Having missed the June seminar, through being double-booked, I was keen to make it down to this month's meeting and see some new companies. As usual the room was full and there was a certain buzz in the air from the prospect of meeting a brace of interesting companies and getting to ask them searching, but reasonable, questions.
First up were Mike Jefferies (FD) and Matt Hooper (Marketing) from IMImobile. This is a software services company which listed in 2014, to give its venture capital owners an exit route, but has been profitable and generating cash for over a decade. Its core service is that it helps customers deal with clients using mobile devices by linking enterprise systems to channels such as chat and social media. This is clearly a big win for large clients such as O2, the AA, Vodafone and the BBC as it allows them to outsource a technology headache while retaining the benefits of increased call-centre efficiency, fraud detection and improved customer service.
Talking of clients their largest is MTN in Africa, which provides 16% of revenue, while the second largest is a Tier 1 bank in the UK. What's interesting about this revenue is that, by IMImobile's own definition, 90% of it is recurring with 15% coming from fixed fees, 40% is directly usage based and 35% is down to transactional volumes; or, in other words, 75% of all fees rely on volume through the system, 15% is fixed and 10% is non-recurring. This is pretty good as clients want there to be high volumes and the receivables from these blue-chip companies are high quality so cash conversion is very good (typically 100% of EBITDA). Sadly there aren't going to be any dividends for a while (which was a sore point with the audience) and any excess cash will be used for acquisitions and share buy-backs.
On the investor front the share structure is slightly odd in that there are 49m ordinary shares, 11m founder shares and 6m options; so, if you're not careful, it can be easy to value the company incorrectly (fortunately Stockopedia uses the correct figure of 60m shares). Beyond the directors owning 20% of the company institutions own something like 75% of the remaining shares with ToscaFund taking out 25% alone - so there's a certain level of illiquidity here. That said IMImobile is in a sweet spot with smartphone penetration increasing worldwide and investment in the US market hopefully paying off this year with break-even being hit at a monthly run-rate level. The landscape in the US is very different to other countries, and perhaps more immature, but apparently the board thought long and hard before deciding that this was the right market to attack. Either way the company is expanding through a mixture of organic and acquisition growth, and has been able to retain all major clients, so it must be doing something right.
Next up came Palace Capital whom I actually looked at in some depth just over a year ago. At the time I liked the progress that the company had made but they seemed fully rated; now though the landscape has changed and so Neil Sinclair (CEO) appeared with Stephen Silvester (FD) and Richard Starr (Dir) to explain why they're on a charm offensive in the City. Simply put the company has been marked down in the swing against the real-estate sector, even though they're not a property fund, and this is anomalous as they're not exposed to London or high-end residential and are seeing real letting demand. In fact, by design, they're only exposed to regional property and this is a market which is doing well.
So for a fair bit of the presentation Neil Sinclair explained just where they had come from, since incorporating in 2010, and how they employed real corporate deal-making to bootstrap the company's growth from essentially zero. This is very much a story of being very selective in deciding what to buy and putting in a lot of leg-work inspecting properties, speaking to tenants and letting agents and performing due diligence; in a way this feels very much like a private operation in terms of how passionate the board are about the business and the extra mile which they're willing to go to close a deal that works for all parties. This may well be because the CEO has been through a number of downturns, and really knows his onions, so they're prepared for the music to stop despite seeing real opportunity for capital and income growth.
This is why gearing is conservative at 37% and the board are sweating their assets hard rather than sitting back or stepping away from the market. For example Hudson House in York is a typical 60s office block and not very pretty; Palace Capital have permission to convert but what they really want to do is knock it down and provide rentable residential accomodation plus a little top-quality office space in the city. Apparently there's a long-term strategic plan to convert large areas in the vicinity in a similar fashion and management know this because they've got to know the council CEO and have their finger on the pulse. So the board are doing everything right but the share price is still at a 25% discount to the NAV of 414p and this hampers their ability to perform non-dilutive share placings; hence lots of meetings in the City and a desire to have a profile in line with their demonstrable operational success.
For ErgoMed Steven Stamp (CFO), previously CFO of Shire, took on the presentation and questions all by himself - demonstrating an impressive understanding of the business for someone who only joined the board in January. The model here is that the company has two arms, Services & Development, with the first engaging in bread and butter consultancy to bring in cash while the second exposes the company to substantial upside through having a carry option on drugs in clinical trials. This seems to work well as ErgoMed has a 16 year track-record of consultation which has been profitable from the start; this means no debt required with all growth boot-strapped from nothing.
