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