Small Cap Value Report (Fri 14 Oct 2022) - BKS

Good morning from Paul! It’s catch-up Friday today. For those of a nervous disposition, and reading this on Thursday, no you haven’t accidentally fallen through a worm hole in the space-time continuum, I’m publishing this early, partly so that I can have a bit more time in bed on Friday morning, and not get so stressed at 7am, but also so that everyone gets to see my notes on this afternoon’s interview with Beeks Financial Cloud (LON:BKS) (I hold), which might have otherwise been overlooked, if added late to Thursday’s SCVR.

Forthcoming CEO interviews – I’m really enjoying doing these CEO interviews, although it is quite a lot of additional work amp; stress, but if we can’t flag up decent companies at attractive valuations, and quiz management, then there’s little point in us being here!

So I’ve lined up some more. NB I only approach companies where they’ve issued a recent trading update or results which look good, and where I think there might be a long-term opportunity because the shares seem cheap, either as value, GARP, special situation, etc. So it’s really my best ideas from these reports, and then I contact the company and ask for an interview (no fee, as I want to be independent). So far, every company I’ve approached has been delighted to engage, so that’s encouraging. The next companies lined up for my interviews over the following fortnight are -

Sanderson Design (LON:SDG) – good recent results, and looks cheap. Lovely balance sheet.

Zotefoams (LON:ZTF) – we flagged it looked good in August, but yesterday’s update sparkled.

As always, these are never recommendations or advice. DYOR please, and it’s up to you to decide if or when to invest.

140p

Market cap £92m

CEO amp; CFO Interview – audio recording is here 

Summary of key points only (lots more detail in the audio)

1. Disclaimers – no fee being charged, I do hold shares personally, not financial advice nor a recommendation. Please do your own research.
2. Please describe the business in layman’s terms! It’s cloud computing to connect banks, brokers to financial exchanges, for trading purposes. Public cloud is small part of Beeks now. Private cloud is dedicated services for client’s own use. Deals typically $0.5m-$2.0m deals, over contract life (4-5 years). Proximity cloud – latest product entirely dedicated to one end client, $2-5m total contract value. Driven by client requests for better security where they control access to the servers amp; manage it themselves through Beeks user interface. Unique in sector, quick to implement, clients pay monthly. Exchange cloud – big deals in pipeline, with potential $5-20m total contract size, but complex amp; take time to negotiate amp; get through security/compliance.
3. Exchange cloud – ICE Group – biggest financial exchange group in the world, owns New York Stock Exchange. Built this for them, they then white label sell it to clients. Major endorsement of Beeks, and took 2 years to set up this deal. Rigorous testing, great reference site, they sell it for BKS. We’ve got dialogue with some of the next 10 biggest exchanges, at various stages of discussion. Big opportunity. New income stream for the exchanges, so they sell it. Can be switched on in an hour for ICE’s clients, as opposed to months to build their own connections. Don’t expect frequent big deals, it’s new business, longer sales cycle, but higher ticket size.
4. FY 6/2023 revenues – over £20m recurring revenues already committed. Forecast is £25m revenues. Big pipeline, nicely spread across each product. Sales processes are involved, lots of resource needed from the clients, but it’s a real quality pipeline that takes time to convert.
5. How sticky are customers? They’re “incredibly sticky” – getting into a big organisation is difficult, so once you’re in, and it works, customers don’t make changes. So if you become incumbent supplier, then inertia works on our side. Some churn for smaller clients, 1% churn per month is acceptable, as cloud services are meant to be flexible. Anything over 1% per month churn is flagged at Board meetings. Very sticky business.
6. Capex – I identified that half the £10m capex was one-offs (freehold amp; leases), regular capex is c.£5m p.a.. Bought stock (of IT kit) due to supply chain delays. That should be reduced as supply chains ease. Capex this year should be c.£5m too. Inventories could be sold to customers.
7. Reader question – most IT companies bill up-front, whereas Beeks seems to spend (capex) up-front. Couldn’t you change contracts? Yes, we’re looking at getting more cash up-front with new contracts. Also looking at debt amp; lease facilities. Looking at doubling RCF (undrawn currently). Want to preserve the cash on the balance sheet. Don’t want any more dilution. Large organisations look at our balance sheet, to make sure we show healthy cash balance. So we’re “very protective” of the cash balance. If mega deals happen, then we’ll try to work with customer to protect our cash pile.
8. Dilution – Gordon: I hardly take any salary (am lowest paid member of staff!), and I’ve never taken any share options. I’m heavily personally invested.
9. Share options – used up 80% of underlying profit, how can you justify this? This is not for management. CEO has never taken any options, and “never will”. Everyone at Beeks could walk out and get double their BKS salary, at big name banks in Glasgow. Average salary at Beeks is incredibly low (incl. Directors) is only £65k. Bulk of the options pot goes to the staff. Usually we do 2% p.a. In new share options to staff. Did a one-off 4% this year, as a thank you to staff for an exceptional year (i.e. as dilution of existing total shares). LTIPs come with 2-3 year lock-in. This is not executive greed. It’s to attract amp; retain talent. They’re locked in for several years, before share options vest. Will normalise to 2% p.a. Going forwards. We’re glad you’ve raised this point, so we can explain.
10. Conclusion – exciting time for the group, opportunity in front of us. Most product development done, headcount doesn’t need to rise much more, it’s all about sales execution.

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