Accumuli is at the forefront of this technology and boasts more than 700 customers in its services and technology solutions businesses. The customer base covers a range of industry sectors, including financial services, utilities, telecommunications, manufacturing and government. It's a highly profitable area to be operating in as the company has just reported a 32 per cent hike in cash profits to £2.9m in the 12 months to end-March 2014. Cash flow performance was impressive, too: cash generated from operations rose 50 per cent to £3.6m and 100 per cent of cash profits were converted into cash. So even after splashing out £3.3m of cash on acquisitions (see below), paying out £600,000 on dividends and spending £300,000 on capital expenditure, net cash ended the year at £3.6m, down from £7.2m in March 2013.
Free cash flow of £1.2m easily covers the £726,000 cost of the final dividend of 0.46p (ex-dividend: 29 September), up from 0.40p in the previous year. And expect further hikes in the future given that Accumuli's policy is to distribute up to 30 per cent of cash profits as dividends to shareholders. In fact, with cash profits predicted by broker finnCap to increase to £3.6m in the 12 months to March 2015, this should easily support a forecast payout of £1.1m, or 0.7p a share. On this basis, the current dividend yield is 1.7 per cent, rising to 2.5 per cent.
Smart acquisitions
True, profits were boosted by the contribution from two acquisitions which accounted for 29 per cent of Accumuli's gross profits of £9.9m in the 12-month trading period, but that should not detract from the quality of the ongoing business. Indeed, IT security skills remain in short supply, providing a strong incentive for companies to seek these services through a managed service provider such as Accumuli.
Last year's acquisition of Signify, one of the UK's leading providers of managed service Two-Factor Authentication, looks a smart deal. The business utilises both public key cryptography algorithm technology and its own Passcode OnDemand software to enable secure remote access to an organisation's network. It has also helped improve the quality and predictability of Accumuli's earnings by boosting recurring revenues derived from managed services, software support and maintenance contracts.
The managed services segment generated £4.4m of Accumuli's annual gross profits of £9.9m, which in turn means that recurring revenues now account for 61 per cent of profits, up from 51 per cent at this stage last year, so reducing the reliance on less predictable software sales. Gross profit margins have been improving too, up from 53 per cent to 60 per cent, reflecting the change in business mix towards services and consulting.
Accumuli's acquisition of Eqalis for £1.9m (including a £1.2m earn-out over three years) is another interesting deal as it provides the company with critical expertise in data analytics. 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' entire IT estate. This level of intelligence and visibility enables businesses to prioritise actions, respond to incidents, improve processes and enhance controls. This is a hot area to be operating in as cybercrime more than doubled last year and has almost quadrupled since 2011, according research from Deloitte and hackmageddon.com. Moreover, over 60 per cent of attacks on companies were motivated by cybercrime.
Another benefit of the acquisition is that Eqalis's 150 strong customer base also 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.
Robust profit growth
With the full benefit of the Eqalis and Signify acquisitions to come through in the current financial year, head of equity research Andrew Darley at finnCap predicts that Accumuli's revenues will rise by over 20 per cent to £20.7m in the 12 months to end-March 2015 to drive pre-tax profits and EPS up by over 30 per cent to £3.4m and 1.7p, respectively. Strip out 2.2p a share of net cash and the prospective PE ratio is 15, hardly an exacting valuation for a company producing earnings growth at well over 20 per cent a year.
In my opinion, the combination of a sharply rising dividend and rapid earnings growth make for a compelling investment case. It is also one likely to drive the shares higher to my upgraded fair value price range of between 30p to 33p by the year-end. Trading on a bid-offer spread of 26.25p to 27p, Accumuli shares rate a buy.
■ 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'
