This market leading e-procurement specialist has seen its share price drop a quarter this year despite encouraging first-half numbers. But it is perfectly placed in a booming sector, says Paul Hill.
The stockmarket can be brutal just look at what's happened to shares of e-procurement specialist, Proactis. They have dropped 25% since January, despite encouraging first-half numbers.
In April the firm said that its pipeline was "buoyant with continued strong client loyalty". Contract values and customer quality were improving too, with "greater life-time potential". Indeed, in the last six-month period, Proactis signed several new blue-chips names, such as UTC, Bridgewater, Ahli Bank and DLA Piper. It even secured a landmark contract with a Fortune 100 organisation in October to provide its flagship Software-as-a-Service (SaaS). This service rationalises a client's purchase-to-pay processes.
The agreement is for a minimum $500,000 over a non-cancellable three-year term, with a pre-agreed roll-out plan for up to 150,000 users. All told, an excellent endorsement of the firm's leading position in its sector.
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Yet investors seem to have misunderstood the shift towards SaaS as being nothing more than a "jam tomorrow" story. During the transition phase, sales will indeed decline as the ongoing pay-as-you-go model replaces up-front licence-fees. Yet strategically, the firm is spot-on. Cloud computing is the "next big thing" in the corporate world. And SaaS should help Proactis win new business, boost income visibility and generate superb returns. What's more, the company's board indicated that the second half "has started well and, although it is too early to say whether the public sector is ready to address spend control, it is encouraging that we have recently signed two new local authorities".
House broker FinnCap is forecasting turnover and EBITA for the year to July of £6.4m and £0.4m respectively, jumping to £7.7m and £1.5m next year. On this basis, I would value the group on an eight-times 2011/2012 multiple. After discounting at 12%, and adjusting for the £2.6m in cash, that generates an intrinsic worth of 41p per share.
Of course, there are the usual considerations when investing in Aim companies. For one, the shares are sometimes difficult to trade, as volume tends to be light. So I suggest investors are patient and wait for the right moment for bid-offer spreads to narrow before jumping on board. Furthermore, being such a small company, there are the usual dangers of over-reliance on one product and being squeezed by larger rivals.
Equally, though, the group is perfectly placed in a booming sector and should reap the rewards as organisations are forced to tighten their belts. Indeed, looking past the immediate, short-term pain-barrier, I would not be too surprised if Proactis was either taken private or bought out by an overseas rival.
Recommendation: SPECULATIVE BUY at 29p
(market capitalisation £9m)
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Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.
Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.
Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.
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