Small Cap Value Report (Mon 27 Sept 2021) - MGP, BKS, ELTA, INS, ELIX

Good morning, it’s Paul amp; Jack here with the SCVR for Monday. Many thanks to Roland for all his work last week, which I’m sure you’ll agree is always excellent. Today’s report is now finished.

There’s a Mello show tonight – you can find David’s preview of it here. Keelan is going to be presenting his findings from the IPO Survival Guide and Jack will look at a company later on in the BASH segment.

Agenda –

Paul’s Section:

Beeks Financial Cloud (LON:BKS) (I hold) – I’ve had a fairly lengthy rummage through the FY 06/2021 accounts, and separate trading update (raising expectations for FY 06/2022 revenues). It’s difficult to value, and certainly not cheap at c.£100m market cap. However, I think this is a very interesting business model, and with growth accelerating, I’m bullish on the long term prospects.

Electra Private Equity (LON:ELTA) (I hold) – I’m flagging up a useful update note from Edison today, which crunches the numbers for us. This confirms my opinion that sum-of-the-parts in this breakup/demerger situation looks very attractive still. Please DYOR, but if my numbers (and Edisons) are right, then ELTA could be worth around double the current share price, once the two companies within ELTA list separately fairly soon (this year). A very appealing special situation, in my view.

Elixirr International (LON:ELIX) – superb interim results from this management consultancy business, which floated in July 2020. Thanks to the readers who flagged it to us in the comments section. Shares have 3-bagged already (well done to holders), and are on a punchy PER now of 30, even after today’s upgrade.

Jack’s Section:

Medica (LON:MGP) – post-Covid recovery continues and acquisitions provide additional longer term growth opportunities, so overall the conditions look positive here. Possible competitive and margin pressures further down the line are a point to consider.

Instem (LON:INS) – the shares have rerated and so valuation is a consideration here. The group does have a strong position in attractive markets though, and three significant acquisitions plus scope for margin expansion means it could still be worth doing more work on the prospects here.

Beeks Financial Cloud (LON:BKS) – Jack’s notes from call with management.

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to cover trading updates amp; results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it’s anybody’s guess what direction market sentiment will take amp; nobody can predict the future with certainty.

We stick to companies that have issued news on the day, with market caps up to about £700m. We avoid the smallest, and most speculative companies, and also avoid a few specialist sectors (e.g. natural resources, pharma/biotech).

A key assumption is that readers DYOR (do your own research), and make your own investment decisions. Reader comments are welcomed – please be civil, rational, and include the company name/ticker, otherwise people won’t necessarily know what company you are referring to.

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Paul’s Section: Beeks Financial Cloud (LON:BKS) (I hold)

170p (pre market open) – mkt cap £96m

Trading Update

Beeks Financial Cloud Group Plc (AIM: BKS), a cloud computing and connectivity provider for financial markets

Unusually, Beeks has issued 2 RNSs today – results for FY 06/2021, and a separate trading update. Usually companies combine them, so presumably BKS wants to draw particular attention to its strong current trading by announcing it separately?

The company’s summary says -

Three significant contract wins in the opening quarter worth approximately $5 million, including the first for Proximity Cloud, drive significant growth in committed revenues

Summarising the main points:

Record sales achieved in July, Aug, Sept, total $5m (but spread over several years) – ahead of expectations in usually quiet quarter

Annualised (contracted) monthly recurring revenue has risen to £15.0m (up from £13.8m at FY 06/2021 year end)

One-off revenue of £1.3m – not explained clearly what this is for – I’ll lodge a query with the company’s advisers. Update – Jack has confirmed with the company that this is licence fees.

Revenues for FY 06/2022 “anticipated to be ahead of current market expectations” – very good, to be upgrading this early in the year. (Existing forecast looks to be c.£15.5m revenues for FY 06/2022)

The company is recycling additional revenues into further expansion – that makes sense to me, I want maximum growth, not profits, at this rapid growth stage.

New “Proximity Cloud” product – secured $1m multi-year contract within just 4 weeks of launch, and a “substantial pipeline” building – sounds promising, I must find out what Proximity Cloud is.

