US tech stocks pushed to fresh highs last week, leaving the wider market trailing – the S&P500 still needs to climb 8% while blue chips need to add more than 14% to record a new high. The market was underpinned by strong US jobs data on Thursday, and consequently, the VIX volatility index has resumed its drift downwards.
When evaluating UK small-cap tech stocks, we think examining year two forecasts for sub 20x earnings, or sub 2x enterprise value (EV)/sales for recovery plays, is a good place to start. Growth themes are also important, such as the trend to home working and the move to 5G telephony.
News roundup
Last week saw annual results from D4t4 Solutions PLC (LON:D4T4), GB Group PLC (LON:GBG), SysGroup PLC (LON:SYS), and Trakm8 Holdings PLC (LON:TRAK) and a trading update from Aptitude Software Group PLC (LON:APTD).
D4T4, the data solutions provider, recorded a 26.2% jump in annual recurring revenue (ARR) to £9.55mln over the 12 months; however, total group revenue slipped 14% to £21.8mln in the year to March, reflecting the move to a recurring revenue model. Recurring revenue represented 45% of the total revenue, up from 29% the prior year. Gross margin improved by 400 basis points (100 basis points equals one percentage point) to 60.7%, reflecting the change in mix, but this is expected to ease back in the near term and rise back above 60% in the longer term. The group finished the year with cash of £12.8mln, up £1.8mln over the year, and it has no debt. The proposed final dividend is 1.9p (FY19:2.3p) resulting in a total dividend 11% lower at 2.67p.
GB Group, the global identity data intelligence specialist, grew revenues by 39% to £199.1mln in the year to March as adjusted operating profit surged by 50% to £47.9mln. Net debt shrank by £31.3mln to £35.0mln. The company is not proposing a dividend due to the COVID-19 pandemic.
SysGroup, the managed information technology services and cloud hosting provider recorded a 53% jump in revenues to £19.5mln in the year to March, as adjusted underlying earnings (EBITDA) doubled to £2.8mln. The group ended the year with net cash of £0.45mln after acquiring Hub Network Services Limited for £1.45mln in cash during the period. There is no dividend.
VR Education, the virtual reality (VR) technology company focused on the education and enterprise training space, announced that it has signed a memorandum of understanding with Virtual College, a digital learning solutions provider, to provide and deliver technology-enhanced learning solutions in the UK and the Middle East. Separately, the company announced the launch of Engage Mobile, an Android phone and tablet supported version of the group's proprietary VR communications, events and training platform.
Trakm8, the telematics and data insight provider, grew revenues by 2% in the year to March, as the adjusted loss before tax shrank by 85% to £0.2mln. Headcount reduced by 15% over the year. The group finished the year with net debt unchanged at £5.6mln. There is no dividend. The stock jumped over 40% on Friday after the company announced it had agreed on the fleet optimisation contract with a major UK food retailer that had been expected in March but was delayed due to COVID-19. The contract is initially for two years and uses Trakm8's algorithm to optimise home deliveries.
Aptitude Software, a provider of financial management software, said trading for the first six months of fiscal 2020 (FY20) was in line with the board's expectations. Annual recurring revenue grew by 11% over the year on a constant currency basis to £30.9mln. The group finished the period with cash of £30.9mln and has no bank debt.
WANdisco PLC (LON:WAND), the big data company, announced that it has signed an initial deal worth up to US$1mln with a major British supermarket. In addition, 11 companies registered for the group's Azure Cloud product in the first month of public preview. This is in line with management’s expectation to sign 50 new customers within the first 12 months of operation.
Small cap software & services market roundup
Volatility abated last week, with stocks underpinned by solid US jobs data on Thursday and activity was subdued on Friday with the US closed. Our small caps software index eased 0.9% over the week, while the large caps index rose 1.2%. Among the small caps, Aptitude jumped 9% following its in-line trading update while losses were recorded by Alfa Financial Software, Iomart and Seeing Machines. Among large caps, gains of between 2% and 5% were recorded by Softcat, Kainos, Micro Focus, Learning Technologies and Blue Prism.
