A unique UK tech stock serving a unique sector

The firm provides bespoke software solutions for businesses in highly regulated industries, such as aviation, banking, and healthcare. More specifically, it suppliess governance, risk, and compliance (GRC) solutions.

The company serves over 6,000 customers, including the top 10 UK accounting firms and the World Health Organisation. The talent and reputation required to provide GRC services to highly regulated industries also means there are significant barriers to entry for competitors. I like that.

Initially, Ideagen generated revenue by selling perpetual licenses to its customers. However, while it still offers these licenses today, that’s no longer the primary strategy. The management team has switched its focus to creating a continuous stream of recurring revenue by providing its software as a service (SaaS). Today, 61% of total income originates from recurring revenue sources, whether it be software subscriptions or additional support services.

This transition has been, and continues to be, achieved through bolt-on acquisitions. In 2020, it acquired another three businesses, namely Redland Business Solutions, Optima Diagnostics, and Workrite. All generate recurring revenue, and the latter two enable Ideagen to provide additional services for its clients operating within the healthcare sector.

Recurring revenue streams generate a consistent and reliable cash flow that can be used to fuel growth. At least that’s what I think. As a result, the UK tech stock has achieved an average 27% annual growth in revenue. But it’s not all smooth sailing.

Acquisitions can cause problems

The most recent acquisitions are undoubtedly a complementary addition to Ideagen’s business. However, they have introduced some new financial speedbumps.

The total debt level has increased from £7.5m in 2019 to £33.7m today. Due to limited cash at hand, the company needed to borrow a significant amount to acquire these businesses. It also resulted in the stock reporting a loss for the year.

Temporary unprofitability in the name of growth is not overly concerning to me. However, the considerable rise in debt is. This additional borrowing has significantly altered the company’s capital structure, with debt now representing 38% of total capital.

While this debt level appears to be manageable, it does increase interest payments, which subsequently limits free cash flow. What’s more, integrating three business simultaneously may create complications that will put a damper on performance.

Another risk I spotted comes from its international operations. Many of the businesses that have been acquired over the years are based outside the UK. While this does help mitigate any impact from Brexit, it also adds exposure to fluctuating exchange rates of several currencies.

The bottom line – should I buy this UK tech stock?

According to Gartner, the integrated risk management market that Ideagen serves is expected to reach $8bn in 2021, growing 9% annually. Comparing this to the £57m of revenue generated last year indicates an enormous amount of room to grow.

Having said that, the aggressive, acquisitive growth strategy does give me pause. Goodwill now constitutes a significant portion of total assets, and sudden changes in capital structure might create issues. For now, I won’t be adding Ideagen to my portfolio, but I will definitely be keeping a close eye on it.

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Viva Aveva

It is relatively becalmed today, rising only slightly on publication of the briefest of trading updates to mark today’s announcement of the 2017 financial results at French-owned Schneider Electric. It bought a majority stake in Aveva last year and its industrial software portfolio shares corresponding assets. This reported continued growth in its licensing and maintenance revenue streams, partly offset by a slight decline in services revenue.

Expensive

Do check out this article by my Foolish colleague Peter Stephens, who warned that this stock could lose you a fortune because it risks being overvalued, which is always a danger with growth monsters like this one. However, Aveva at the moment looks to have earned its success after posting strong performance in the first nine months of its financial year, across all reporting regions with a particularly good performance in Asia Pacific.

The share price surge has pumped up its valuation to a hefty forecast 36.8 times earnings, while its PEG ratio stands at an equally stretched 3.3. Those two numbers will be enough to put many potential investors off but there is growth in the pipeline, according to City analysts, who forecast an increase in earnings per share (EPS) of a healthy 11% in the year to 31 March 2018, followed by 5% and then 9%. So the share price could keep rising, but it shouldn’t be too hard to find a better home for your £1,000 today.

Nice IDEA

Could that home be high-growth technology play Ideagen (LSE: IDEA)? The company supplies information management software to highly regulated industries and its stock spiked 20% at the end of January following publication of its unaudited interim results for the six months to 31 October.