Our latest product evolution, Proximity Cloud is a pre-configured IAAS trading environment platform dedicated to the demands of capital trading markets and financial institutions and is our most comprehensive offering to date.

What’s encouraging, is that it seems the company’s Ramp;D spend is delivering rapid results – all the more reason to plough increasing revenues back into developing the business, rather than prioritising profitability, for now anyway.

Growing confidence, increasingly large deals being signed with large banks.

My opinion - it’s difficult to value Beeks, but it seems obvious to me that this is a company on a roll, with growth accelerating. Although this is a value-focused column, we’re not blind to the potential from growth companies, where they are credible, we can understand the business model, and are reasonably priced – which does seem to be the case with BKS.

It operates in a niche of its own making – the story of how the company is formed really impressed me, and remains a key reason why I hold the shares personally. The founder, Gordon McArthur apparently set up his own personal black box trading systems, and persuaded exchanges to let him locate his server next to theirs – thus minimising latency. Over time, exchanges referred queries to him, from other traders who wanted some direct connectivity to the exchange servers, because nobody else did it. That’s the ideal starting point for any business – unmet demand, and no competition!

By expanding worldwide into many exchanges, and offering cloud-based, modestly priced access, it looks to me as if BKS is building a decent moat around its business. With sticky, and rapidly growing recurring revenues, there’s lots to like here. Although it is still quite a small business.

I don’t know how to value it, but £100m doesn’t seem outrageous, given the growth that’s now accelerating, and the market opportunity. I could see BKS becoming a much bigger business, with a considerable moat, in a few years.

Think I’ve just talked myself into increasing my position size!

Thinking about downside risks, I suppose a slowdown in growth could hurt the valuation (as with any growth company), but why would that happen, given the strong momentum the company is now reporting?

Also, the big risk for this type of business has to be if their systems are hacked, or otherwise fail, so IT security is paramount.

Another potential risk is what recently happened with Pci- Pal (LON:PCIP) – someone accused them of infringing a patent. There are often risks which investors haven’t anticipated with any company, hence why portfolio diversification makes sense.

In this bull market, recurring revenue tech companies are often valued on a multiple of sales, not profits. That doesn’t entirely make sense to me, but it’s an established trend now, so sometimes it makes sense to go with the flow.

Final Results

27 September 2021 – Beeks Financial Cloud Group plc (AIM: BKS), a cloud computing and connectivity provider for financial markets, is pleased to announce its final results for the year ended 30 June 2021.

Revenues £11.6m (up 24% on LY) – this looks slightly below broker consensus of £12.0m, but that doesn’t matter because the company says in its trading update today that it should exceed FY 06/2022 revenue forecast (of c.£15.0-15.5m)

Underlying profit before tax (PBT) of £1.6m (up only 13% due to higher costs)

Costs – the company is not being run for maximum profit at the moment, but for growth. E.g. administrative costs are up a whopping +60% on LY, to £5.8m – which gives sceptics something to latch on to.

Shares based payments of £546k strikes me as a bit excessive, but I don’t suppose anyone will be complaining because the share price has done so well.

Underlying diluted EPS of 3.0p – at 186p that makes the PER 62 - sky high, but to my mind not a terribly relevant valuation metric for a rapid growth company that’s ploughing its profits back into faster growth (costs). Definitely not a share for traditional value investors.

Net cash £1.89m

Headcount has risen in the year from 65 to 80

£2.0m writeback of a contingent liability is helpful – relates to a “very challenging” earn out target for an acquisition, which has not been met.

Large addressable market, and industry tailwind of moving to cloud services.

Gross profit margin has slipped slightly, from 50.8% LY to 49.6%. That’s quite low for a software services company – I’d like to see more granularity of what costs go in to the gross margin.

Outlook – all good, and see trading update too (covered above) -

Also this -

“The prospects for Beeks have never been more promising.

The successes with our tier 1 clients means we are now recognised as an established technology provider to financial markets, with a track record and compelling reference clients, providing us with a strong foundation to drive our business forward.

