AdvancedAdvT Ltd (LSE:ADVT), having completed eight acquisitions so far, was initiated at a 'buy' rating by Shore Capital on Monday.
The company is pursuing a roll-up strategy of companies providing niche, mission-critical software, with the management team having executed the same model successfully in the past, notably Advanced Computer Software, which delivered shareholder returns of more than 1,000% between 2008 and 2015.
Acquisitions completed to date have focused on business solutions, compliance and human capital management software, with around £110 million in cash still sitting in the bank for further M&A.
Most recent results showed organic revenue growth of 18% and margin expansion of 600 basis points, though Shore Capital is remaining conservative with its forecasts, estimating only 2% organic growth and 3% EBITDA growth for the 2026 financial year.
"Medium term, we anticipate mid-single-digit organic revenue growth, coupled with margin expansion via a combination of gross margin uplift (>10pp due to the shift to the cloud) and operating leverage.
"Whilst not forecasted, incremental M&A looks highly likely to provide further value accretion."
Shore Cap set 'fair value' for the shares at 240p, compared to 192.5p at the end of last week, based on discounting medium-term revenue growth at 5% and terminal adjusted EBIT margins of 30% compared to 26% in the past year.
This price would equate to multiples of 4.1 times on an EV/sales basis, 17x, EV/EBITDA, while a 15% liquidity discount is applied to the £21 million stake in M&C Saatchi.
"Moreover, the business still has firepower of circa £110 million for more value-accretive M&A – option value which we have not included in our fair value estimate."
James