Greater visibility on revenues

And going by some of the latest developments for the company, I am hopeful that it can continue to be a rewarding stock to buy and hold for a long time. Its biggest client, Australia and New Zealand Banking Group, better known by its abbreviation and ticker as simply ANZ, has just renewed its contract with the company. It says that this will “materially increase its investment” in it. 

It specifically mentions its software Clareti in this context, that software being used to conduct banking transactions in a scalable and safe way. The platform’s revenues from ANZ alone are expected to increase by 35% during the year. This is significant, because Clareti accounts for the lion’s share of the company’s total revenues. 

Healthy results for Gresham Technologies

This builds on its already healthy results for the first half of 2021. Gresham Technologies’ revenues grew by 19% and its adjusted earnings before interest, taxes, amortisation and depreciation, better known as EBITDA, grew by 17%.  

These numbers are encouraging, but I think it is important to highlight that it reported a net loss in the latest update. This was on account of its acquisition of Electra, which is another software provider that caters predominantly to US-based buy-side companies. For that reason, this was not  a loss due to a recurring cost. And going by the expected improvement in its revenues this year, I think it is reasonable to expect that it can still post a profit for the year. In fact, in the past years, it has indeed been profitable. 

Small stocks and the liquidity problem

A less easily reconciled challenge when considering whether to buy the stock or not, is its size. As a small company, with a market capitalisation of less than £150m, there are relatively few transactions in the stock on a daily basis. As a result, if I would like to sell the stock, there is no guarantee that I will find buyers as quickly as desirable. 

Is this a stock to buy?

But then again, going by the company’s past financials and its share price movements, this is a stock for the long term. There is potential to make quick capital gains from it, for sure. But I doubt if that will really give me the doubling or tripling in capital that can happen if I hold it for a long enough time. And if it continues to grow over the next decade as well, I reckon that it would be a far more liquid stock by then as well. It is a buy for me. 

The post 1 UK stock to buy and hold for a long time appeared first on The Motley Fool UK.

A growth stock growing through acquisition

This week, Gresham Tech announced it’s proposing to buy Electra Information Systems. This is a US-based company providing software solutions and services for processing trading data, to buy-side companies such as institutional portfolio managers.

Gresham will buy Electra using existing cash resources and a share placing. The total price to be paid is $38.6m (£27.2m) including a £21m share fundraise. Last year, Electra generated revenues of £10.1m, while Gresham generated £24.8m. Therefore, the Electra acquisition should accelerate Gresham’s earnings growth quickly.

Gresham’s current customers include many of the world’s largest financial institutions from banking, investment management, and financial services. Therefore, I believe this acquisition should complement Gresham’s existing business. It should also help Gresham make inroads in the US, providing an opportunity to grow the business further.

Gresham’s fluctuating share price

Gresham is a growth stock with a £117m market cap, a high price-to-earnings ratio (P/E) at 93, and a dividend yield of 0.45%. It makes money from subscription-based offerings.

This past year has seen the Gresham share price soar. Today, it’s down 6% from its 52-week high and up 62% from its 52-week low.

Looking back a bit further, the Gresham share price rose between 2016 and 2018, but collapsed by almost 70% by early 2019. It remains below those 2018 highs today, but certainly seems to be back on the right trajectory.

The reason for this share price collapse was a drop in its earnings. Delays to collecting revenue from new projects caused licensing fees to fall. This caused its adjusted earnings before interest, taxes, depreciation, and amortisation (EBITDA) to plunge a whopping 83%.

Nevertheless, fast-forward to this year and revenues are much improved. Its adjusted EBITDA came in at £4.5m, up from £4.1m in 2019 and £0.9m in 2018.

Notable customer base

Gresham’s core product, Clareti, is proving popular among leading investment banks and other financial institutions. Clareti is an industry leading cloud-based, data control platform. Financial services is a time-sensitive business and this platform helps companies ensure accurate data and real-time connectivity.

Growth stocks are undoubtedly riskier investments than well-established companies and Gresham’s blip post-2018 illustrates this risk. However, I think the financial services industry is becoming more dominant than ever, as retail interest in investing rises.

Gresham is a global fintech company with clear potential. Fintech is a loose term often applied to anything crossing the boundaries of financial and technology, which Gresham clearly does. But Gresham has been serving the financial industry for over 20 years, so it’s not a newcomer to the space. Nevertheless, it’s a competitive field in which many major companies are causing disruption.