This buoyant set of figures showed revenue increasing 43% to £17.2m, with underlying organic revenue growth of 13%. New bookings increased 78% to £10.8m while recurring revenues increased 60% to £10.8m. My colleague Alan Oscroft flagged up its success at the time, and said he admired a business that benefits from a captive clientele and high barriers to entry.

The gen on Ideagen

Ideagen has now posted five consecutive years of double-digit EPS growth with another 27% forecast in the year to 30 April 2018, followed by 10% after that. Once again, its pricey valuation reflects the recent share price surge, with the stock trading at 34.2 times earnings, although this is expected to calm down by 2019, to 24.6 times.

Before you part with your £1,000, make sure you understand the risks as well as the potential rewards. This AIM-listed software developer has a market cap of just £227m and needs to constantly build revenue sources to justify high investor expectations, so any slippage could prove costly. In January it won a new audit software contract with Commerzbank and will need more of that to keep rattling along. This probably should not be the first stock to pop in a newbie portfolio, but it could add some zip to an existing one.

The post Should you invest £1,000 in these two growth monsters today? appeared first on The Motley Fool UK.

The former is tricky to evaluate at this stage, but there’s no denying that there’s been plenty of hype — especially as the company’s aggressive TV advertising campaign has propelled it from an unknown to a household name in such a short spell.

Those ads go to lengths to stress that Purplebricks isn’t just some internet thing, but it’s a real group of estate agents. Yet isn’t that doing the opposite of differentiating itself? There’s the no-commission angle too, which is excellent marketing. Yet you still have to pay them, just using a different charging strategy.

Anything special?

What I’m really seeing is not a revolutionary new idea, but a new entrant in a long-established and competitive industry. And it isn’t yet profitable.

Purplebricks isn’t expected to report its first pre-tax profit until the year ending April 2019, and then it’s predicted to be just a tiny one. Fundamentals in the year a company turns profitable aren’t very useful, but by 2020 we should be seeing a more sustainable profit level — and that puts the shares on a forward P/E multiple of 34.

That might actually turn out to be good value, but right now we have no way of even guessing, and a lot can change in the next two years.

My current thoughts are that Purplebricks shares are at best fully-valued today, and they could be seriously overvalued.

Higher flyer?

If you want to put your money into a growth prospect, I reckon Ideagen (LSE: IDEA) is well worth a close look. It’s another company whose shares have more than quadrupled in value, over five years in this case, to 105p. 

But this time we’re looking at a track record of strongly rising earnings per share, forecasts for two more years of double-digit growth, and significantly lower P/E ratios — 25 for the current year, dropping to 23 a year later. That’s still above the FTSE 100‘s long-term value of around 14, but I think it’s a fair valuation considering the firm’s growth prospects.

Ideagen describes itself as “a leading supplier of information management software to highly regulated industries.” That’s rather a niche part of the software business and immediately makes me think of a captive clientele and high barriers to entry. And the firm has an impressive list of more than 3,000 customers — including Royal Dutch Shell, BAE Systems, and even the European Central Bank.

Great first half

On Tuesday, Ideagen reported a 43% rise in revenue for the first half of the year, to £17.2m, with recurring revenues accounting for 63% of total revenue — which suggests high visibility of future earnings.

Adjusted EBITDA came in 52% ahead at £4.7m, with adjusted EPS up 38% to 1.73p. If anything, that suggests to me that current forecasts might even be a little on the conservative side.

The interim dividend was lifted by 15% to 0.078p, though with a forecast yield of only 0.2% that doesn’t mean a lot just yet. But I see potential for this £200m company to turn into a mature cash cow when it reaches the stage of needing to invest less in future growth.

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Multi-millionaires

One way to achieve this dream could be to stake a claim in a handful of speculative stocks hoping that they’ll become the next ASOS or Domino’s Pizza, both of which have seen their shares prices explode over the years and turned early stakeholders into multi-millionaires.

