The business is focused on three web-related areas: portals, enterprise content management and 'big data' analytics with a key specialisation in business intelligence. And it's the analytics operation, accounting for almost three quarters of IS Solutions' revenue, that sparked my attention on the back of a raft of new contract wins. IS Solutions primarily acts as a strategic technology partner, helping its clients to develop and improve business with their own clients and give them a competitive advantage through access to the best analytics information and in a timely manner too. The client list includes catalogue retailers Little-woods.com, Very.co.uk and N Brown; leisure brands P&O Ferries and Hilton Hotels; and insurance aggregator comparethemarket.com.
Higher rating warranted
The raft of contract wins has also led to a raft of upgrades; analyst Lorne Daniel at broker FinnCap now expects IS Solutions' revenue to increase from £12.8m in the 15 months to the end of March 2015 to £18.3m for the financial year ending March 2016. On that basis, expect underlying pre-tax profit to almost treble to £3.5m, EPS to double to 7.8p, and the payout per share to be hiked from 0.6p to 2p. The board can certainly afford the £728,000 cash cost of the higher dividend as its balance sheet is debt-free, reflecting a cash inflow of £2.5m from operations in the six months to the end of September 2015. Net funds are expected to be around £900,000 at the end of this month according to analyst Richard Jeans at Edison Investment Research.
Moreover, guidance from IS Solutions' board suggests that profits for the financial year to the end of March 2017 will be "well ahead of previous upgraded estimates", prompting Mr Daniel to raise his pre-tax profit estimate last month by a further 25 per cent to £4m, based on revenue rising by 15 per cent to £21m. On that basis, expect EPS of 8.9p and a 10 per cent hike in the payout to 2.2p a share in the 12 months to March 2017. I wouldn't rule out even stronger dividend growth given that Mr Jeans at Edison predicts that net funds could easily quadruple to £3.6m over the next 12 months, reflecting free cash flow of around £3m.
In any case, for a company that's in a strong earnings upgrade cycle, winning new contracts, well funded to meet the working capital requirements, and growing its recurring revenue streams, I feel that a share price rating of 17 times earnings estimates supported by a 1.4 per cent prospective dividend yield is not overly punchy. To put the rating into some perspective, it represents a 25 per cent discount to the likes of FDM (FDM), an IT services company that specialises in areas such as data analytics and cyber security, and First Derivatives (FDP), a software developer of analytics for banks.
Expect more earnings upgrades
In fact, I feel that there is real chance of IS Solutions beating raised expectations for the 2017 financial year given the potential for earnings to be enhanced through additional new contracts, and selling more of its own higher-margin solutions rather than those of third parties. The company is also expanding its European direct sales force in order to offer its portfolio of products and services to a broader range of customers. I understand from analysts that there are "a number of other exciting opportunities in the pipeline with the potential to convert these in the first half of this calendar year."
It's hardly surprising given that the web analytics segment of the global business analytics market is forecast to grow by 18.9 per cent each year between 2014 and 2022 to reach a size of $5.1bn (£3.6bn), according to Wise Guy Reports, a leading provider of market research reports and industry analysis. Separately, global market intelligence firm IDC sees the big data technology and services market growing at a compound annual growth rate of 23 per cent between 2014 and 2019. The strong industry tailwind underpinning demand for IS Solutions' big data analytics business is unlikely to subside any time soon.
In the circumstances, I would strongly recommend that you run your healthy paper profits ahead of the full-year results and next trading update in June and I have raised my fair value target price to 175p. Run profits.
Please note that I have published 23 columns in the past fortnight, all of which are listed below.
MORE FROM SIMON THOMPSON...
I have written articles on the following companies recently:
■ Plethora Solutions: Take profits at HK$0.079 ('On the takeover trail', 14 Mar 2016)
■ Somero Enterprises: Buy at 150p; target 185p ('A solid buy', 15 Mar 2016)
■ 32Red: Run profits at 150p ('32Red in the money, 15 Mar 2016)
■ Communisis: Sell at 44p ('Patience running short at Communisis', 15 Mar 2016)
■ Global Energy Development: Sell at 27p ('Global Energy plays waiting game', 15 Mar 2016)
■ Raven Russia: Sell at 30p ('Raven Russia battens down the hatches', 15 Mar 2016)
■ Stadium: Buy at 122p, new target price 150p ('Switch on for bumper gains', 16 Mar 2016)
■ French Connection: Buy at 42.75p ('Return to profitability looms for chic operator', 16 Mar 2016)
■ Fairpoint: Run profits at 159p ('Fairpoints to make', 17 Mar 2016)
■ Netplay TV: Buy at 10p ('Netplay's shares spin higher', 21 Mar 2016)
■ Satellite Solutions Worldwide: Buy at 5.5p, target 9p to 10p ('Blue sky tech play', 21 Mar 2016)
■ Miton: Buy at 30.5p, new target 38p ('Riding earnings upgrades', 22 Mar 2016)
■ Inland: Run profits at 86p, new target 95p ('Valuation surge boosts Inland', 22 Mar 2016)
■ Pittards: Crystallise loss at 71p ('Subdued demand hits Pittards', 22 Mar 2016)
■ French Connection: Buy at 43p ('Stakebuilding gathers pace at French Connection', 22 Mar 2016)
■ Safestyle: Run profits at 276p ('Exploiting a window of opportunity', 23 Mar 2016)
■ PV Crystalox: Speculative buy at 10p ('Lights start to glow at PV Crystalox', 23 Mar 2016)
■ Arbuthnot Banking Group: Buy at 1340p ('Banking on a banking duo',23 Mar 2016)
■ Cenkos Securities: Sell at 130p ('Cenkos profits slide', 23 Mar 2016)
■ Burford Capital: Run profits at 256p ('Legal eagle flying high', 24 Mar 2016)
■ 1pm: Buy at 62p, target 82p ('1pm's smart bolt-on buy', 24 Mar 2016)
■ Bilby: Buy at 128p, target 175p; AB Dynamics: Run profits at 390p ('British success stories', 29 March 2016)
■ IS Solutions: Run profits at 157p, new target price 175p ('Big data, big rating', 30 March 2016)
■ GLI Finance: Recovery buy at 32.5p, initial target 40.75p ('High yielding recovery buy', 30 March 2016)
■ 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