In addition to competition, other risks facing the Gresham share price include failing to win new business, existing customers cancelling, product failure, and rising operational costs.

As Gresham appears to be building a scalable business with notable clients, I’m tempted to invest and add GHT shares to my Stocks and Shares ISA.

The post A small-cap growth stock scaling up through M&A – should I invest? appeared first on The Motley Fool UK.

Gresham Technologies

£136m market cap Gresham Technologies (LSE: GHT) is a software and services company that specialises in providing real-time transaction control and enterprise data integrity solutions to financial services institutions. Its key product Clareti has been designed to assist companies with internal risk management, data governance and regulatory compliance.

Gresham released full-year results for 2017 this morning and the numbers look pretty good. For the year ended 31 December, group revenues increased 26% to £21.7m, easily beating consensus estimates, with revenues from Clareti surging 48% to £11.1m. Adjusted EBITDA rose 34%, while adjusted earnings per share climbed 38% to 6.5p. The company had a cash balance of £8.5m at year-end, up from £7.2m last year.

Management stated that it was confident about the group’s prospects, with CEO Ian Manocha commenting: “With Clareti sales now generating more than half of all Group sales and with the Group now generating surplus cash for the first time in many years, we are confident our strategy is on track and certain about our ability to deliver sustainable long-term profitable growth for our shareholders.”

One thing that stands out to me about today’s results is that the firm has initiated a progressive dividend policy. A final dividend of 0.5p per share was proposed. To my mind, this is a signal of confidence from management and suggests that the outlook for the firm is positive.

Given today’s strong numbers and the dividend initiation, I believe the story here looks exciting. It seems the market agrees with my stance, with the shares up 3% today. This is a stock to watch closely in 2018 and beyond.

Clipper Logistics

Another small-cap worth keeping a close eye on in 2018 is Clipper Logistics (LSE: CLG). Back in late December, I listed CLG as a ‘blockbuster growth stock’ to watch in 2018. However, so far the stock has not lived up to the hype. After an initial run higher in early January to 485p, the shares have fallen by nearly 20%. Yet that has not put me off the growth story.

Clipper provides bespoke logistical services to clients such as John Lewis, New Look and Asda. As such, the company should benefit as the popularity of online shopping increases and consumers become increasingly more impatient. Revenue and profits have grown significantly in recent years, and City analysts expect the growth to continue in the near term. For the year ended 30 April, Clipper’s top line is expected to grow 18%, while net profit is anticipated to climb 20%.

The recent share price decline has lowered Clipper’s forward P/E ratio to 25.6, a valuation which I think is reasonable. A prospective dividend yield of around 2.2% is also on offer. Like Gresham Technologies, this is a stock to watch closely in 2018.

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Although both stocks could still be a decent buy at current levels, I believe that the smart thing to do might be to add these to your portfolio during periods of weakness.

Profits up 32%

Fintech stock Gresham Technologies (LSE: GHT) produces software used by banks and financial businesses to help maintain the integrity of their data. Areas of operation include regulatory compliance, risk management and financial controls.

Shares in this £150m group surged 7% higher this morning, after it said 2017 sales are expected to have risen by 24% to £21.3m. Earnings before interest, tax, depreciation and amortisation (EBITDA) are expected to be 32% higher, at £5m.

Both figures are in line with market expectations, but I believe the significance of today’s news is that EBITDA is rising faster than revenue. This implies that the group’s profit margins are continuing to rise. If this continues, profit growth could accelerate.

Don’t get carried away

Of course, it pays to consider the valuation of Gresham stock as well as its growth potential.

The London-based group’s main growth engine is its Clareti software business, where revenue rose by 48% last year. But this isn’t new information. Much of this growth potential is already priced into the shares.

One risk is that City analysts’ 2018 forecasts are surprisingly modest. Sales are expected to be broadly flat, while earnings per share are expected to rise by just 6%. Today’s update didn’t include any change to profit guidance for next year.

Today’s increase has left this stock trading on a 2017 forecast P/E of 33, falling to a P/E of 31 for 2018. In my view, the upside and downside risks are fairly evenly balanced, even if growth remains strong.

Gresham looks like a good business to me, but I’d prefer to wait for a cheaper buying opportunity.

FTSE 100 safety + growth?

How about a financial software stock that combines the stability of a FTSE 100 listing with internet-fuelled growth potential?

Management at Sage Group (LSE: SGE) would like you to believe that their accounting software fits the ticket perfectly. But the size of this business means that achieving strong earnings growth could be more challenging than at a smaller firm.

