An ambitious software company has pushed its rivals aside to become the dominant force in its niche. And it has a really dull name -- what could be better?
Like Hermann Goering's reaction to 'culture', when I hear the word 'software' I reach for my gun. The similarity ends there -- I don't own a Browning 640b pistol and neither did I preside over the humiliating defeat of the Luftwaffe against an air force one third the size. Just as well, I'm never very good with enraged fascist megalomaniacs.
The reason I avoid investing in go-ahead technology outfits is that my pre money-grabbing career was in that very area. I've often seen a laughable underestimation of the difficulty of getting something completely right. I've been guilty of it myself. The pace of change in the industry makes female fashion look like the fossil record, and that reduces visibility of earnings.
Usually the wizzbang company's name is enough to put me off. QinetiQ
(LSE: QQ)
, SQS N
(LSE: SQS)
and another zeitgeist pandering affront to the English language, Qonnectis
(LSE: QTI)
may all be splendid companies but merely reading the names is like a pepper spray into my investor's eye.
So what have I gone and done? I've bought another software share. I probably wouldn't have glanced at it had its moniker not been as old fashioned as the frock-coated Victorian Prime Minister that is its namesake -- Gladstone.
Gladstone
(LSE: GLD)
is the UK's leading supplier of systems to manage membership at leisure clubs. Clients include JJB Sports
(LSE: JJB)
, Bannatyne Fitness and 250 local councils. They are also expanding in Europe and Australia. Gladstone has the usual "client relationship vision statement blah blah", but the purpose of its software is to sweat the membership database to increase revenue and retention.
Profits running ahead
Recent full year results showed a leap in pre-tax profits to £0.93m (2005: £0.2m) and adjusted earnings per share (EPS) of 2.63p, up 48%. Net cash is £4.7m, up £0.6m despite acquiring some smaller competitors.
At 24.75p Gladstone is worth £12.8m, so cash is 37% of capitalisation. If we strip out the cash and interest, the P/E of the business is 7, though this would be higher if the company wasn't using tax losses to reduce the tax rate. EV/operating profit is a low (i.e. cheap) 6.7.
What about technology stocks' Achillies heel, visibility of earnings? Recurring revenues, at over 40% of turnover, provide some stability. The outlook statement is strong and the sports club market is likely to keep growing with spending and hype in the sector set to reach Olympic levels by 2012.
The P/E is very low for a company growing as fast as Gladstone, so what's the catch?
Negatives
- EPS growth forecast to slow to 6% in 2007, though pre-tax is still expected to rise 60%. The discrepancy must be due to Gladstone's running out of tax losses.
- There is only one forecast available, from house broker KBC Peel Hunt.
- Dividend is zero, which is surprising for a company stuffed with cash.
- Capitalisation is tinpot, so the share price spread is high (1.5p or 6%) and liquidity not great, though there are five market makers.
- It's AIM listed, so it won't fit in your ISA.
- Expansion abroad increases both risk and opportunity.
To my surprise, the shares fell on results day so I was able to pick up a good number at 27.25p. They have fallen further since then, so I reckon they are now even better value.
Alun owns shares in Gladstone
