I wrote about cloud computing a few weeks ago. In essence, it’s a way of outsourcing many of your computing and technology requirements. Instead of spending vast sums of money building and maintaining IT equipment, businesses can simply rent computing power and services online – just as you would rent electricity from a utility over the grid.
There are two ways you can profit from this growth sector. First, there’s the mammoth raw computing power that firms can now access online. Over the last decade, internet giants such as Amazon have been building vast computer farms housed in warehouses and abandoned factories. They are now renting these out for use over the internet.
Secondly, there’s the business services that cloud providers can offer online. One of the first companies to do this was Salesforce. Declaring the “end of software”, Salesforce offered a simple service – a computer program that helped corporate sales forces keep track of their accounts over the internet. But now you can rent all sorts of business services online and save your business a fortune in the process – from accounting to sales to web design. This is called software-as-a-service or SaaS, and it is a godsend for small businesses and start-ups.
The cloud will be an increasingly important factor in delivery of IT services. Cisco estimated that cloud data traffic is growing at 44% a year currently, and researchers Frost & Sullivan expects the market to more than double in value over three years, from $20bn in 2012 to $47bn in 2015. That’s explosive growth!
And the thing is that a lot of this growth will come from emerging markets, which is where the company I want to talk about today operates.
A new Malaysian cloud player in town
RapidCloud International (RCI) is a Malaysian supplier of cloud-based services that has recently listed on Aim. The Malaysian cloud industry is growing at 42% currently, and is expected to reach $131m in 2015. Support for the market is coming from the government and from strong growth in new business registrations. Cloud computing revolutionises the way a business can run its operations, and it is easy to see how the cloud lowers entry barriers to starting up a new business.
RCI’s origins go back to 1999 when it began a web hosting service – running servers which allowed its clients to go online with a website. To add value to this service, RCI began designing and maintaining websites for clients, which was quite labour intensive. The shift to the cloud and SaaS came in 2009 when it launched a software product that allowed customers to build their own websites using tools provided online by RCI. Now RCI offers tools enabling clients to set up online commerce services and manage more complex online functions – from web building to e-commerce software. It’s a good business to be in right now.
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RCI serves some huge global companies
SaaS makes up 68% of revenues. The bulk of the remainder is hosting services. Here RCI owns the servers but rents the space in data centres to house them. This has paid off for RCI because rental costs are falling due to a glut of local data-centre capacity. As a smaller player compared to Fujitsu for example, RCI has focused on the SME sector where it estimates it has a 6-7% share of the half a million companies with websites. It also has blue-chip clients, serving local divisions of global companies such as Prudential, Canon, and Deloitte.
The next big step is geographic expansion into neighbouring Indonesia. This market is eight to nine times the size of Malaysia, is close by and does not provide any language or cultural problems. Singapore and Vietnam offer longer-term expansion opportunities. To support this strategy, headcount is expected to double in the next two years to 200 people, with emphasis on sales and marketing as well as on research and development.
So, I see this as a great play on the development of these fast-growing economies. As they look to expand internationally, companies in this region will need an online presence and a means to manage the huge growth in data traffic that comes with a growing business. That’s true of everyone from telecoms to banks and smaller businesses looking to expand without huge setup costs.
So why did RCI choose Aim?
I think we’ll see more companies like RCI listing on Aim in the next year. Aim seems to have had a lot of criticism, but it still offers an attractive proposition to companies looking for a listing and the prestige that London offers. RapidCloud considered the US but was put off by the onerous Sarbanes-Oxley rules. Hong Kong might have been deemed a more natural home for a Far East company, but the listing process would have taken a lot longer than Aim.
On listing, RCI only raised £1m. Significant funds weren’t needed due to it already being in a net cash position. The business is also cash generative and has the resources to develop its office in Indonesia and support the growth in the business. Surprisingly, the company pays a dividend which is a nice bonus for a small tech stock.
The founder, Raymond Chee, is only 37, and retains a 53% stake. One of the reasons for listing, apart from gaining a higher profile, is to have money to pay for acquisitions. We should expect this at some point, and I understand Raymond is relaxed about being diluted as new shares are issued.
The shares listed at 54p in mid August and now stand at 80p where RapidCloud is valued at £14m. The free float is 35%, equivalent to just under £5m. On Allenby Capital’s forecast, the shares trade on a price/earnings (p/e) of 13.5, which seems very undemanding for the growth prospects. The maiden interim results are due in a couple of weeks, and I will be looking out for them with interest.
• This article is taken from our free twice-weekly small-cap investment email, The Penny Sleuth. Sign up to The Penny Sleuth here.
Information in The Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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