Sage shares have doubled in just over three years. Over the same period, the group’s reported after-tax profits have risen by around 60%. So the stock has got more expensive, because the price has risen faster than earnings.

But in fairness to the group’s management, if Sage hits forecasts for a full-year profit of £360m in 2017/18, this £8.7bn group will have doubled its profits in four years. That’s a fairly impressive achievement for a company of this size, in my view.

It’s for this reason that I’m attracted to Sage. The group’s operating margin of 20% and strong cash generation mean that management has been able to maintain dividend growth of 8% per year in recent years.

The stock is a little too pricey for me, on 24 times 2018 forecast earnings. But I am tempted and would certainly consider buying on any dips.

The post This FTSE 100 double-bagger isn’t the only stock I’d buy on the dips appeared first on The Motley Fool UK.

Growth potential

Reporting on Wednesday was software and services company Gresham Technologies (LSE: GHT). It announced a rise in revenue of 26% compared to the first half of the previous year. Within this figure, total Clareti revenue is 52% higher. This includes the contribution from recently acquired C24 Technologies. Clareti software revenues were up 136% versus the same period of the prior year, which means adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) will be strongly ahead of the prior year.

During the first half of the year, the company signed eight new CTC clients across a wide range of industry segments and geographies. This should help to improve the diversity of the business, thereby reducing its overall risk profile. Given that the company continues to trade in line with previous guidance, its outlook remains relatively upbeat.

Looking ahead, Gresham Technologies is forecast to increase its earnings by 27% in the current year. This growth rate is around four times that of the wider index, and suggests that investor sentiment may improve as the year goes by. With a price-to-earnings growth (PEG) ratio of just 1, the company appears to be undervalued given its outlook. As such, now could prove to be a buying opportunity.

A return to profitability

Also offering investment potential within the IT sector is Redcentric (LSE: RCN). The supplier of IT managed services has posted two consecutive years of pre-tax losses, but is now expected to return to profitability in the current year. This has the potential to provide a boost to market sentiment, which could push the company’s share price higher after its decline of 51% in the last year.

Looking ahead to next year, the company is forecast to report a rise in its bottom line of 17%. This puts its shares on a PEG ratio of 0.8, which indicates there is upside potential. Certainly, there is scope for a downgrade to its forecasts as it transitions from loss to profit, but with a relatively wide margin of safety it could prove to be a sound long-term buy.

Furthermore, Redcentric is expected to recommence dividend payments next year. Although the company has a forward yield of just 0.6%, dividends are due to be covered almost 10 times by profit. This suggests they could rise rapidly, while the payment of a dividend also suggests the company’s management has confidence in its long-term outlook.

The post 2 cheap growth stocks I’d buy in July appeared first on The Motley Fool UK.

The key takeaway is that Gresham is trading in-line with expectations and has been able to deliver a rise in pretax profit in the first half of the current financial year. In fact, Gresham’s pretax profit increased from £597,000 in the first half of 2014 to £647,000 in the first half of 2015. That’s a rise of 8.4% and was delivered due to a strong surge in revenue which more than offset higher operating costs.

Encouraging for investors in Gresham is news that its Clareti Transaction Control (CTC) software product is now the company’s largest product by revenue, with it accounting for 31% of revenue in the first half of the year. This appears to confirm Gresham’s decision to focus a significant proportion of its resources (in terms of both investment and sales resources) on this one product and, with revenue for CTC jumping by 247%, it appears to be a very strong growth area for the business.

Meanwhile, Gresham continues to have no debt on its balance sheet and remains confident in its outlook. Looking ahead, it is forecast to increase its bottom line by an incredible 110% in the current year, followed by a further 37% next year. And, while it trades on a rather rich price to earnings (P/E) ratio of 26.2, such strong growth prospects mean that Gresham has a price to earnings growth (PEG) ratio of just 0.5. Therefore, its shares could continue the run that has seen them rise by 18% since the turn of the year.

Of course, other stocks in the software services sector also have considerable potential. For example, Micro Focus (LSE: MCRO) is forecast to grow its bottom line by 4% in the current year and by a further 8% next year. Although these figures may be considerably lower than those of Gresham, Micro Focus offers superb stability, size and scale, with its earnings having risen in each of the last four years and its financial strength being evidenced via a yield of 2.5%. In addition, Micro Focus trades on a PEG ratio of 1.9 which, for a company with such strong finances and an excellent track record, appears to represent good value for money.