Having completed the first stages of our product investment, our focus for the year ahead will be on sales execution and delivery for our customers. Whilst we continue to assess the ongoing impact of Covid-19 on our business and operations, and the pipeline of opportunities will take time to convert, this pipeline is at a record level which combined with the expansion opportunities within our current customer base gives us confidence in another strong year of growth ahead.”

Dividends – proposing to put divis on hold, to focus instead on growth. This is following consultation with shareholders. I think that’s absolutely the right thing to do. It was pointless paying a small dividend, when there’s better use for the cash inside the business, driving growth.

Balance Sheet – there’s a fair bit of capital required in fixed assets, which have risen from £6.8m to £10.4m in FY 06/2021. We can expect more capex, as the business expands I think, and IT equipment tends to need quite rapid replacement cycles, as performance of new equipment continuously improves.

Working capital looks adequate.

NAV is £13.8m, up strongly due to a placing. Take off £6.0m intangibles, leaving NTAV of £7.8m – which looks fine to me, given the size amp; recurring revenues nature of the business.

Cashflow statement – looks impressive at the top, with £5.5m operating cash inflow (after favourable working capital movements), but more than this is spent on capitalised development spend (£2.0m) and £4.75m capex. So free cashflow is negative.

Note also £669k of grant income.

£5.2m of fresh equity was raised. Will it need more equity? Possibly, but with a market cap of c.£100m, would dilution of say 5% to raise £5m hypothetically matter? I don’t think so.

Shareholding structure - note that shares are tightly held, with the owner/manager Gordon McArthur very much in control. I’m fine with that, as he’s established a track record as a safe pair of hands, and personally I like owner/managed businesses -

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My opinion – you can probably tell by the amount of time I’ve spent on this, that I think it has good long-term potential.

Today’s news of upping forecasts early in FY 06/2022 augurs well – I’m imagining further forecast upgrades seem likely as this financial year progresses.

This share won’t appeal to everyone. Some may feel the £100m market cap could be ahead of events. However, I think that overlooks that the company is spending on expansion, which obscures the short term underlying profitability. Several years ahead, there should be a bigger, and much more profitable business, if current trends continue.

I don’t know what the competitive threats are, but with customers seeming sticky (the larger ones away, the commentary does mention some churn of smaller customers), then recurring revenues seem likely to continue rising strongly. It’s difficult to find rapid, organic recurring revenue growth, so I think BKS deserves its premium rating.

The share price anticipated strong trading, as you can see -

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Call with management - I didn’t know that Jack had a call lined up with BKS management this morning. Anyway he’s typed up his notes, which will appear below, in Jack’s Section. Should be interesting to compare our views on the share! We write independently of course, so different writers at Stockopedia might have different views on the same share, rather than having a house view on things. I think that’s more healthy, as we’re all responsible for doing our own research, and views often differ between investors.

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Electra Private Equity (LON:ELTA) (I hold)

562p (down 1% today, at 10:01) – mkt cap £220m

Updated Edison note

I’m flagging this because I think there’s a really good upside opportunity here for readers. ELTA is a situation I’ve written about a lot in the last few months, a breakup of an investment trust, which will result in ELTA holders owning shares in two new floats, TGI Fridays (Hostmore), and Hotter Shoes (Unbound).

The investment case is really simple – ELTA’s valuation seems too low, compared with what realistically the two newly floated companies could be valued at, if we rate them on a similar level to their peers.

I’ve read through the Edison note, and I think it very much supports my bullish stance on the sum-of-the-parts value of Hostmore amp; Unbound.

Some previous reader comments here were understandably sceptical about the TGI Fridays (now just Fridays) brand, and some negative personal dining experiences. For me, none of that matters. Look at the financials – it’s trading well, and looks on track to hit £40m EBITDA, which will allow self-funded roll-out of 8 new sites per year, and pay down (modest) debt. So clearly plenty more people like it! Although when I last spoke to management, they do accept it’s work-in-progress in terms of the brand refresh, and new menus are being introduced in October.

Hostmore’s second roll out, of the new 63rd+1st cocktail bar/bistro format is also starting. Hostmore shares could seriously re-rate in future, just look at sector peers like Fulham Shore (LON:FUL) Various Eateries (LON:VARE) and others (which the Edison note uses as comparatives). Fridays looks to be on an EV/EBITDA of only 5.6, or even lower (that’s based on 0% growth, and ignores new site openings). Therefore as Edison imply, Fridays could be worth over double what it’s in the ELTA NAV calculations from March 2021.

