Richard Jeans' week in technology: Mood remains nervous

This is the latest weekly round-up by our tech guru Richard Jeans

Trackwise - Richard Jeans' week in technology: Mood remains nervous

The markets remain nervous, amid concern over the rising coronavirus cases across the globe. The nervousness is reflected in the VIX index which is hovering around 35, near double its long-term average.

A major focus this week will be the key US monthly jobs data on Thursday, which follow the surprisingly strong figures of a month earlier. 

News roundup

Last week we saw annual results from Trackwise (LON:TWD), Iomart (LON:IOM), and Alpha Financial Markets Consulting (LON:AFM), a trading update from NCC (LON:NCC) and Capital Markets Events from CentralMic (LON:CNIC) and Kape (LON:KAPE).  There were fund raisings from Instem (LON:INS) and Redcentric (LON:RCN), which also released a trading update.

Trackwise.Designs, which provides specialist products using printed circuit technology, reported a 16% decline in revenues to £2.9mln and a modest adjusted profit. However, the Improved Harness Technology (IHT) business, which is the group’s key growth area jumped by 55% to £0.9mln. Stevenage Circuits (SCL), acquired in April, has been successfully integrated, and the company’s existing Radio Frequency (RF) business is being transferred to Stevenage, freeing up capacity at Tewkesbury for the IHT operations. SCL was acquired in April for an initial £1.4mln net of cash acquired. The company had net debt of £0.3mln as at 31 December, raised c £5.87mln gross in March, partly to fund the acquisition, and currently has a net cash position of c £1.5mln. The IHT business produces PCBs that replace wiring and hence result in a substantial reduction in weight. End markets include electric vehicles, aerospace and medical. The RF business targets the telecoms industry and has been impacted by the delayed T-Mobile / Sprint merger in the US, which has since been resolved, and the trade disputes between the US and China. The investment case is promising, for instance, the company is negotiating with several medical device companies and there is one opportunity for an order of a million units for one product alone. In total, the group has 72 customers and collaborations, up from 45 as at March 2018. This includes a number  blue-chip names such as GKN Aerospace and Airbus.

NCC, the cyber security provider and resilience advisor, said in its trading update that it expects revenue and adjusted EBIT to be comfortably ahead of analysts' consensus expectations. While NCC has experienced delays, cancellations, and disruption to its business, these are clearly not as bad as had been feared. However, the company in not yet reintroducing guidance due to Covid-19 uncertainties. Net debt slipped to below £5mln from £20.8mln as at 30 November.

Redcentric, the UK IT managed services provider, said in a trading update that Q1 recurring revenue orders were expected to be marginally ahead of Q120 and significantly ahead of the board's expectations at the time of the last trading update in April. Further, Q1 customer installations are expected to be significantly higher than last year and also ahead of expectations. The restructuring programme will be largely complete by the end of June and Redcentric now expects to deliver annualised cost savings of slightly more than the £2.8mln previously announced. While demand for new business in Q121 has been strong, the company has also experienced customers deferring decisions on largescale IT projects due to Covid-19 and hence the board remains cautious on future trading.  In addition, The company is raising £5.775mln to part fund a settlement with the Financial Conduct Authority in relating to certain historical accounting misstatements (see section below),

Iomart, the cloud computing company, grew FY20 revenues by 9% to £112.6 mln while adjusted PBT slipped by 11% to £22.8mln. The Cloud Services organic growth rate increased to 6% in FY20 from 2% in FY19.  The group has traded in line with management expectations in the first two months of FY21, reflective of the group’s recurring revenue business model.  The final dividend is reduced by 22% to 3.93p, for an annual total of 6.53p, which equates to a payout ratio of 40%- the maximum under the group’s current policy.

GRC International, a supplier of IT governance, risk management and compliance products and services, said in a trading update that billings are almost 20% ahead of management's expectations. This is in spite of the fact that the company had been planning for a V shape recovery. In addition, costs are lower than anticipated and, hence, cash is better than expected.

