Full-year results from business software company Proactis Holdings (LSE: PHD) caused the share price to fall this morning and it’s down 3.5% as I write.
However, the figures look good. Revenue rose 31% compared to a year ago and adjusted earnings per share put on a decent-looking 25%. The directors pushed up the final dividend by almost 8%, suggesting optimism about the immediate outlook.
Organic and acquisitive growth
The firm creates, sells and maintains software that enables organisations to streamline, control and monitor their non-payroll internal and external expenditure. In today’s world of often cut-throat pricing and little fat in the cash flow to absorb inefficiencies, a strong grip on costs seems essential. So I’d expect the sector to grow and, indeed, Proactis has grown its earnings robustly over the last few years, delighting shareholders with a more than 760% rise in the stock since 2013.
Today’s figures show underlying organic growth in revenue of 9%, but the company has also been busy on the acquisition trail. During August, Perfect Commerce Group LLC joined the stable making Proactis “the sixth largest global ePurchasing pure-player by revenue,” according to the directors. The purchase comes on the heels of the acquisition of Millstream Associates Limited, which the firm signed off during November 2016.
Successful integration
Chairman Alan Aubrey tells us the acquisition of Millstream was the fifth over the last three years and “given the encouraging post-acquisition performance, the Group has, once again, demonstrated its ability to implement optimal integration strategies.” The firm is now focusing on repeating its integration success with Perfect, and Mr Aubrey confirms that the acquisition programme “remains a fundamental part of the Group’s growth strategy with a pipeline of opportunities under review.” The directors are ambitious and so far, investors have had little to complain about, judging by the stock’s performance.
At 165p, the forward price-to-earnings ratio runs just below 15 for the current year to July 2018. City analysts following the firm expect earnings to grow 26% this year, so at first glance, the valuation seems modest for the growth on offer. But I think the firm is worth researching and seems more attractive than the outsourcing specialist Capita (LSE: CPI), for example.
No growth, big dividend
Capita’s market capitalisation of just over £3.7bn dwarfs the £153m of Proactis. However, size alone doesn’t make Capita less attractive to me. The problem is the lack of growth. City analysts expect earnings to decline 12% this year and to only bounce back by 4% next year. Compared to the double-digit growth rates we’re used to with Proactis, Capita’s performance is underwhelming and I think it shows that the outsourcing business shapes up as a tough way to make a living.
In fairness, Capita has one redeeming feature as a stock in its dividend yield. At today’s share price of 561p, the forward yield for 2018 runs at 5.6%. But I think there are safer yields out there, and given the choice between these two, I’d rather take my chances on the growth that Proactis has to offer.