Similar story with Unbound, there’s good upside on the valuation there too.

My opinion – I’m really bullish on ELTA, and think with patience we could double our money from the current share price. That’s based on what I think the businesses are worth now, and doesn’t include upside from expansion.

The Edison note is a great place to start your research, hence me flagging it. Using their tables, it’s very easy to tweak the numbers, and work out your own valuation. I come to a figure of c.1000p+ per ELTA share (current price c.570p), hence why I’ve been buying more recently, when funds permit.

Just to clarify, I’m thinking in terms of holding both Hostmore and Unbound shares after the demerger. Although if they do shoot up in price, then it would be tempting to top slice some, as with everything.

Downside risks are mainly related to any renewed restrictions on hospitality due to covid. Personally I’m not worried about that, because the data now clearly shows that healthy, double vaccinated people are not dying or even being hospitalised in any significant numbers. Therefore more lockdowns seem unthinkable to me, based on what we currently know. That could change of course. If the last 18 months has taught us anything, it must surely be that we should expect the unexpected (good and bad). So of course, I have no idea what the future holds, but we all need at least some rational basis for making our investment decisions – and a willingness to quickly change our minds, when the facts change.

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Elixirr International (LON:ELIX)

688p (up 31% at 12:24) – mkt cap £317m

Interim Results

Elixirr International plc (AIM:ELIX), an established, global award-winning challenger consultancy, is pleased to report its unaudited interim results for the six months ended 30 June 2021 (H1 21).

H1 revenues £24.0m (up 77% on H1 LY [lockdown 1 comparative]), 45% organic growth, plus acquisitions

Very high adj EBITDA margin of 34%

Net cash £21.1m

Guidance raised for the FY 12/2021 -

Strong pipeline for the remainder of the year leading to the second upgrade in board expectations for FY 21 of c.£47m-£50m of revenue with an Adjusted EBITDA[1] margin in the 30-32% range…
Previously our expectation was to achieve revenues at the upper end of the £44m-47m range, at c.29% EBITDA margin.

Examples are given of projects undertaken -

- Launching a bank’s Mobile and Online digital banking solution

- Designing and building a customisable client-facing portal for a global real estate company

- Transforming a UK insurer’s digital user journey, utilising our creative expertise in strategy, digital marketing and user experience

- Advising an international healthcare group on a billion-dollar healthcare acquisition – evaluating Mamp;A opportunities against alternative growth options

- Contracting and commercial support for the extension of an automation company’s global TMT network services deal

It would be useful to have a breakdown of revenues, in terms of size of projects, and their nature (one-offs or likely to recur)? What reliance is their on the (say) top 5 clients? The narrative mentions “numerous repeat clients”, which is encouraging.

Balance sheet - looks fine to me. Unusually, the company lends money to its staff to buy shares, hence aligning interests – useful in a people business. It also pays bonuses to staff, obviously.

Share options – note 6 says there are 11.0m share options, at a weighted average exercise of 238p.

Shareholdings – founders own a large stake still, e.g. S.Newton holds 30.6%. The largest institutional shareholders is Slater, at 9.4%.

Valuation – many thanks to Finncap for an update note. It has actual EPS of 16.0p for FY 12/2020, rising to forecast 22.7p FY 12/2021. At 688p per share, that’s a 2021 PER of 30.3 times – that’s a punchy rating for a people business.

Such a high rating would be justified if earnings continue to rise strongly.

The key question is how sustainable earnings, and growth are?

My opinion – very impressive numbers. I’ve only just started looking at the company, so it’s too early for me to form a view.

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Jack’s section Medica (LON:MGP)

Share price: 168.99p

Shares in issue: 122,427,237

Market cap: £206.9m

Medica is a market-leading provider of teleradiology services to the NHS and private services. It provides both elective (non-acute routine) reporting to support capacity gaps, and also has the pioneering NightHawk service, which provides higher margin out-of-hours emergency reporting.

