It’s an area of expertise that is becoming increasingly critical as companies combat the threat of cyber attacks potentially compromising the confidentiality of information they store and process. Specifically, network security involves policing the network perimeter; establishing multi-layered boundary defences with firewalls and proxies between the external network and the trusted internal network of the website or ISP; and protecting internal internet protocol (IP) addresses and providing real time security intelligence. Cybercrime more than doubled last year and has almost quadrupled since 2011, according research from Deloitte, which helps explain the growing demand for Accumuli’s services. It’s also a major reason why I recommended buying the shares at 23p a few months ago ('Profit from cyber warfare', 23 April 2014).
Both of the new contracts are for technology solutions and services associated with Accumuli's ‘Big Data’ monitoring and analytics capabilities. These were obtained through the acquisition eight months ago of Eqalis, a leading provider of the Splunk Enterprise Operational Intelligence platform. Splunk (NASDAQ: SPLK) is the provider of the leading software platform for real-time Operational Intelligence.
Accumuli acquired Eqalis for £1.9m (including a £1.2m earn-out over three years) to provide the company with critical expertise in data analytics. It made strategic sense because the key to successfully mitigating IT security threats, detecting incidents and responding to breaches is the ability to access and analyse large quantities of data in real time across a business's entire IT estate. This level of intelligence and visibility enables businesses to prioritise actions, respond to incidents, improve processes and enhance controls.
Another benefit of the acquisition is that Eqalis's 150-strong customer base provides cross and upselling opportunities for Accumuli's other services since the company only dealt with 10 per cent of these customers previously. And since 85 per cent of all its 704 customers only take one product from Accumuli, there is scope to penetrate this customer base with other products from the acquisitions. And that’s exactly why these contracts are so important.
The first of which is with an existing customer and is the first technology licence sale of any kind to this customer, with Accumuli having previously only sold consulting services. The second contract is to a new customer win delivering Splunk Enterprise technology licences and consulting implementation services.
The nature of Big Data Analytics is that once organisations start gaining insights into their business, they quickly discover new areas to deploy the technology in, so offering potential for further sales into both these organisations. The contract wins highlight the cross selling opportunities into Accumuli’s existing customer base too.
Earnings estimates well supported
These deals also underpin analysts’ earnings forecasts for the current financial year. In fact, with the benefit of the Signify acquisition, one of the UK's leading providers of managed service Two-Factor Authentication, also being seen in the current financial year, head of equity research Andrew Darley at brokerage finnCap predicts that Accumuli's revenues will rise by over a fifth to £20.7m in the 12 months to end-March 2015. On this basis, he expects the company to drive pre-tax profits and EPS up by over 30 per cent to £3.4m and 1.7p, respectively.
This means that after stripping out 2.2p a share of net cash on the company’s balance sheet, the prospective PE ratio is 14, hardly an exacting valuation for a company producing such robust earnings growth. There is a dividend too, as Mr Darley predicts Accumuli’s board will declare a dividend of 0.7p a share, up from 0.46p last fiscal year, implying a dividend yield of 2.6 per cent.
In my view, a sharply rising dividend and rapid earnings growth make for a pretty strong investment case and one that should realistically drive the shares higher to my upgraded fair value price range of 30p to 33p. On a bid-offer spread of 25p to 26.5p, inline with the price when I last updated the company (‘Fighting cyber crime’, 1 July 2014), Accumuli shares rate a decent buy on a six month basis.
■ 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'
