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Dial into a lowly rated tech stock

A lowly-rated company that makes its money by providing telecoms operators with precision marketing software is building up a highly profitable recurring revenue stream.
Dial into a lowly rated tech stock
  • First half adjusted cash profit rises 141 per cent to US$1.66m on 51 per cent higher revenue of US$3.46m.
  • 100 per cent of revenue either recurring or repeat business.
  • Adjusted EPS of 1.6c (loss of 0.6c in first half of 2020).
  • Revenue visibility of US$7.2m for full-year.
  • Pipeline of $18m, of which US$5m is from existing customers.
  • Net cash of US$2.8m at 31 August 2021.

Aim-traded Pelatro (PTRO:39.5p), a company that makes its money by providing 19 large telecoms operators with precision marketing software, has delivered a step change in profitability and completed its move to an annual recurring revenue (ARR) model. This materially de-risks the investment case and means investors are far more likely to attribute a higher valuation to its growing income stream.

Pelatro uses 'big data' analytics (artificial intelligence, machine learning and other analytical techniques) to reveal patterns, trends, associations and behavioural traits of telecom subscribers. These insights enable mobile telecom operators to monetise their data, boost average revenue per user and their share of subscriber spend while also reducing churn rates.

In the first half, the group leveraged its position with one of its large Asian telcos, which has 230m subscribers, whereby Pelatro will now be paid a fixed amount each quarter for all its base products (including annual maintenance support and ad-hoc change requests), thus creating a valuable ARR stream. Incremental revenue of US$100,000 from the contract for the 2021 financial year is expected to ramp up to US$500,000 from 2022 onwards under the three-year agreement. In addition, the group won a recurring revenue campaign management contract with another Asian telco that should generate US$1.5m of revenue.

Existing customers have also been active in purchasing additional modules such as enterprise contract lifecycle management (automates and streamlines contract processes during key stages) and change requests, which combined will produce US$1.5m of revenue this year. Pelatro is benefiting from its share of client revenue gains above minimum contractual payments, too.

So, with the cost base relatively fixed, and revenue scaling up, the operational leverage of the business model is kicking in. First half cash profit surged by 141 per cent to $1.66m to deliver adjusted operating profit of US$0.76m (loss of US$0.11m in first half of 2020) on 51 per cent higher revenue of $3.46m. Pelatro’s full-year guidance points to annual revenue increasing 80 per cent to US$7.2m, an outcome that more than supports house broker Cenkos Securities’ full-year cash profit estimate of US$2.5m.

On this basis, Pelatro’s enterprise valuation of £16m equates to a modest three times forecast revenue, almost all of which will be recurring or repeat business. That’s an incredibly low rating for the sector as the average rating for software companies operating Software-as-a-Service models is around eight to 10 times ARR. Furthermore, Pelatro is only being valued on nine times cash profit estimates to enterprise valuation, almost half the rating of finnCap’s Tech 40 Spec Software index. The valuation discrepancy is even more anomalous when you consider that the directors are working on a “strong pipeline that is expected to secure recurring revenue and lead to attractive growth in 2022.”

Cenkos’ expectation of 25 per cent annual revenue growth next year looks conservative to me especially as the directors are leveraging Pelatro's position in 'big data' analytics by entering the mobile advertising space, a market that is worth $100bn and one projected to grow to $221bn by 2024.

The shares have traded sideways since my last article (‘Marketing re-rating potential, 21 June 2021), and I see material upside to my 100p target price. Strong buy.

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