Recent UK software sector fundraisings
No significant new fundraisings in small-cap tech were announced last week.
|
Estimated gross amount |
Announced |
Method |
Price |
Discount/(premium) to prior day |
Estimated % of new capital |
Comment |
Redcentric |
£5.755mln |
26-Jun |
Placing/subsc |
110p |
(7.8) |
3.3 |
Part funds settlement with the FCA |
Instem |
£15.75mln |
26-Jun |
Placing |
435p |
4.4 |
17.7 |
Accelerate the acquisition strategy |
Boku |
£20.1mln |
17-Jun |
Placing |
85p |
7.1 |
8.4 |
Part finances $41m acquisition of Fortumo |
WANdisco |
US$25mln |
11-Jun |
Placing |
650p |
12.2 |
6.0 |
Strengthen b/s and working capital |
Learning Tech |
£81.8mln |
29-May |
Placing |
127p |
7.6 |
8.8 |
Accelerate growth and gain market share |
accesso technology |
£32.9mln |
22-May |
Placing |
290p |
13.4 |
29.1 |
Strengthen balance sheet as CV19 continues |
accesso technology |
£6.2mln |
22-May |
Open offer |
290p |
|
|
1 for 13 ratio |
VR Education |
€3mln |
20-May |
Subscription |
5.47p |
43.9 |
20.0 |
Subscription by strategic partner HTC |
Keywords Studios |
£100mln |
15-May |
Placing |
1450p |
5.8 |
9.5 |
Acquisition strategy and strong balance sheet |
KRM22 |
£0.135mln |
14-May |
Subscription |
30p |
|
1.8 |
Management subscription |
KRM22 |
£1.145mln |
14-May |
Placing |
30p |
(9.1) |
15.4 |
Strengthen working capital, accelerate growth |
Rosslyn Data |
£7.3mln |
07-May |
Placing |
5p |
(5.3) |
43.1 |
Increase S&M, maintain product development |
Mobile Streams |
£1mln |
06-May |
Placing |
0.3p |
25.0 |
33.2 |
To give potential clients confidence |
Shearwater |
£3.75mln |
24-Apr |
Placing |
240p |
17.2 |
6.6 |
Capitalise on considerable growth opportunities |
Blue Prism |
£100mln |
21-Apr |
Placing |
1100p |
4.4 |
9.8 |
Improved balance sheet resilience |
Crossword Cyber |
£1mln |
20-Apr |
Placing |
230p |
34.3 |
21.8 |
Enable to continue to drive business growth |
essensys |
£7mln |
09-Apr |
Placing |
151p |
4.1 |
8.8 |
Increase balance sheet liquidity and flexibility |
IMImobile |
£22.2mln |
09-Apr |
Placing |
300p |
8.4 |
9.0 |
To provide maximum financial flexibility |
Calendar
March year results are anticipated over the next few weeks from IMImobile, Redcentric and Aptitude and April- year-end from Ideagen. June interims results season begins in late July with FDM and Gresham.
Large-cap Micro Focus reports its interims this Tuesday.
Across the pond, reporting is quiet for the next few weeks, until Microsoft reports annual results later in the month.
The main economic focus this week will be industrial production data for May in key European countries.
Date |
Company |
Event |
|
|
|
July |
IMImobile |
Final results |
|
|
|
14-Jul |
Final results |
|
Mid-July |
Ideagen |
Final results |
|
|
|
21-Jul |
Redcentric |
Final results |
21-Jul |
Gresham Technologies |
Interim results |
|
|
|
23-Jul |
GetBusy |
Interim results |
|
|
|
Late July |
Quartix |
Interim results |
Late July |
Shearwater |
Final results |
29-Jul |
Aptitude Software |
Final results |
29-Jul |
FDM |
Interim results |
|
|
|
13-Aug |
Tribal |
Interim results |
|
|
|
03-Sep |
NCC |
Final results |
|
|
|
Mid-Sept |
Accesso |
Interim results |
Source: Data from regulatory news and company websites...
