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OPINION

Big data, big potential gains

Big data, big potential gains
June 29, 2016
Big data, big potential gains

However, investors have become fixated on Brexit issues, so much so that they have completely overlooked the company’s earnings beat. Moreover, having first advised buying at 120p ('Big data, big profits', 8 February 2016), and advised running profits at the end of March (‘Big data, big rating’, 30 March 2016), it’s now possible to buy in back around the 117p mark. That’s a low entry point for a company that almost trebled underlying pre-tax profit to £3.5m in the 12 months to end March 2016 on revenues up 45 per cent to £18.6m. EPS more than doubled to 8.24p, far better than the 7.8p forecast of analyst Lorne Daniel at brokerage finnCap, a performance that enabled the board to hike the dividend from 0.56p to 2p a share.

The payout is covered four times over by post tax earnings and with the board guiding to future targeted dividend cover of between 3 to 4 times, then we can expect the payout to be raised by at least 10 per cent to 2.2p a share based on finnCap’s EPS estimate of 8.9p for the current financial year. The increase could be even greater because the company generated free cashflow of £5.9m after tax which means that it has swung from a net debt position of £1.9m in March 2015 to net funds of £3.4m in March 2016 despite paying out total dividends of £380,000 in the interim. The proposed final dividend of 1.5p a share has a cash cost of £549,000.

To recap, the business is focused on three web-related areas: portals, enterprise content management and 'big data' analytics with a key specialisation in business intelligence. And it's the analytics operation, accounting for almost three quarters of IS Solutions' revenue, that’s been winning a spate of contracts. IS Solutions primarily acts as a strategic technology partner, helping its clients to develop and improve business with their own clients and give them a competitive advantage through access to the best analytics information and in a timely manner too. The client list includes catalogue retailer N Brown; leisure brands P&O Ferries and Hilton Hotels; and insurance aggregator comparethemarket.com.

Hot property

It’s a hot area to be in right now as the web analytics segment of the global business analytics market is forecast to grow annually by 18.9 per cent between 2014 and 2022 to reach a size of $5.1bn (£3.6bn), according to Wise Guy Reports, a leading provider of market research reports and industry analysis. Global market intelligence firm IDC sees the big data technology and services market growing at a compound annual growth rate of 23 per cent between 2014 and 2019. This gives a strong tailwind to underpin demand for IS Solutions' big data analytics business. IS Solutions’ chairman Peter Simmonds is confident enough, pointing out that his company is in dialogue on a number of exciting projects which “underpins our confidence in our pipeline of projects.” He’s backing the company with his own cash too having bought 40,000 shares at 118.6p post results to take his stake to 181,500 shares.

Moreover, the company is reaping the benefits of the transformational acquisition of Celebrus Technologies. In its first full year under IS Solutions’ ownership, Celebrus posted pre-tax profits of almost £800,000 on revenue of £3.3m, making the £7.5m price paid to take full ownership in December 2014 a smart piece of business.

UK-based Celebrus specialises in data feeds that supply detailed records of customer interactions with websites, mobile apps and social media. Its IP, protected by US and European patents, relates to the control of web page visitor behaviour – monitoring information and allowing the session context to be maintained. Not only has Celebrus enhanced IS Solutions’ analytics offering, giving it a more predictable income stream from project work, as well as boosting recurring revenue, it has also helped the company become a more balanced product-led business, rather than primarily service-led. Interestingly, Mr Simmonds says that “Celebrus is generating a number of significant opportunities across new and existing customers......and the integration of the two businesses continues to open up a number of cross selling opportunities.”

The point being that these prospects are not in the price. Assuming IS Solutions, shortly to be renamed D4t4 Solutions, hits finnCap’s revenue estimate of £21m in the 12 months to end March 2017 then expect cash profits to rise from £3.8m to £4.2m to deliver a 14 per cent increase in pre-tax profits to £4m. However, with the shares priced at 117p, the company only has a market value of £42.8m and an enterprise value of £39.4m after accounting for its £3.4m cash pile. In other words, the business is in effect being rated on a cash profit to enterprise value ratio of 10 times, or 12 times EPS estimates of 8.9p after accounting for a cash pile now worth 9p a share. Frankly that’s a harsh rating, and one that fails to recognise that the big data analytics market is set to grow strongly irrespective of the Brexit issues which are making investors more cautious right now.

So, with the board positive on trading prospects, and the directors buying, I rate IS Solutions’ shares a decent buy on a bid-offer spread of 115p to 117p and have a target price of 145p. Buy.