But there is another way. Spectacular returns can also be realised by investing in larger, more established companies that have a proven business model and delivered a track record of profitable growth. Take Micro Focus International (LSE: MCRO) for example. The FTSE 100 software giant has a market value in excess of £9bn, and yet it still manages to deliver double-digit earnings growth year-in year-out.

Very enticing

Interim results announced this morning revealed a mammoth 80.3% increase in revenues to $1.2bn for the six months to 31 October, with the newly acquired Hewlett Packard Enterprise (HPE) Software unit contributing a very significant $569.8m. Operating profit for the period rose 34.7% to $220m, while pre-tax profits soared 28.7% to $145.7m, compared to $113.2m for the first half of the prior year.

Clearly, the merger with HPE Software is having an immediate positive impact, with the enlarged group now one of the world’s largest pureplay software companies. Going forward I see huge growth opportunities, with recent acquisitions giving the company a wider geographical footprint and access to more markets around the world.

The share price has pulled back sharply from last year’s all-time highs of 2,871p, and plunged further today after the results missed some analysts’ expectations. But I see this dip as a great buying opportunity with the shares now trading on a very enticing price-to-earnings ratio of 14.

Double-digit growth

Another, much smaller, software firm that I believe could be a millionaire-maker over the longer term is AIM-listed technology minnow Ideagen (LSE: IDEA).

Valued at just over £200m, the Nottingham-based firm is but a fraction of the size of its FTSE 100 counterpart, and yet boasts a customer base of over 3,000 organisations that use its wide range of information management software products, including high-profile names such as the European Central Bank , Royal Dutch Shell, Emirates Airlines, and BAE Systems.

As I predicted last July, the share price has now breached the £1 mark, but I believe this is just the start. The company has been growing its earnings at a double-digit rate every year since it went public in 2012, and its earnings multiple of 25 may be expensive-looking but still manages to compare very favourably to other high-growth technology firms in the software arena.

The post Why Micro Focus International plc is set to be a millionaire-maker stock appeared first on The Motley Fool UK.

However it is not the only company which could post high levels of capital growth over the medium term. Certainly, the FTSE 100 may be relatively high at the present time, but this stock could offer high growth at a reasonable price. As such, it could be worth buying today ahead of potentially FTSE 100-beating performance.

Upbeat performance

The company in question is Information Management Software provider Ideagen (LSE: IDEA). It reported an upbeat trading update for the first six months of its financial year on Tuesday. The company’s performance was strong during the period, and it remains on target to deliver revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) which are significantly ahead of the same period from the prior year.

In fact, the business is expected to post an underlying organic revenue growth rate of around 12% for the period. It is also on track to meet expectations for the full year to 30 April 2018. Encouragingly, cash generation in the first half of the year was strong, with the company’s balance sheet having a £5.9m cash position as well as no debt. This reduces its overall risk and provides it with an improved risk/reward ratio for the long run.

Looking ahead

Ideagen is forecast to post a rise in its bottom line of 26% in the current year, followed by further growth of 10% next year. Despite such an impressive growth outlook, the company’s shares trade on a price-to-earnings growth (PEG) ratio of just 0.8. This suggests that they offer a wide margin of safety and that more upside potential is on offer after their 31% gain since the start of the year.

Likewise, Just Eat also appears to have significant share price growth potential. The company also has a PEG ratio of 0.8. Certainly, there is a risk of a downturn in UK consumer spending hurting the company’s financial performance. With inflation moving higher and spending levels coming under pressure, people may cut back on non-essential items. However, since takeaways could also be viewed as an affordable substitute item for dining out due to their lower cost, the company’s performance may hold up better than expected.

Investment potential

Just Eat has international exposure gained partly through its acquisition programme. For example, SkipTheDishes has gained exposure to Canada, and seems to be performing well according to the company’s recent update. With the company appearing to have a sound balance sheet, it could pursue more acquisitions in future.