Looking at Services this mainly involves managing clinical trials for large and small
pharmaceutical companies with a particular expertise in oncology, neurology and immunology. They do patient approvals via connections with local hospitals worldwide which allows them to locate patients with rare diseases and manage the process on the ground (they also have lots of on-site nurses on a retainer to get this local knowledge). In addition they engage in adverse case reporting, which involves looking for side-effects of existing drugs, and other contract work through phases I-IV. This area is growing at 10-15% and appears to meet a real clinical need. On the other side ErgoMed is building a portfolio of co-development partnerships with pharma and biotech companies where they offer reduced fees for a carried interest (and a cut of milestone payments). This is a rather clever model since the company are party to all of the trial data and can weigh any judgement in their favour - which is why only 2% of drugs considered for co-development make it to the offer stage.
This model has, however, changed with the recent acquisition of Haemostatix Ltd back in May. This is a company with a single product that manages bleeding in operating theatres and is currently in Phase I trials (which are apparently more like Phase II as it's being used on real patients). According to Steven the board realised that this product represented a golden opportunity due to the fact that it just works, it's much more stable than existing compounds (due to being synthetic) and it's cheap to put through trials as the results are immediate and no follow-up is required. So while the change of tack has reduced profits (and the share price) and added risk it could also pay out handsomely and triple the size of the company in 5 years (or more if applications in the OTC market bear fruit). Obviously it's early days, and a partner will be needed for Phase III, but some milestones later this year will be worth monitoring.
Beyond this the company has very good forward visibility of revenue (85% was contracted for this year on 1st January) and will remain cash and EBITDA positive as they finance Haemostatix development. It's likely that there will be further small acquisitions, which bolt onto existing operations, and to a degree there is some financial engineering here as they buy cheaper companies with more expensive paper. Nevertheless the track record of the company speaks for itself and the future potential is apparent.
Finally, after a short break, David Hornsby (CEO) and Graeme Spenceley (CFO) from Ideagen hit the stage. They're no strangers to ShareSoc, having presented before, and regulars will know that they are an information management software company who focus on the GRC (Governance, Risk & Compliance) space. David is a very engaging and entertaining presenter and he was happy to outline how Ideagen work with clients where errors are either high risk or high consequence (which means the complex manufacturing, healthcare, finance and transport sectors). The nice thing about this business is that it's quite sticky as once clients are using the system to monitor how they're performing then it's a wrench to move somewhere else.
This explains why the firm has grown steadily since 2009, when David joined, and last year improved profits by 26% despite a big share issue (to fund the acquisition of Gael Limited). In common with many companies recurring revenue is an important theme at Ideagen and currently turnover is split into 46% from maintenance and support contracts (recurring), 32% from software licences (some recurring and some perpetual) and 21% from professional services (not recurring). To improve this split the company are moving from the traditional purchase model to a subscription (SaaS) model which is hard but ultimately beneficial. The big problem is that sales get booked later (over a 3-year period rather than immediately) and this can make it look like the company is losing business.
To counteract this perception the board are being careful not to cannibalise existing clients to hit their target of half of revenue being from the SaaS platform by 2018 (which means slightly more than doubling current sales) - unless the client is going to leave entirely! So smaller numbers of sales heads are allowed to push the SaaS platform and the transition is being managed. Even so broker forecasts are currently for organic growth of only 10% this year, which the management are happy with, and this went down badly with investors in the audience as there's a fair level of expectation built into the current share price.
Still even if next year is one of integration and consolidation the GRC business is still trucking along nicely - it's the document management arm (20% of turnover) which is performing poorly due to exposure to the NHS. I get the feeling that the board know that their future lies in the GRC field, whatever legacy sales they have, and this is why they're investing in marketing this year (trade shows, SEO optimisation and sales training) and are looking to bed in recent SaaS wins like the £4.9m contract with the Railway Safety & Standards Board. The fact is that GRC is a very fragmented market, with lots of speciality niches/verticals, and Ideagen are positioning themselves to act as a market leader.
Disclosure: the author holds shares in Palace Capital.