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Advanced Computer Software to remind investors of growth potential

Interim results from Advanced Computer Software on Wednesday represent a chance to restart a share price advance that seems to have stalled for no good reason.
Advanced Computer Software to remind investors of growth potential

Interim results from Advanced Computer Software (LON:ASW) on Wednesday represent a chance to restart a share price advance that seems to have stalled.

Having topped out at 97p in mid-June, the share price of the acquisitive software and information technology services provider has mostly been range-bound between 80p and 90p.

This is despite the company winning its largest ever managed services win, worth £14.5mln over five years, in October.

That followed a reassuring trading statement in mid-September that indicated Wednesday’s interims are likely to be in line with management expectations, with revenues up 74% to no less than £99.0mln and adjusted underlying earnings (EBITDA) up 67% to no less than £22.0m.

Both those numbers came as a pleasant surprise to joint broker N+1 Singer, which had pencilled in £96.5mln for sales and £20.9mln for EBITDA.

Meanwhile, the firm’s other broker – Arden Partners – has suggested that well-publicised problems over the summer with the NHS 111 service are weighing on the share price, for no good reason.

NHS Direct recently decided to withdraw from its contract to run part of the NHS 111 non-emergency helpline. Advanced Computer Software (ACS or ASW) is the supplier to a number of 111 providers, including NHS Direct, for integrated call handling and its Adastra Out Of Hours software.

There is no suggestion, however, that ACS’s software has been responsible for the teething problems; the software is proven and is working well, Arden reported.

In any case, any uncertainty over future revenue is limited to a total of £1mln per annum maintenance and managed services from 111 providers, of which Arden estimates half to be from NHS Direct.

“In the context of our £196mln forecast for full year revenue from ASW, this is inconsequential,” the broker maintained.

Meanwhile, there is plenty of growth to go for, according to Panmure Gordon, which rates the shares a ‘buy’ and which has a target price of 110p.

“Multiple growth opportunities within healthcare, business solutions and managed services - as evidenced by the recent announcement of the company’s largest ever managed services win, worth £14.5m over five years – should continue to drive above-market growth. This will enable ACS to keep spinning out impressive amounts of cash, which will either fund the pursuit of additional growth opportunities or potentially turn this into the kind of ‘returns’ stock UK investors so highly value,” suggested Adam Lawson and George O’Connor at Panmure Gordon.

As a returns stock, it is a case of small acorns at the moment, with the group having declared its maiden dividend payment of 0.4p as recently as June of this year, at the time of its full-year results announcement.

On the other score – growth through acquisition – the ACS bandwagon is rolling along at its usual lick. In the first half of the year the company acquired Computer Software Holdings (CSH) for £110mln in cash, and the acquisition could hardly have been more tailor-made for ACS had the company’s chief executive, Vin Murria, rubbed a magic lamp and made a wish.

The purchase had all the usual things ACS looks for in an acquisition: similar but complementary activities; strong cash generation; a high level of recurring revenue from customers who love the product; its own intellectual property; and the opportunity for cross-selling.

On top of that, it is a company senior management knows well, as many of them held prominent positions at CSH when the company was taken private back in 2007.

In the second half of this year, ACS made another purchase which, in Murria’s view, is “a natural fit”. It bought Plain Healthcare, the trading subsidiary of Avia Health Informatics.

“Avia is a business we have been trying to buy for about five years,” chief executive Vin Murria told Proactive Investors at the time of the purchase announcement.

Plain Healthcare developed the Odyssey system which is used by more than 100 NHS customers, and it is already a long-term partner of ACS’s Health & Care business.

Lest the impression is given that ACS is all about bought-in growth, Panmure Gordon notes that the AHC business has apparently continued to show “strong organic growth” and made “excellent progress in all areas”. The 365 managed services business, similarly, has achieved “strong growth” in its recurring managed services revenue, and has “substantially reduced” its exposure to lower-margin hardware sales.

The final word goes to Panmure Gordon.

“Although investors currently have an appetite for blue-sky growth, ACS’s track record, growth potential and ability to generate cash should not be ignored.”

Shares in Advanced Computer Software were up 2.3% to 87.47p in late afternoon trading.



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