Therefore, now could be the right time to buy it alongside Ideagen. Both companies seem to have sound business models which offer high growth, while investor sentiment does not yet appear to have peaked even after substantial share price gains during the course of 2017.

The post Just Eat plc isn’t the only stock with a promising future appeared first on The Motley Fool UK.

Fourfold increase

The Nottingham-based firm provides quality, safety, audit, performance and risk-management software and expertise and has operations in the UK, EU, US, and the Middle East. With an excellent portfolio of software products, it helps companies to improve operational efficiency, strengthen compliance, and anticipate and manage every detail of risk, helping to reduce costs and improve efficiency.

With a market value of £166m the AIM-listed group may be considered small-fry when compared to software giants such as Sage Group, valued at £7.2bn, but it can still boast a customer base of over 3,000 organisations that use its products. These include many blue chip names such as BAE Systems, Emirates Airlines, Royal Dutch Shell and the European Central Bank, as well as 180 hospitals in the UK and US.

Despite a fourfold increase in the share price over the last five years, the shares have never breached the £1 mark, but I think this is about to change. With City analysts forecasting a further 28% improvement in underlying earnings for the current year to April, investors should look past the premium P/E rating of 21 and see that this is a price well worth paying for rapid growth.

A better choice?

For those of you who are still uncomfortable with the idea of investing in AIM-listed companies or indeed small-caps in general, then FTSE 100-listed Micro Focus International (LSE: MCRO) could be the answer for those still keen on gaining exposure to the technology sector.

The Newbury-based global software giant isn’t expected to complete the acquisition of Hewlett Packard Enterprise’s software arm until early September, but last week’s announcement of full-year results for FY2017 gave investors plenty to celebrate in the meantime.

Buying opportunity

For the 12 months to the end of April total revenues rose by 10.9% to $1.38bn, with underlying operating profit up by an impressive 20.4% to $640.9m, compared to $532.5m for fiscal 2016. Management duly raised the final dividend by 17.3% to 58.33¢ per share, bringing the full-year shareholder payout to 88.06¢, 32.1% higher than the 66.68¢ it paid out for FY2016.

The shares have now retreated from May’s all-time highs of £26.60 and are looking much better value at just 15 times forecast earnings for FY2018. Of course there are no guarantees in the technology sector, but in my view Micro Focus could be a worthy blue-chip alternative to Ideagen for those who are more risk-averse.

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Carving a niche

First up is Ideagen (LSE: IDEA), an information management software company. It is a serious player in highly regulated industries, with a particular focus on GRC (Governance, Risk and Compliance) and Content and Clinical solutions within the Life Sciences, Aviation and Financial sectors.

And while this puts in competition with some of the big players in industry like IBM, Oracle and SAP, Ideagen’s focus on its core markets and complete information lifecycle solutions has earned it a reliable customer base that includes many big blue-chip names, such as BAE Systems, Emirates, Royal Dutch Shell and the European Central Bank.

Although its shares are up a staggering 62% over the past 52-weeks, they have come off a bit in recent weeks, which could mean that this may be a good time to step in.

The company is set to announce its full-year results on 18 July, but in a pre-close trading update, Ideagen said it expected earnings to be in line with market expectations, with organic revenue growth of approximately 10%.

City analysts expect Ideagen to punch growth to the tune of 14% for the year to 30 April 2017, with a further 28% increase anticipated for this year. These estimates suggest shares in the company currently trade at an expected P/E of 28, with a forward P/E of 21.9 on this year’s expected earnings.

Structural growth

Another company worth considering in the same industry is Microgen (LSE: MCGN). Shares in it are up 71% year-to-date, following a strong financial performance in 2016 and news of significant new contract wins over the past year. For the 2016 full year, Microgen reported overall revenue growth of 35% to £43m, as adjusted earnings-per-share (EPS) increased by 34% to 12.3p.

