Bournemouth-based Modrus will be modestly earnings in the first financial year and add significantly more to the bottom line in the second.
The deal will ostensibly be a cash transaction, although Modrus’ owners will take around £1.3mln in paper.
Last year the company, which also has offices in London and New Zealand, generated revenues of £6.1mln, and underlying earnings (EBITDA) of £1.6mln. Almost 86% of its sales are recurring.
Nasstar said the acquisition gives it access to new markets, while there are also cross-selling opportunities.
Chairman Peter Daresbury told investors: “Modrus introduces three new target market verticals to Nasstar's product suite, media, property services and ISVs [independent software providers] whilst adding further penetration in financial services and recruitment.
“This acquisition represents a highly complementary fit with obvious synergies within licensing costs and data-centre consolidation.”
Nasstar is at the vanguard of cloud computing; it hosts a company’s IT applications centrally that are then accessed individually by users via a specially designed desktop.
Cutting edge of cloud computing
The system works live via the Internet, can be accessed by most devices (tablet, smartphone and laptop as well as PC) and remains functional even when there isn’t a wireless connection.
The system is fully supported from the company’s three data centres.
So, in layman’s terms, Nasstar allows customers to dispense with the server rooms and the IT support required to run them.
Its main markets are legal, financial and recruitment and it counts among its customers base big, blue-chip firms such as generator E.on, Sir Stelios Haji-Ioanou’s easyGroup and Pertemps, the UK’s largest independent jobs agency.
With customers signing three to five year contracts, the recurring revenue base is estimated by analysts to be just shy of 90%. The churn rate (how many people discontinue the service) is around 4% - which is extraordinarily low.
All of this creates a business that is supremely predictable and cash generative. With such a stable base of revenues, banks are happy to lend to Nasstar, which sees the opportunity to consolidate this segment of the Cloud computing market.
Reacting to Nasstar’s plans, Peter McNally, analyst at Shore Capital, said: “We think the sector, which has evolved with both large and small competitors, will continue to consolidate as the model of selling IT has changed to include external cloud hosting providers, making businesses more efficient, especially as they grow in size.
“It would appear that small acquisitive companies in the sector have much to gain from reasonably priced acquisitions as the targets tend to be acquired at valuations that are highly accretive to acquirers.”
The shares, up 17% in the last year, marked time in morning trade as they changed hands for 8.49p each, valuing the business at £32mln.
Room for growth
The small-cap specialist finnCap reckons the stock is worth 13p. It reckons the Modrus deal is a good strategic fit and “further develops the group’s growth opportunities”.
In a note to clients, analyst Andrew Darley said the additional funds raised, over and above and cash portion required for the acquisition, would reduce the company’s net debt, “accelerating Nasstar towards an un-geared balance sheet and continuing opportunities for further consolidation of an attractive market niche”.
Half-year results showed the company's buy-and-build strategy is bearing fruit.
Reporting a first half performance that was in line with expectations, the company said total monthly recurring revenue at the end of June was £1.23mln, up from £1.17mln at the end of 2015 and £969,000 a year earlier.
Having said that, recurring revenues as a percentage of turnover edged lower to 88% from 89% at the end of 2015, though the company pointed out that there was an additional £17,000 per month of signed recurring revenue in the first half of 2016 that will begin to have an impact in the second half of the year.
Revenue in the six months to the end of June shot up to £8.08mln from £6.63mln in the same period of last year, reflecting the contribution from VESK, which was acquired in October 2015.
Underlying earnings, or EBITDA, climbed to £1.60mln from £1.35mln the year before.