Chief executive Henrik Bang has confirmed the company "continues to see double digit new sales order growth from both existing and new customers including the first orders for our new social media and PCI payment solutions products". The pipeline is also being buoyed by bumper demand for its Liberty Customer Engagement product suite. This is being driven by the private sector and orders for business process management and software-as-a-service (SaaS) solutions. Two-thirds of all new business is generated from existing clients, highlighting the quality of Netcall’s products and services, and recurring revenue from a client base of over 700 organisations accounts for in excess of 60 per cent of turnover.
The company continues to win new contracts. Only last month, Netcall announced a five-year agreement with Cairn Housing Association to manage the organisation's entire end-to-end customer engagement process through Netcall’s Liberty platform, including recently integrated social media capabilities. Cairn will overhaul the way it interacts with customers, using Netcall's customer engagement suite to engage via email, SMS messaging, web chat and social media integrated with customer relationship management software all through a single interface. Using these new channels, Cairn aims to be a leader in service delivery in the sector by ensuring that customers are able to speak to a member of its team quickly and that as many queries as possible are dealt with at the point of contact.
This highlights how Netcall’s clients look to balance the need to improve the quality of their own customer engagement while at the same time making operational efficiencies and reducing costs. This is why Netcall’s products are so attractive as the company not only offers a suite of software products to support organisations' end-to-end customer engagement plans, with the aim of improving customer service, retention and acquisition, but its Liberty platform offers multi-channel contact handling too. This has the benefit of improving customer interactions and workflow capabilities.
In addition, Netcall’s product offerings have been enhanced by integrating acquisitions into its Liberty platform. This means the company can offer additional services to customers as well as attracting new ones which in turn creates even more demand. In the circumstances, it’s only reasonable to expect further earnings accretive acquisitions as Netcall recycles cash flow and more of its low yielding cash pile into earnings enhancing bolt-on deals.
Recycling bumper cash generation
To put Netcall’s cash generation into some perspective, in the first six months of this year the company’s cash pile increased from £10m to £11.4m, or the equivalent of 8.5p a share. A year ago, the cash pile was £9.1m since when the company has made investment in its systems, paid for acquisitions and raised its dividend sharply. Indeed, in the last financial year, Netcall’s board declared a 40 per cent increase in the payout to 0.7p a share. Cash returned to shareholders should get a further lift too given that dividend cover is still very comfortable.
After factoring in another 14 per cent hike in the payout to 0.8p a share for financial year to June 2014 - as forecast by analyst Andrew Darley at brokerage finnCap and Luke Tribe at WH Ireland – the payout is more than three times covered by underlying EPS of 2.5p for the fiscal year just ended. In turn, this offers the flexibility for the board to be even more generous by allocating a quarter (£1.1m) of the company’s forecast cash profits of £4.5m to shareholders when the board releases its full-year results in September.
Furthermore, this robust cash flow generation means Netcall’s management team are able to recycle cash into more earnings enhancing bolt-on acquisitions while at the same time still having ample resources to invest in existing operations to support organic growth.
In the circumstances, it’s hardly surprising that the shares have done well since I first advised buying at 13p ('Queuebusters', 17 January 2011). I have remained positive ever since given the attractive valuation on offer and strong earnings growth predicted. I have updated the investment case on a number of occasions since initiating coverage to take advantage of a several buying opportunities. For instance, I reiterated my buy advice when the price was 45p at the end of last year (‘Dial into cloud based profits’, 28 November 2013), reiterated the recommendation at 54p post a pre-close trading update (‘Riding earnings upgrade cycles’, 14 January 2014), and again at 47p at the time of the full-year results (‘Making the right call’, 4 March 2014). My last update was three months ago when the price was 58p (‘Betting on an earnings beat’, 22 April 2014).
Poised for the next leg up
True, Netcall’s shares are only up slightly since then, but I still feel there is another leg up in the price towards my target of 70p. I also have little reason to doubt that the company will fail to hit at least finnCap’s and WH Ireland’s EPS estimates of 2.7p and 2.8p respectively for the financial year to end June 2015. Strip out net cash from the current share price and a prospective PE ratio of 18 is hardly over the top once you consider the company’s stable recurring revenue base, prospects for decent earnings growth and progressive dividends.
It’s also my view that the conservative looking earnings estimates for the year ahead offer potential for an earnings beat. There are realistic prospects of a better than forecast dividend hike too. Add to that the potential for more earnings enhancing bolt-on acquisitions and the investment case is as solid as it ever has been, a fact not fully factored into the share price. That’s because Netcall is still only being valued on 12 times prospective cash profits of £5m to enterprise value (market capitalisation of £80m less net cash of £11.4m) for fiscal 2015. That multiple will drop further if Netcall recycles its cash into profitable bolt-on acquisitions as seems likely.
From a technical perspective, the set-up is equally encouraging and points to more upside. Following a sideways move all year, the shares look primed to break-out of a tight trading range that has capped the price at 62p for the past three months. Beyond that the 13-year high of 64p hit in January this year is the next target on the way towards my 70p fair value estimate. Reassuringly, the 14-day relative strength indicator is not overbought (reading around 60), so offering scope for any break-out to be the real deal and the rally to continue.
So, offering 13 per cent upside to my fair value target price of 70p, I rate Netcall shares a trading buy on a bid-offer spread of 60p to 62p ahead of the forthcoming interim results in two months time. My time frame for this trade is three months.
■ Simon Thompson's new book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stock-picking'
