During their heyday back in 2007, shares in Maxima, the Scottish IT firm, reached a high-water mark of 329p. Its customers included big names such as the Driver and Vehicle Licensing Agency, Balfour Beatty, Caledonian and Orange, after it blazed a fast-paced trail of 11 acquisitions. But the board didn't anticipate the credit crunch, which cut off a vital source of funding at a time when corporate clients were also tightening their belts.
Four years on, after a string of disposals and the departure of the CEO and chairman, Maxima seems to be back on its feet. Today, its bread-and-butter business is based on delivering and managing services including cloud computing, hosting, software applications, data centres and networks management.
Net debt has been cut and is now at a comfortable £4.2m (or about twice EBITDA). Additionally, there's a possible £0.5m of cash due from an escrow account. Executive chairman Ian Smith (who owns a 14.5% stake) said after releasing the interims in February that "this market is experiencing good growth and has been the focus of attention for numerous acquisitions, particularly by private equity, indicating the attractiveness of the recurring revenue base. We have seen good renewal rates from our annuity contracts recently and the disposal programme has enabled us significantly to reduce debt."
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Maxima (Aim: MXM)
In the absence of broker estimates and/or guidance from the board, I believe the slimmed-down group is delivering proforma sales and underlying EBITA of about £35m and £2m respectively. On this basis, I rate Maxima on a multiple of 70% of sales, which, adjusted for its debt, dishes up an appetising fair value of more than 50p per share, or nearly double today's level.
Moreover, if I'm right and the end-game is eventually to dispose of the group to the highest bidder once the current restructuring is over, the price tag could be considerably higher.
So what could go wrong? Being a relatively small player, Maxima could get squeezed by its larger and better-funded rivals. It is also is exposed to the usual risks associated with managing contracts and technological change.
Rating: SPECULATIVE BUY at 26p (market capitalisation £9.5m)
Paul Hill owns shares in Maxima
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