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OPINION

Profit from cyber warfare

Profit from cyber warfare
April 23, 2014
Profit from cyber warfare
IC TIP: Buy at 23p

The relative ease at which the virus has accessed what should be secure websites, and retrieved millions of customers' passwords (and thus their personal information), is not just alarming, but brings into sharp focus the need for all ISPs and websites to secure their businesses against the ever-increasing threat of security breaches. The high-profile nature of the Heartbleed virus should also drive demand for companies specialising in this niche area of IT infrastructure and complex security management.

By developing network security policies and adopting risk management systems to protect corporate and private networks, companies can mitigate the threat of compromising the confidentiality, integrity and availability of information they store and process. Specifically, network security invloves policing the network perimeter; establishing multi-layered boundary defences with firewall and proxies deployed between the untrusted external network and the trusted internal network of the website or ISP; protecting any direct connections to external services; and protecting internal internet protocol (IP) addresses and providing real time security intelligence.

It's not just an area of internet security that has been making the headlines, but one where there is an investment opportunity to profit from. That's because Aim-traded Accumuli (ACM: 23p) is operating at the forefront of this technology and boasts more than 700 customers in its services and technology solutions businesses. Its global customer base consists of companies of all sizes across an expanding range of industry sectors, including financial services, utilities, telecommunications, manufacturing and government.

Understand the product offering

In the solutions business, Accumuli represents no fewer than 21 leading technology vendors in order to provide independent advice to its customers and recommend the most appropriate technologies to meet their security and budgetary needs. The solutions offered to clients fall into four key areas: defence in depth - examples include firewalls; data monitoring and analytics such as ArcSight, Splunk and Logrhythm; network access control; and external threat intelligence to identify emerging IT Security threats and ensure preventative actions can be taken in advance.

Big data monitoring and analytics is now intrinsically linked with security and optimising operational performance. As Accumuli's chief executive, Gavin Lyons, rightly points out "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."

So to ensure that Accumuli's business proposition meets "customers' requirements, both in terms of securing their business against the rapidly evolving threat landscape and in ensuring that projects are delivered and managed in the most efficient and effective manner", the company has been making some smart looking acquisitions in the past three years. Importantly, each of these acquisitions was the expert in its niche area which gives Accumuli a competitive advantage and enables the company to maintain or enhance its profit margins.

Accumuli's other main operation is focused on helping organisations identify where they are vulnerable, providing expertise to deploy technologies correctly for the first time, and delivering a managed service platform that enables companies to outsource the management of those technologies. Ultimately the "business is about serving our customers, being experts in our field and delivering bottom line profitability," says Mr Lyons. And it is clearly a growth area and one where demand is being driven by the growing IT needs of customers.

For instance, large companies operating in sensitive, regulated sectors, such as financial services, legal or defence, are no longer simply focused on their own IT Security. They increasingly "need to manage and monitor the IT security of their supply chain as the confidentiality of their data will only be as good as the weakest part of the chain. This clearly increases the demand for specialist services".

In data analytics, the key IT vendors are now focusing on software's ability to process and analyse large quantities of data, which also opens up other management uses. Accumuli's acquisition of Eqalis for £1.9m (including a £1.2m deferred consideration over three years) last November provides the company with critical expertise in this area. Moreover, Eqalis's 150 strong customer base provides cross and upselling opportunities for Accumuli's broad range of solutions since the company only dealt with 10 per cent of these customers previously.

Improving quality of revenues

It's also worth noting that IT security skills remain in relatively short supply, providing a strong incentive for businesses to seek these services through a managed service provider such as Accumuli. Interestingly, the company is now seeing a shift in its business towards managed services, partly down to the acquisition of Signify, one of the UK's leading providers of managed service Two-Factor Authentication, utilising both public key cryptography algorithm technology and its own Passcode OnDemand software to enable secure remote access to an organisation's network. Signify was acquired for a net cash consideration of £2.6m in June 2013, a price that looks sensible given that the company made cash profits of £560,000 on revenues of £2.9m in the year to March 2013, and recurring sales accounted for over three quarters of the total.