Valuation table
The sector ratings continue to 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, NCC has seen upgrades.
|
Share Price |
Market Cap |
Net debt/(cash) |
Enterprise |
EV/sales |
Price/earnings |
||
|
Pence |
£mln |
£mln |
Value |
Year 1 |
Year 2 |
Year 1 |
Year 2 |
2505 |
687 |
49.4 |
736.4 |
3.2 |
2.9 |
41.6 |
31.9 |
|
EMIS Group |
1070 |
673 |
(31.1) |
641.9 |
4.1 |
3.9 |
22.5 |
20.7 |
NCC Group |
175.2 |
489 |
5.0 |
494.0 |
2.0 |
2.0 |
25.8 |
28.0 |
SDL |
498 |
454 |
(26.3) |
427.7 |
1.2 |
1.1 |
23.9 |
17.1 |
Ideagen |
180 |
408 |
16.8 |
424.8 |
7.6 |
7.0 |
34.2 |
28.7 |
Kape Technologies |
225 |
357 |
24.2 |
381.2 |
3.9 |
3.5 |
20.6 |
18.0 |
Iomart Group |
325 |
355 |
37.3 |
392.3 |
3.4 |
3.2 |
19.7 |
18.6 |
WANdisco |
620 |
318 |
(17.6) |
244.4 |
15.1 |
N/A |
(21.6) |
N/A |
DotDigital Group |
101.5 |
302 |
(22.0) |
280.0 |
6.0 |
5.5 |
25.5 |
26.5 |
IMImobile |
297.5 |
245 |
0.1 |
245.1 |
1.5 |
1.4 |
20.2 |
25.4 |
IDOX |
49 |
217 |
14.0 |
231.0 |
3.4 |
3.2 |
23.3 |
19.2 |
Aptitude Software Group |
368 |
207 |
(30.9) |
176.1 |
3.1 |
3.2 |
28.7 |
31.0 |
Redcentric |
126.5 |
188 |
13.5 |
201.5 |
2.3 |
2.2 |
24.3 |
18.1 |
Alfa Financial Software |
62.1 |
186 |
(58.5) |
127.5 |
2.1 |
2.0 |
69.0 |
39.6 |
620 |
181 |
(26.0) |
155.0 |
N/A |
N/A |
N/A |
N/A |
|
Centralnic Group |
87.5 |
165 |
56.6 |
221.6 |
1.4 |
1.3 |
18.7 |
16.2 |
Eckoh |
62.5 |
159 |
(11.6) |
147.4 |
4.1 |
3.7 |
37.0 |
29.6 |
Quartix Holdings |
313 |
150 |
(6.8) |
143.2 |
5.5 |
N/A |
N/A |
N/A |
196 |
148 |
(5.4) |
142.6 |
4.3 |
3.8 |
66.4 |
35.6 |
|
Bango |
181.5 |
135 |
(2.7) |
132.3 |
11.2 |
N/A |
106.8 |
N/A |
Accesso Technology Group |
277.5 |
114 |
(24.5) |
89.5 |
2.3 |
1.1 |
(4.2) |
(39.5) |
Tribal Group |
55 |
113 |
(16.5) |
96.5 |
1.4 |
1.3 |
14.8 |
13.6 |
Seeing Machines |
3.25 |
109 |
(25.0) |
84.0 |
4.0 |
2.9 |
(6.6) |
(14.8) |
80 |
101 |
(14.2) |
86.8 |
2.3 |
2.1 |
18.5 |
13.7 |
|
230 |
93 |
(12.8) |
80.2 |
N/A |
N/A |
N/A |
N/A |
|
Cerillion |
306 |
90 |
(4.8) |
85.2 |
4.2 |
3.9 |
29.4 |
26.0 |
Gresham Technologies |
128.5 |
88 |
(9.6) |
78.4 |
2.9 |
2.7 |
55.2 |
39.5 |
Essensys |
150 |
79 |
(8.7) |
70.3 |
N/A |
N/A |
N/A |
N/A |
Instem |
457 |
76 |
(5.9) |
70.1 |
2.4 |
2.3 |
21.2 |
20.4 |
745 |
76 |
(17.3) |
58.7 |
2.0 |
N/A |
42.9 |
N/A |
|
|
|
|
|
|
|
|
|
|
Median |
|
|
|
|
3.2 |
2.9 |
24.1 |
20.7 |
Average |
|
|
|
|
4.0 |
2.9 |
29.1 |
20.1 |