Back to the Future for Advanced Computer Software

It is made up of three divisions: Advanced Business Solutions, Advanced Heath & Care and Advanced 365. All three provide IT and business solutions to allow clients to leverage their data to drive their business, without getting bogged down in the day-to-day running of the IT infrastructure. What makes ASW unique is the breadth of services that it offers, but also CEO Vin Murria and her team.

Murria was previously CEO at Computer Software Group, which she sold right at the top of the cycle to private equity group HgCapital for £500m in April 2007. This won her a loyal shareholder following, which backed her new start-up in 2008, ASW. An IT industry veteran, Murria and her team have built ASW from nothing to revenues of close to £121m in 2013 in just five years, largely through acquisition. What impresses me most though is the acquisitions have not resulted in a large amount of debt on the balance sheet. At year ended 28 February 2013, ASW had only £3.2m of loans outstanding with debts largely being repaid from ongoing cash flow.

In February 2013, ASW raised £44m from a share placing and agreed a new £105m credit facility to fund a £110m purchase of a company she knows very well, her old firm, Computer Software Holdings (CSH). At the time Murria said “this deal gives us strong recurring revenues, significant cash generation, its own intellectual property and the ability to up-sell and cross-sell to customers,” and when questioned about the additional debt, she responded “we expect our net debt to decrease swiftly.”

As of 31 August 2013, the group had net debt of £50m. Based on their track record, I believe that Murria and her team will continue to work their magic on the enlarged company and that the debt will come down as she says. The shares currently trade on a forward PE of 14.5 and EPS is forecast to more than double at the end of this financial year, driven by the acquisition of CSH. The PE is below the sector average of 18.85 and doesn’t appear to price in any growth beyond that of the acquisition. Whilst Murria and her management team will have their hands full integrating CSH, there should be further opportunities to cross sell services across the wider client base. A recent large contract win, ASW’s second largest contract to date, shows that this business has the potential to continue to deliver.

I bought ASW for my ValuableGrowth portfolio at 87.35p back in September but the share price has since fallen to 83p following the sale of 30m shares at 83p by Marwyn Asset Management, its entire 6.89% holding, to a number of institutional investors. However, I believe that now the share sale is complete, an update on the CSH integration as well as full year revenue expectations in the interim results, due on 30th October 2013, will provide the catalyst for further share price growth.

ValuableGrowth Update

I mentioned in my last post that I’d provide and update on my purchases to date so here it is:

Kerry Balenthiran is the author of “The 17.6 Year Stock Market Cycle, Connecting the

Panics of 1929, 1987, 2000 and 2007”.

Disclosure: Kerry Balenthiran owns shares in Advance Computer Software Group plc.