Alpha Financial Markets Consulting, the provider of specialist consultancy services to the global Asset and Wealth Management industry, grew FY20 revenues by 17% to £90.9mln, reflecting 7.8% organic growth and c £7mln from the acquisitions of Axxsys and Obsidian. Adjusted PBT rose by 15.2% to £18.6mln. The North American operations grew by an impressive 57% to £15.2mln (17% of group revenues), generating a gross margin of 33% compared with 44% for the UK operations. Management is buoyant on the new Pensions & Retail Investments practice, which targets the insurance sector, and it typically a cross-sell to the customer base. It is also buoyed by the quality names that it has been winning, among the 102 clients added in the year - c 70 of these were via the acquisitions and the balance organic.  74 consultants were added during the year of which c 40 joined via the acquisitions. There is no final dividend due to Covid-19 uncertainty.

CentralNic, the internet platform that derives revenue from the worldwide sales of internet domain names, provided a Capital Markets event.  CentralNic’s investment case is interesting as the business is highly cash generative while being leveraged and is acting as a consolidator in the space. CentralNic has not seen any slowdown from Covid-19. CentralNic also released its Q1 organic revenues, which at 15%, suggest the shares have plenty of upside if this growth rate is sustained.  The 15% growth was after taking account of weakness in the euro and Australian dollar (it reports in US dollars) along with one off items and compares with 2% organic growth in FY19.   

Kape Technologies, the digital security and privacy software business, provided a Capital Markets presentation webcast. Kape is a minnow in the space, compared with Avast, the UK FTSE constituent, or industry giant Check Point Software, but its investment case has a number of interesting features. For instance, VPN usage has jumped by 33% since the beginning of the Covid-19 pandemic, as a result of increased demand as people work from home. The group’s digital privacy business segment has undergone significant upgrades, transforming it from a VPN provider into a fully-fledged privacy suite and the development team is working on a number of new products and services to further broaden the offering.  Kape acquired its North American competitor PIA at end-2019 in a transformational acquisition for an enterprise value of $127.6m.  It now has c 2.5mln customers and is expected to generate $120mln to $123mln in revenues in FY20. This compares with the total industry size estimated at >$170bln, growing at high single digits. At the time of the deal, Kape was targeting synergies of $3.5mln to $4.5mln from the acquisition, but recent run-rate suggests synergies could be c $2mln higher. EBITDA margin is expected to rise to c 30% in FY20, from c22% in FY19, and management is targeting 40-45% in the longer-term.

Small cap software & services market roundup

Last week, our small caps software index rose 1.1%, reflecting the positive news flow,  while the large caps slipped 1.7%. Among the small caps, the notable gainers included Seeing Machines up 20%, Redcentric up 16%, NCC up 15% and Kape up 9%.  Large caps were held back by declines in Micro Focus, down 10%, Blue Prism, down 8%, and Learning Technologies, down 7%.

Recent UK software sector fundraisings

Instem, which provides IT solutions to the global life sciences market, has placed c 3.62m shares at 435p, raising £15.75m gross (£15.0m net).  In addition, c0.69m shares were sold at the same price by directors and related parties to raise gross proceeds of c £3.0m. The company plans to use the money accelerate its acquisition strategy and it says a number of compelling opportunities have already been identified.

Redcentric, the UK IT managed services provider, is raising £5.775m in a placement and subscription to part fund a settlement with the Financial Conduct Authority in relating to certain historical accounting misstatements. 3.91m shares are being placed at 110p and a further 1.34m subscribed for by Coltrane Asset Management at the same price. The fund raising is part of a c £11.4m restitution scheme.


March year results are anticipated over the next few weeks from D4T4, GB Group, Sysgroup, IMImobile, Redcentric and Aptitude and April- year end from Ideagen. FDM begins the June interims results season in late July.

Across the pond, in the shortened week, Micron, the chipmaker, reports Q3 numbers after the close on Monday.

This week’s economic data includes key May jobs numbers in the US on Thursday, ahead of the Independence Day holiday on Friday.

Valuation table

The sector ratings look attractive in comparison with the UK 350 large caps, given the significantly stronger growth potential, combined with the relatively strong balance sheets. Among individual shares, Kape and CentralNic have seen upgrades.

Source: Data from regulatory news and market sources

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