In the US, RadMD provides highly specialised services to support the use of imaging in a clinical trial setting.

The group is notable for its high quality metrics and an ambition to double revenue between 2020 and 2025, although it has taken a hit in the past year due to Covid disruption.

While earnings per share has fallen, cash generation was far more resilient (FY20 normalised EPS of 2.05p compared to free cash flow per share of 5.95p), and the longer term growth trend is intact.

In recent months the share price has recovered as investors look forward to more normalised trading conditions.

Interim results

Strong organic growth following continued Elective recovery, strong NightHawk revenue, and the positive impact of acquisitions

Highlights:

• Revenue +55.7% to £26.4m,
• Gross profit +68.8% to £13.5m, gross profit +4% to 51.1%,
• Underlying operating profit +106.1% to £4.3m, underlying operating margin +3.9% to 16.1%,
• Underlying profit before tax +103.2% to £4m,
• Profit before tax +69% to £2.2m,
• Underlying EPS +133.1% to 2.82, basic EPS +98.6% to 1.47p,
• Interim dividend up 4.7% to 0.89p,
• Net debt of £35,000, improved from 31 December 2020 figure of £3.9m.

The underlying profit figures exclude one-off acquisition-related costs. Notable lines here include £1.027m of amortisation of acquired intangibles, £355,000 of share based payments, £384,000 of other acquisition costs, and £155,000 of legal fees.

Medica is working hard to provide support for the backlogs of patient images following the impact of Covid-19. Integration of the new acquisitions is also ongoing. £6m of revenue was generated from the recently acquired US-based RadMD (for three months), and six months of business in Ireland. UK revenue growth was +20% (£3.4m).

NightHawk – revenue grew 39.1% to £14.3m year-on-year (although the comparative was disrupted).

UK Elective – revenue fell 8.5% yoy from £6.7m to £6.2m. The comparative included a strong Q1 before the impact of Covid lockdowns.

Total UK underlying operating margin improved from 12.2% to 15.3%.

Ireland – revenue of £4.5m represented the first full six-month period since acquisition in November 2020, with performance in line with expectations and included a strong performance from Medica Vision, MGP’s diabetic retinopathy screening service. Net operating margin of 19%.

US (RadMD) – contributed revenue of £1.5m in the first three-month trading period since acquisition on 26 March 2021. Net operating margin of 18%. This performance is in line with management expectations.

Gross margin has improved as a result of an improving mix in the UK, cost efficiencies, and higher margins from acquired operations in the US and Ireland. Underlying operating profit has more than doubled despite ‘the impact of continued investment in overheads to sustain future growth.’

Acquisitions and other developments – RadMD cost £16m and allows the group ‘​​to diversify into the $1bn global market of clinical trial imaging’. Medica has also established MedX as a joint venture with Integral Diagnostics (a market leader in Australia).

The FutureTech, the group’s new teleradiology platform, is on track for Q1 2022. Medica’s ​​’Augmented Intelligence’ (AI) solution has now been integrated and is resulting in significantly faster reporting turnaround of urgent stroke cases.

Outlook –

In recent months, the Company has seen a strong resumption in Elective activity both in the UK and Ireland as hospitals grapple with an unprecedentedly large backlog of patients. We expect the pressure on healthcare services will continue to build, but it will be limited by available scanning capacity, which should be assisted by current initiatives including hospitals making more use of independent sector capacity and, in the UK, the NHS funding a series of Community Diagnostic Hubs expected to be launched later this year and into 2022 to boost capacity for diagnostic imaging. These initiatives should provide opportunities for increased reporting activity.

Balance sheet – is called strong but looks weak on some measures, with net tangible asset value of £740,000 after accounting for £53.6m of goodwill and intangibles. Cash of £11.6m is set against current liabilities of £25m, including £11.7m of borrowings.

The group is cash generative with relatively low capital expenditure requirements though, and the net debt figure is already improving, so I’m expecting further progress here.

Conclusion

These half year figures are still not back up to H1 19 levels, but that presumably reflects the fact that Elective remains on an improving month-on-month trend (it was back to 75% of pre-pandemic levels by the period end and is more or less back to normal levels now).

