I clearly wasn’t the only one running my slide rule across Coventry-based software company Sanderson (SND:140p) when I suggested buying the shares, at 120p, in my June 2019 Alpha Report ('Capitalising on the digital revolution', 21 Jun 2019). Aptean, a company controlled by US investment firms TA Associates and Vista, has made a recommended cash bid for the UK company which values the equity at £90m, or 140p a share. It’s not difficult to understand why other predators could be circling. In fact, I highlighted Sanderson as a potential takeover target in my initiation note.
Sanderson is a very profitable software business specialising in the retail, wholesale, supply chain logistics, food and drink processing and manufacturing sectors. The company’s proprietary product suite is in such strong demand that no fewer than 800 small- and medium-sized businesses license it. They are loyal customers, which is why the business has a robust recurring contracted revenue stream, and boasts a strong contracted order book.
In the retail sector, Sanderson provides integrated in-store technology; the back-office systems which are so crucial to processing sales and fulfilling customer orders efficiently; and mobile and ecommerce systems that underpin online operations. These solutions are operated from its cloud-based platform, MESH, allowing retailers to cost effectively extend their existing ecommerce capabilities across any device or sales channel including: mobile web and apps; in-store till (EPoS) apps; assisted selling iPads; mobile payments such as Apple and Android Pay; and beacon technology which allows retailers to communicate with customers’ mobile devices for marketing purposes, thus providing them timely and relevant content to increase their loyalty and build brand engagement. This is not just high-tech proprietary software, but it is high-margin, too. Sanderson boasts a gross margin of 75 per cent in its retail division.
The software is not just being used in retail, either. For example, it will play a part in UK’s supply network post Brexit as The Port of Dover, a vital international gateway for the movement of people and trade, has appointed Sanderson to supply its Warehouse Management and Cargo Terminal Management software for the new Refrigerated Cargo Terminal (RCT) at the port. Sanderson software solutions will manage operations across the terminal including ships unloading at the quay, dispatch from warehouse to road, with live tracking of vehicle and container movements. The solution is set to make a huge difference to the business: growing revenue, boosting efficiencies and delivering service improvements, thus highlighting the tangible business benefits that Sanderson’s suite offers to corporate customers, who usually achieve rapid return on their investment (often within a year of implementation), so can recoup the cost in double quick time. It’s a win-win situation.
Importantly, Sanderson is highly cash generative. This supports a progressive dividend policy, bolt-on acquisitions and investment in new products and sales. Indeed, the combination of robust trading and contributions from recent acquisitions explains why analysts predict an 11 per cent increase in current year pre-tax profits to £5.4m, rising to £6m in the 12 months to September 2020. Cash is building, too, buoyed by annual net operating cash flow in excess of £5m.
In fact, Sanderson should end the 2019 financial year with net funds of £3m (4.6p a share), a sum that could easily double to £6m by September 2020 (9.3p a share). In other words, on a cash-adjusted basis, the proposed £90m offer for Sanderson equates to only 14 times operating profit estimates for the 2019/20 financial year, a massive discount to peers and hardly a punchy valuation for a company that is generating a post-tax return on equity of 15 per cent.
True, Sanderson’s management team (22.3 per cent shareholding in aggregate) and three institutional investors (combined 16.9 per cent stake) are backing the recommended cash offer of 140p a share. However, the institutions can withdraw their irrevocable undertakings if a counter bid emerges at not less than 155p a share (Unicorn Asset Management); 150p (Downing LLP); and 154p (Gresham House Asset Management).
Given that Aptean’s offer is well below the 175p fair value target I outlined in my June Alpha Report, I not only believe that a rival bid could easily emerge, but TA Associates and Vista, which control $82bn of funds between them, may be forced to dig deeper if their takeover attempt is to succeed. Aptean, a supplier of enterprise resource planning (ERP) and supply chain management software, has given pretty compelling reasons why Sanderson is a good fit and how it plans to accelerate growth through greater investment. The strategic rationale for the takeover is not in doubt, just the price. Reject the offer.
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