Looking ahead, I reckon Microgen has a couple things going for it. First, a growing number of companies increasingly realise that they pretty much have to invest more in financial management applications in order to modernise their finance IT infrastructure and address increasingly strict regulatory reporting requirements. This should drive structural growth in the market, with Microgen’s recent strong run of new contract gains proving there’s a significant place for niche players as the market expands.

Second, the company is increasing investment to develop additional specialised financial management software applications as new opportunities are identified. There’s room for expansion as it diversifies to different parts of the asset and governance spectrum and its acquisition-led growth strategy could help it to strengthen its position in the financial services and wealth management software market.

In the near term, City analysts expect Microgen’s bottom line to grow by 3% this year, with a further increase of 13% in 2018. This leaves shares in the company trading at 25.1 times its expected earnings this year, and 22.2 times its expected earnings in 2018.

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Ideagen’s sales and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) are expected to show a significant increase versus the same period of last year. This is partly because of the acquisition of Covalent, but it is also due to organic growth. Ideagen’s sales are expected to have risen by 16% on an organic basis, with a small contribution on top from Covalent following its acquisition in August.

Considerable growth potential

Ideagen’s cash generation during the period was strong and it maintains a sound balance sheet that contains no debt. The cash balance at the end of the period was £4.8m following the £3.8m payment for acquisitions and associated costs. The integration of Covalent is now complete and an increased contribution is expected in the second half of the year.

In the long run, Ideagen has considerable growth potential. For example, its cloud-based Enlighten solution offers a major market opportunity which Ideagen should be able to capitalise on. In the near term, its bottom line is due to rise by 12% in the current year and by a further 13% next year. Despite this upbeat outlook, Ideagen trades on a price-to-earnings growth (PEG) ratio of only 1.2. This indicates that it offers a wide margin of safety should its performance fail to meet guidance. It also means that Ideagen’s capital gain potential is high.

A more stable outlook

Of course, Ideagen is a relatively small company which continues to offer a relatively high risk profile. Therefore, more risk averse investors may prefer to buy a company which has a longer track record of profitability and that offers a more stable outlook. Within the tech space, Micro Focus (LSE: MCRO) offers a potent mix of stability as well as growth potential.

For example, Micro Focus’ merger with HPE should lead to considerable synergies as well as a more stable business. This could lead to improved cash flow and higher dividend payments, which could make Micro Focus a highly appealing income stock. It already yields 2.8% from a dividend which is covered 2.3 times by profit, so the dividend growth potential is considerable. And with Micro Focus having a robust balance sheet, its risk is relatively low.

However, in terms of which company could become the next big thing, I think Ideagen has more potential. Certainly, it is far riskier than Micro Focus due to its smaller size. But with a sound business model, bright growth prospects and a low valuation, Ideagen could deliver stunning capital gains over the medium to long term.

The post Could this small-cap tech stock be the next big thing? appeared first on The Motley Fool UK.

Melrose

Melrose (LSE: MRO) has risen by as much as 13% in Monday trading after it announced that the ‘window shop period’ in respect of its takeover proposal for Nortek expired on 6 August without Nortek having received a superior proposal. Furthermore, all anti-trust conditions in relation to the acquisition have been satisfied, as well as all shareholder resolutions regarding the acquisition. This means that Melrose will now proceed with the acquisition and rights issue, which has been well-received by the market.

Looking ahead, Melrose is forecast to increase its earnings by 25% next year. While impressive, this would still put it on a price-to-earnings (P/E) ratio of 85, which indicates that it’s considerably overpriced. Furthermore, Melrose’s yield of 0.4% provides additional evidence that it lacks a sufficiently wide margin of safety to merit purchase, which means that now may not be the right time to buy it.

Ideagen

Also in the news today is Ideagen (LSE: IDEA). The information management software provider to highly regulated industries has announced the acquisition of Covalent Software for £3.6m. The deal will be funded from Ideagen’s existing cash reserves and with Covalent being profitable and cash generative, it should have a positive impact on Ideagen’s financial performance in future.