Medica has always looked like an interesting proposition and remains so even after a strong run in the share price. The past eighteen months has proven to be a useful test of the group’s business model, and the ensuing recovery gives some confidence as to its market position. The group expects to see month-on-month growth for the remainder of the year in the UK and Ireland.

Meanwhile, management is making moves for future growth and says it is on track to double revenue in a 3-5 year period. Let’s say it assumes to double the pre-pandemic FY19 revenue figure of £46.5m to £93m by between March 2023 and March 2025.

Profit margins were on an improving trend: from 7.6% in FY15 to 17% in FY19. I’ll assume the profit margin settles at 15% (although there may at some point be competitive pricing pressures to consider, possibly offset by scale advantages), then we get about £14m of net profit or 11.4p of earnings per share. That would value Medica at about 14.3x 2023-2025 earnings per share.

According to current consensus figures, the group trades on 19x forecast FY21 earnings per share, perhaps falling to 14.3x by FY23. It’s not terribly expensive, but neither is it a bargain. That said, the company has highlighted its resilience over the past year and prospects over the next 18 months or so are altogether more favourable.

Elective reporting activity in the UK is now close to pre-pandemic levels and Medica expects activity here to continue to build month-on-month throughout the remainder. Trends at Medica Ireland and RadMD are similar. Nighthawk continues to see month on month growth with ‘significant opportunities’ to continue to expand services with existing clients and to win new contracts.

I suspect there’s scope to continue growing beyond the 2023-2025 target, as well. The group now has more avenues for future expansion in light of recent acquisitions and joint ventures. So it continues to be worthy of consideration. I wonder if the eventual unwinding of the current backlog will lead to a dip in performance later down the line, or if organic and acquisitive growth opportunities will ultimately outweigh this normalisation in conditions.

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Instem (LON:INS)

Share price: 902p (+1.06%)

Shares in issue: 22,189,856

Market cap: £200.2m

Instem provides IT solutions and services to the global early development healthcare market, delivering solutions for data collection, analysis and regulatory submissions management. The main divisions are Study Management and Data Collection, Regulatory Solutions for Submissions and Compliance; and Informatics-based Insight Generation.

These solutions are used by over 700 customers worldwide, including all the largest 25 pharmaceutical companies, enabling clients to bring life enhancing products to market faster. According to the group, its products address aspects of the entire drug development value chain and ‘over 50% of all drugs on the market have been through some part of Instem’s platform at some stage of their development.’

So it’s firmly embedded in a high value, growing market. The group’s share price has been very strong, with some big jumps in revenue anticipated by the analysts that cover this company.

Half year report

Highlights:

• Total revenue +41% to £19.8m,
• Recurring revenue +18% to £9.9m (within this, software-as-a-service revenue up 29% to £4.9m),
• Organic revenue growth of 8% to £15.2m and +16% at constant currency (excluding The Edge and d-Wise acquisitions in March and April 2021),
• Adjusted profit before tax up from £2.1m to £2.9m, but statutory PBT down from £1.9m to £1.2m,
• Adjusted diluted EPS up from 10.7p to 12.8p, statutory diluted EPS down from 9p to 4.6p,
• Net cash generated from operations of £4.1m (up from £2.8m) and net cash of £10.1m (up from £7.3m).

The notable difference between statutory and adjusted results comes after adjusting for the effect of foreign currency exchange on the revaluation of inter-company balances, non-recurring items, and amortisation of intangibles on acquisitions.

Instem has completed some important acquisitions over the past year or so and a big part of whether or not the group is good value depends on how well these businesses are integrated, and how they contribute to earnings growth going forward. You can see brokers are forecasting a step change in revenue and profits.

That would be £6.7m of net profit in FY22 for a company that already has a market cap of more than £200m, so longer term growth is required.

The cash balance has improved to £17.9m, highlighting strong operational cash generation, and is up c.£3.9m on the £14.0m balance disclosed after the d-Wise and The Edge acquisitions.

Revenue growth was particularly strong in North America and China, where successful early-phase Ramp;D is starting to deliver a healthy pipeline of drug candidates. Instem remains a substantial market leader in China.