There is decent organic growth coming through, too, as Accumuli's underlying revenues rose by 6 per cent in the first half of its financial year to end September 2013. In turn, these strong industry trends and smart looking acquisitions are improving the quality and predictability of earnings by boosting recurring revenues derived from managed services, software support and maintenance contracts where the company has an obligation to provide an ongoing service over a contractual period.

Indeed, over 60 per cent of the company's gross profits in the 12 months to March 2014 were derived from recurring revenues, so reducing the proportion of lumpy and less predictable software sales. It also enhances gross profit margins which rose from 55.5 per cent to over 58 per cent in the six months to end September and will have risen again in the second half of the financial year. In fact, in a pre-close trading update Accumuli stated that gross margin is "expected to be ahead of previous expectations reflecting the positive change in business mix towards services and consulting, both of which have grown in terms of revenue and gross profit".

Robust results forecast

As a result when Accumuli reports results in June, we can expect the company's cash profits to rise by 38 per cent to £2.9m on 20 per cent higher revenues of £17m in the 12 months to end March 2014. This translates into a 40 per cent rise in both adjusted pre-tax profits and EPS to £2.8m and 1.4p, respectively, according to analysts at brokerage finnCap. And with the full benefit of the Eqalis and Signify acquisitions to come through in the current financial year to March 2015, analyst Andrew Darley predicts that Accumuli's revenues will rise by over 20 per cent to £20.7m this year to drive pre-tax profits and EPS up at the same rate to £3.4m and 1.7p, respectively. In other words, with the shares trading on a bid-offer spread of 22.5p to 23p, the prospective PE ratio is a modest 14, hardly a punchy valuation for a company producing earnings growth at well over 20 per cent a year.

Moreover, even after factoring in the settlement of the aforementioned acquisitions, Accumuli ended the financial year with £3.5m of net funds on its balance sheet. That’s the equivalent of 2.2p a share of net cash. Strip this sum out from the current share price and the cash adjusted forward PE ratio drops to a little over 12 for the current fiscal year.

There is decent dividend support too. That's because Accumuli's board has initiated a policy to distribute up to 30 per cent of cash profits as dividends to shareholders. Expect a final payout of 0.46p per share for the year just ended, a 15 per cent increase on the final dividend paid in the previous year. Furthermore, with cash profits predicted by finnCap to increase by a quarter to £3.6m in the 12 months to March 2015, this should support a payment of 0.7p a share based on 158m shares in issue. On this basis, the prospective dividend yield is 2 per cent, rising to 3 per cent.

In my opinion as more investors cotton onto the earnings growth potential of Accumuli, and the solid income stream the board are distributing to shareholders, then the combination of a sharply rising dividend and falling earnings multiple are likely to make for a compelling investment case to drive the shares higher. It's also one that is supported by the technical set-up.

Charting for share price gains

Having hit a multi-year high of 25p earlier this month, Accumuli's share price has retraced back to the rising 20-day moving average around 22.5p. The 200-day moving average is also playing catch up and is now around 19p. As a result the 14-day relative strength indicator (RSI) has unwound its overbought condition and with a reading a little over 50 is now at a level where a strong bounce off the 20-day moving average should be expected.

The timing favours a rally from here because Accumuli is due to release its financial results in June, which will undoubtedly make for a good read, so we are virtually guaranteed the necessary good news story to drive the share price higher. In fact, it's my view that the results will be strong enough to warrant a move through the April 2014 and October 2103 eight-year highs, both of which have halted the previous advances at the 24.5p and 25p levels.

So with Accumuli's shares trading on 12 times prospective cash adjusted earnings for the current fiscal year, and offering a forward dividend yield of 3 per cent, I feel a target price of 30p is not only realistic, but achievable in the summer months. If hit this would price the shares on a far more reasonable 16 times forward earnings after adjusting for cash, a rating not out of kilter with other small cap software providers, and one well underpinned by the company's faster earnings growth rate.

Offering 30 per cent to my fair value target price, the shares rate a trading buy on a bid offer spread of 22.5p to 23p.

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