The acquisition is in line with Ideagen’s strategy of acquiring complementary businesses with strong intellectual property and recurring revenues. Synergies from the deal are expected to be around £0.18m per annum as well as an initial £0.1m, with the combined entity having a stronger position in the NHS, local government and financial services verticals.

Looking ahead, Ideagen is forecast to increase its earnings by 8% this year and by a further 10% next year. This puts it on a price-to-earnings growth (PEG) ratio of 1.6, which indicates that it offers good value for money. As such, its shares could continue their 20% rise over the last 12 months.

IGAS

IGAS (LSE: IGAS) has surged 32% higher today after Theresa May suggested that people affected by fracking could be paid compensation directly. Although no hard and fast figures have been released, it could be as much as £10,000 per household and this would be a significant shift in policy since compensation was previously expected to be paid to local councils.

This could prove to be good news for IGAS since it shows that the government appears to be committed to fracking over the long term. It means that IGAS’s share price has now risen by over 50% in the last month and while it remains a relatively risky buy, it could continue this run over the medium-to-long term as external factors appear to be increasingly favourable.

Clearly, IGAS is highly dependent on news flow, but with its latest results showing that its leverage is falling and its costs remain manageable at $30 per barrel of oil equivalent (boe), it could be a sound buy for less risk-averse investors.

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But not so fast. For while the price of ARM has extended in the last three-month period, so has the stock’s beta (the calculation of its overall price volatility). Beta measures the risk of holding a stock during the period in which returns are being calculated: the higher the beta, the lower the risk-adjusted return.

In the case of ARM, the stock plunged almost 13% in value to a 52-week low over the period before it resurfaced, creating a higher beta value. Thus accounting for ARM’s beta therefore produces a risk-adjusted return of barely 3% or so over the previous three-month period. That no longer looks like such impressive growth. So what does right now?

A New Idea For A New Year

As growth investors, what we want are stocks where growth is consistently being managed – not the stuff that is tarnished by wild interim high-low swings. This is especially important if you like to shuffle money between different holdings as various investment opportunities appear on the horizon.

Of course, technology is a great place to find this sort of growth, as its effect is to streamline costs while producing exponential income. Combine these two forces and you have something resembling constant value creation in a portfolio.

For a company harnessing these kinds of attributes via an interesting strategy revolving around acquisitions, look no further than Ideagen (LSE: IDEA).

Since mid-December, Ideagen has risen in value by a fifth, compounding a year-long 17% climb. (Contrast this to ARM’s recent rally, which merely shortened a 52-week 9% decline overall.)

Ideagen’s intrinsic market capitalisation jumped to £63.5m in December when the company raised £17m for an acquisition it picked up after a new stock issuance that was oversubscribed by a whopping £40m, including 11 new institutional shareholders. The company still trades well below this valuation, making it appear like great value.

Why all the fervour in the City for Ideagen’s shares? Because the company uses tech in tandem with strong management to both increase the earnings and decrease the costs of the acquisition target, creating constantly exponential P/E growth. That in turn means a share price that keeps rising with an impressive risk-adjusted return attached.

Ideagen’s strategy is to make an acquisition, then centralise costs of the target to cut back 10% of overhead while creating cross-selling synergies to drive revenue growth an additional 10%.

Is It A Bird, Is It A Plane …. No, It’s A Superstock 

Ideagen’s acquisition at the end of 2014 of software developer Gael is a classic example of how the company creates value. For a start, Ideagen picked the maker of risk and compliance software – which supplies the life sciences, aviation, healthcare and manufacturing industries – up for a song, at 7.8 times EBITDA.

The acquisition, when spread out across the company’s existing sales channels, is immediately earnings-enhancing. Gael will add £9 million in revenues and EBITDA of £2.3 million to Ideagen’s 2014 earnings, and those earnings are expected to grow at an exciting 24% clip throughout 2015.

In addition, Ideagen picked up 1,000 new customers in the tricky compliance and standards management sector, including various NHS units and complex manufacturing clients.

That’s a value-creation story you’d be crazy not to take part in.

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