The group says it has a scalable platform in place and a ‘highly leverageable’ business model with a number of growth opportunities in existing and adjacent markets.

Study management and data collection – Strong study demand from the non-clinical CROs has fuelled growth in licensed users for Instem’s Study Management and Data Collection solutions.

In March 2021 the Company completed the £8.5m acquisition of Discovery technology solutions provider The Edge. The acquisition provides scope for increased cross-selling opportunities and enhances the company’s product range and routes to market.

In Silico solutions – Instem’s computational toxicology business once again performed ahead of management expectations as clients sought to leverage predictive models to complement or replace lab-based studies.

Regulatory solutions – The FDA has announced that it will more strictly enforce the SEND Technical Rejection Criteria, that commenced 15 September 2021. This is complex and new regulation that should drive pharma demand for outsourced domain specialists like Instem.

Clinical trial acceleration solutions – d-wise was acquired for up to $31m and is the start of the Clinical Trial Acceleration Solutions division.

The combined strength of Instem and d-wise positions the enlarged Group as the foremost authority and driving force in generating, analysing and leveraging data from Discovery through late-stage Clinical Trials.

PDS – there has been a further acquisition post-period end for £11.4m. PDS Pathology Data Systems is expected to be immediately earnings enhancing and further extends Instem’s Study Management and SEND market share.

PDS is a direct analogue of two areas of Instem’s business. It provides software that helps orchestrate non-clinical Ramp;D studies, and its software and outsourced services in SEND helps with the transformation of study data into the submission standard. PDS was a direct competitor to Instem.

Retention rates in study management are very high, so this leads to sticky market share while removing a competitor when it comes to winning new business. The SEND standard is quite new and complicated so having domain expertise via Instem is attractive to the big pharma companies. The margin impact should be positive over time.

Market – the backdrop remains favourable as global population growth and life expectancy underpins increased demand for successful innovation in life sciences. There’s growing levels of investment in the biotech industry with the pharma sector spending heavily in drug development.

Pension deficit – There’s a legacy defined benefit pension scheme here with a deficit of £2.7m at 30 June 2021 (H1 2020: £4.0m). Liabilities decreased from £16.4m at 31 December 2020 to £15.9m at 30 June 2021 and Plan Assets have increased from £12.5m at 31 December 2020 to £13.2m at 30 June 2021.

The latest triennial actuarial valuation of the group’s defined benefit pension arrangement was completed in July 2021, with the results to be reflected in the next Annual Report.

Outlook –

We are delighted to have achieved strong organic growth, with the additions of The Edge, d-wise and, most recently, PDS underpinning a step change in the scale of the business. Market conditions remain buoyant and we have a strong pipeline of opportunities, with a significantly increased target market. The improvement in our trading profitability in the first half has been sustained post the period end and, as a result, we now expect trading performance, excluding any negative impact of the fair value adjustment to acquired deferred revenue, for the current financial year to be slightly ahead of the Board’s previous expectations.

Conclusion

Good organic growth, the SaaS model transition continues and will bring improved earnings visibility and margins, and recent acquisitions increase the scale of the business. Recurring revenues increase as a result, as do the routes to market and cross-selling potential. So it looks positive.

The board believes there are three opportunities to grow the business:

• Organic revenue growth from additional market penetration, cross-selling and the introduction of new products and services;

• Margin improvement through conversion to SaaS deployment and extensively leveraging global infrastructure; and

• Accretive Mamp;A and strategic partnerships in existing markets, as well as entry into related adjacent areas.

Valuation – after a strong run the group’s shares are pricey. A premium is likely deserved but still, you are paying up for the growth prospects.

The potential opportunity here is quite big though, and Instem appears to have quite a strong market position to underpin its growth ambitions. The recent acquisitions are a step change in the scale of the group and bring potential for margin expansion too.

So even though the shares look expensive, it’s possible that the earnings growth prospects warrant such multiples. That’s if the management team continues to execute – at these multiples the market can be harsh if acquisitions prove tricky to integrate for example – but so far the company does not seem to have put a foot wrong.

I’m not paying up for the shares just yet, although it is possible that this is one of those companies that always looks expensive but just grows and grows.

