placing in October. Cash flow from operations was £210,000, down from £1.43 million, mainly due to a £1.1 million increase in trade debtors and a £0.9 million fall in trade payables. This does not concern as it is only really a matter of timing on the working capital front, which I expect has unwound in the company's favour since the period end.

Highlights of the year included a number of multi-million pound contract wins with the likes of theme park operator Merlin Entertainments and sandwich chain Pret a Manger. While all divisions managed to grow revenues and gross profit there was a particularly good performance from retail, which increased sales by just under 10% to £10.08 million, and from leisure which grew sales by 20% to £1.48 million. The company was upbeat in outlook, stating that "good bids and tenders are under way in all territories and we are enhancing our sales and operational resources to address higher activity levels."

These results go to show just how much progress the firm has made in the past three years or so under the management team led by Ken Smith. When he took over at the end of 2007 the company was making heavy losses and had net debt of over £3 million. It is now making substantial profit, is growing and has a strong cash position.

To hear a webcast with Ken Smith, in which he explains more about the company's current situation and prospects for the future, click here .

Forecasts, Valuation and Conclusion

Boosted by the recent acquisition of IT service desk, Cyntergy, Clarity's house broker reckons it will be making £4.1 million of pre-tax profit by 2013 - representing a more than doubling of earnings in just three years. I believe that this is achievable given the company's strong cash backing, recent evidence of the ability to win multi-million pound deals and the capable management team. With the shares now at 35.5p, capitalising the company at £14.4 million, they continue to look cheap. At up to 42p, my stance remains “buy” .

T1ps.com provides 20 hot tips a year and hundreds of updates, as well as the diaries of legendary bear raider Evil Knievil and stacks of webcasts with small cap CEOs. To get all this, including 2 new tips this week and a recently-uploaded webcast with the CEO of Clarity Commerce, join t1ps.com now .