However, telecoms peer Vodafone (LSE: VOD) also has the potential to deliver strong share price growth. That’s at least partly because the situation in Europe, which is a key market for the business, continues to improve. Because of this, Vodafone is expected to increase its bottom line by 21% next year, which puts the company’s shares on a PEG ratio of just 1.8.

Furthermore, Vodafone continues to be one of the most appealing income stocks in the FTSE 350, with its yield currently standing at 4.8% and being expected to rise ahead of inflation over the medium to long term. And, as the largest of the three businesses, it has the greatest size, scale and diversity and, as a result, should be able to provide the greatest resilience and stability over the long run.

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Shares in Gresham Computing (LSE: GHT) are up 19% today as the specialist provider of software based solutions has announced the winning of three further contracts for its CTC risk management platform.

The news is clearly hugely positive for the company and its investors, although Gresham Computing did not identify the three firms in its press release. Indeed, it only stated that one is a derivatives clearing house, another is a legal services business, while the third is a buy-side financial services company that has contracted to use CTC for reconciling and matching broker fees, cash allocation and bank reconciliations.

As mentioned, shares in Gresham are up significantly following the news, but continue to be down 38% since the turn of the year due to a profit warning in early October. Furthermore, with shares in the company trading on a forward price to earnings (P/E) ratio of 20.9 – even when next year’s improved profit expectations are taken into account – they appear to be rather enthusiastically priced.

As such, shares in Gresham Computing may be unable to continue today’s sharp gains over the medium term as a result of a very generous valuation already being placed upon them.

Rank Group

Shares in Rank Group (LSE: RNK) are up 6% today despite no significant news flow being released by the company. Indeed, shares are still little changed on their level prior to the quarterly management statement released in mid-October that showed the company remains on-track to deliver on its full-year guidance. Clearly, like-for-like revenue growth of 3% for the group is relatively strong and could help it to turn around a disappointing recent period.

Furthermore, with wages set to rise at a faster rate than inflation during the course of 2015, disposable incomes could rise in real terms and demand for gaming services such as Rank Group’s Mecca bingo and Grosvenor casinos could increase. This would clearly be beneficial for the company and could help to stimulate a bottom line that is set to grow by just 3.6% next year.

With shares in Rank Group currently trading on a P/E ratio of just 11.5, they appear to offer good value. Meanwhile, there appears to be scope for a substantial increase in dividends, with Rank Group’s payout ratio being only 35% and shares in the company yielding 3.1%.

As such, Rank Group could appeal to income investors, as well as value investors, over the medium to long term.

The post 2 UK FTSE All Share Risers: Gresham Computing plc And Rank Group PLC appeared first on The Motley Fool UK.

It’s been a tough 2014 for investors in Gresham Computing (LSE: GHT), with the transaction and cash management software specialist seeing its share price fall by 24% from the turn of the year until yesterday’s close.

However, today’s profit warning has sent shares in the company tumbling by a further 30%, meaning that they are now down 46% year-to-date.

Could this, then, be the perfect time to buy a slice of the company? Or, should potential investors wait for further updates before investing their hard-earned cash?

Profit Warning

Today’s profit warning from Gresham means that earnings for the current year are expected to be materially below current market expectations. The cause of this is weak revenues, resulting from delays in new Clareti Transaction Control (CTC) contracts. As a result, contracts that had been forecast to be booked in FY 2014 will now not be included in the current year’s figures; instead being delayed until FY 2015.

This means that revenue for the current year is now expected to be between 10% and 15% lower than current market expectations, which is likely to mean that earnings are below their FY 2013 level, too.

Looking Ahead

Clearly, this is hugely disappointing news for investors as strong top- and bottom-line growth had been pencilled in for the current year. However, Gresham goes on to state that it has a strong pipeline of CTC business and, perhaps more importantly, it continues to see increased use of CTC at existing customers, which could mean higher recurring revenues moving forward.

So, while disappointing, the reason for the profit warning appears to be a delay rather than an irreversible problem with the company’s products, or with a key account. In other words, it appears as though it is more of a ‘blip’ as opposed to be problem that will linger over the long term.

Timing

Of course, further delays could lie ahead. Indeed, using last year’s earnings, Gresham continues to trade on a rather rich price to earnings (P/E) ratio of 15.4. In other words, strong growth is still being priced in despite earnings being expected to fall in the current year.

As a result, it could be prudent to wait for either a more attractive share price or for further updates from the company that show the delay was a one-off and is not a recurring problem.

After all, patience has never lost anyone any money.

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