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Beeks Financial Cloud (LON:BKS)

Jack’s call with management

Results:

• Reported revenue +20% and Ebitda similar a few weeks ago
• Historically over the past few years it’s been consistent 25-30% growth
• PBT typically just over 10% growth, which is good given the level of investment
• It’s been a solid year, but what’s exciting is the fact Beeks exited Q1 with record sales in the quarter. Summer is typically its quietest period but this year it’s been record-breaking, so there could be upgrades if this momentum continues
• Flagship new product had first win
• Much higher growth figure this year – in excess of 40% this year and still fairly conservative
• Last year was the year of product, two new products
• Proximity Cloud is a gamechanger, big demand
• Hoping this year will be a breakthrough year for the group

Proximity Cloud (PC)

• Just packaging of what BKS does differently, but it’s an important difference
• BKS has a private client infrastructure – it takes space in data centre, BKS engineers treat the hardware, which gives clients security issues as engineers have access to tier 1 customer data – a big red flag for security and compliance departments, kept bumping up against it.
• PC is building a BKS cloud with all functionality developed over the last 10Y, delivered to customer’s space in exchange data centre and customer manages interface with a very easy to use admin system and keeps control of the data
• Gets away from a lot of the security concerns for banks as it’s into their environment, engineers no longer have access
• Nobody else does this in BKS world, unique
• Banks can have private cloud in exchange with scalability at month to month price
• This came about as a result of lots of conversations with lots of big organisations over the past three years – traders loved the flexibility of BKS (can take banks 9m to set this stuff up otherwise). Security, compliance back office functions – gets caught up in red tape. Kept bumping up against it. Over last three years
• Has spent quite a lot of money on it over the last 18 months; will invest further to remain ahead

Competition

• generic cloud providers but they don’t specialise in capital markets – you need specific set of tech that allows market data to be consumed. Low latency is a priority, and specific hardware
• They don’t understand capital markets

Growth

• Growth comes from all over; as a tech provider, BKS doesn’t get too involved in complex overseas regulation. That’s for clients to navigate
• Proximity Cloud provides clients with easy access to Asian exchanges they don’t have the physical infrastructure to support. This is attractive and there’s a lot of interest in Asian exchanges.

New product

• Proximity Cloud is a differentiating product
• Entire mission for the last three years has been on getting tier 1 clients who spend ttens of millions each year on this stuff. Breaking into this area is the massive scaling going fwds
• PC is BKS attempt to get further into this space
• More conversations this three months than past year combined
• Real momentum in the business
• Historically quietest quarter has been the record quarter

Non-recurring product (NPR) revenue

• the dynamics in the business are changing; more multi-year contracts
• Has to recognise some of that revenue in advance and smaller portion in recurring
• NRP will likely become a larger part of the business

Capital investment

• Mix for Proximity Cloud is different
• From customer point of view, BKS is an opex cloud model but for BKS, business is capex intense
• It has invested considerably, £4.7m in the year is the largest by far
• If PC mix shifts as expected further capital investment will be warranted

Conclusion

I’ve not done a huge level of research into Beeks but I’m aware that Paul has a positive view of the company. Having sat down with Gordon McArthur, the CEO and founder, I am impressed with what he and his team have been able to achieve. A lot of time has been spent talking with tier one customers, building relationships and improving the offering.

The initial feedback regarding the resulting Proximity Cloud is positive and the current trading momentum is obviously encouraging.

The share price has increased substantially over the past few months though, so valuation is important here. Beeks may well be the kind of company that forgoes short-term profits in order to build a more valuable business in the longer term. That’s a positive if correct. Indeed the group has a history of significant capex investment, which could indicate a company that is investing to steal a march on an attractive opportunity.

As to the potential scale of the opportunity and just what the mature Beeks’ business model and economic characteristics look like, that’s what I would need to satisfy myself on before paying these prices. It’s tricky to value on the existing financial data alone. Either way, it’s great to see management’s hard work paying off in the form of accelerating growth.

Stockopedia

Source: https://www.stockopedia.com/content/small-cap-value-report-mon-27-sept-2021-mgp-bks-elta-ins-elix-874110/