The company's products and platforms are now used by more than 500 organisations globally, including commercial, public and not-for-profit sectors, and it is the largest independent eProcurement solution provider to the UK public sector. PROACTIS develops its own proprietary software using an in-house team of developers and sells through both direct and indirect channels via a number of Accredited Channel Partners.
The key takes for me in the results release were the strength of the order book and the double-digit underlying revenue growth rate in both acquired and existing businesses. True, the headline numbers were flattered by the contribution of three acquisitions made between February and August last year. These contributed cash profits of £2.7m and revenues of £7.7m to the group totals of £4.8m and £17.2m, respectively. But breaking down the constituent parts reveals that the acquired businesses increased revenues by just over 10 per cent on a like-for-like basis, and the PROACTIS businesses did even better, reporting growth of 12.6 per cent on the same basis. In other words, the underlying performance was robust across the board.
In addition, the group signed 39 new deals in the 12 months to end July 2015, of which a third of the £5.2m contract value was recognised in the period, in addition to 82 upsell deals to existing clients. Deferred income of £5.5m on the balance sheet is also supportive of revenue forecasts of £18.9m for the current fiscal year which even head of equity research Andrew Darley at house broker finnCap sees as a 'cautious' estimate. He has a point as the total value of subscription, managed service, support and hosting revenue was £14.3m at the fiscal year-end, a sum equating to 83 per cent of reported revenues for the year just ended. That's worth noting because PROACTIS has very low cancellation rates, and support and hosting revenues is generally renewed annually in advance, so the business enjoys high levels of recurring income. In fact, the aggregate value of contracted income to be recognised in future periods surged by 39 per cent from £14.2m to £19.7m, highlighting a robust order book.
Margins on the rise
Another take for me was the margin growth that is coming through. That's partly because two of the three acquisitions sell directly to clients rather than through business partners, so enjoy higher gross margins. But PRAOCTIS' board also point out that additional operational savings and synergy benefits have boosted margins, and are likely to continue to do so. Following an 8 per cent upgrade post results, finnCap predicts cash profits will rise by 16 per cent to £5.4m based on a 10 per cent increase in revenue to £18.9m in the 12 months to end July 2015 to deliver a 21 per cent hike in adjusted pre-tax profit to £3.5m. On this basis, expect fully diluted EPS to jump by 16 per cent to 6.6p. Moreover, even after the upgrade, these estimates are looking increasingly conservative to me given the commercial potential of a major contract won with Screwfix, announced alongside these results, and potential for more earnings accretive acquisitions.
At the end of July 2015, PROACTIS had net funds of £1.5m on its balance sheet. The board have been buying wisely too, having acquired Intelligent Capture, one of the UK's leading providers of document scanning and optical character recognition services, in August last year for a net consideration of £1.3m. In the latest 12-month trading period, that business posted a 250 per cent rise in cash profits to £700,000 on revenues up 40 per cent to £2.1m, so looks a bargain buy. PROACTIS saw potential to cross-sell its existing services to Intelligent Capture's 40 clients, and it has clearly worked.
Raised target price
So with PROACTIS winning new customers, enjoying high levels of repeat business, boosting margins, boasting a bumper order book and offering potential to make further earnings enhancing acquisitions, then the investment case is pretty compelling.
In addition, the board have just hiked the dividend per share by 8 per cent to 1.2p, so there is a modest and rising income stream for shareholders too. Of course, capital appreciation is the main reason for holding the shares, so it's worth flagging up that post the full-year results today, PROACTIS' share price signalled a triple top break-out on the point-&-figure chart which, in my opinion, paves the way for a return to the 2007 bull market high of 117p at the very least. Mr Darley at finnCap is even more bullish, having raised his target price from 115p to 150p post results this morning.
I think he has a point and feel that the shares could easily trade up to 130p, where the rating would be 20 times current year earnings estimates, given the scope of upgrades and reflecting the 15 per cent annual earnings growth rate forecast for both this year and next. So having first recommended buying PROACTIS' shares at 93p ('Procuring growth', 11 August 2015), I continue to rate them a strong buy on a bid-offer spread of 98p to 102p, offering potentially a further 28 per cent to my target price of 130p. Buy.
Please note that I have written four articles today and links to the others are included in the list of my articles below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies in the past three weeks:
■ Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).
■ KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).
■ Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)
■ Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)
■ Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)
■ LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)
■ Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)
■ STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)
■ First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)
■ Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Equity market strategy ('Bull market pointers', 8 October 2015)
■ Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)
■ Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)
■ Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)
■ PROACTIS: Buy at 102p, new target 130p ('Secured growth for re-rating', 13 October 2015)
■ Simon Thompson's 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 £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
