A recurring theme for Iomart

Despite being in line with its April trading update, Iomart’s (IOM) modest sales decline and a 16 per cent fall in operating profit in the year to 31 March were never likely to play well with the market. But the full-year figures demonstrate why we have previously highlighted solid levels of cash conversion and recurring revenues as the mainstays of the investment case.

Reported profits were held in check largely because of a £1.8m lower gain on revaluing the contingent considerations for historic acquisitions. The prior year’s purchases of Memset and ServerChoice also drove a £1.3m increase in the depreciation charge, and served to bump-up the admin bill through the period.

Wider commercial disruption fed through to a one-third drop in non-recurring revenues to £11.7m. This was perhaps predictable, even when set against the accelerated digital transition under way. But the fall-away in new business was largely mitigated by a 5 per cent increase in return custom to £100m.

Around 90 per cent of sales are linked to repeat business, doubly significant when you have over 10,000 customers in your core cloud services segment. That provides stability against an uncertain commercial backdrop.

The apparent stickiness of the cloud computing group’s commercial offering has shown its worth in the pandemic year, but the breadth of its digital services has also been widening on the back of M&A. Hybrid cloud, security, the digital workplace and connectivity are growth areas of the digital sphere that are being targeted by Iomart, and it seems that management is willing to pay higher multiples for the right bolt-on acquisitions.

Cash generation remains impressive, with the conversion rate coming an at 106 per cent of adjusted cash profits (Ebitda), arguably another plus linked to a stable customer base. It meant that the year-end cash position totalled £23m, rising from £15.5m a year earlier. Meanwhile, net debt contracted by 5 per cent to £55m, leaving it at 1.3 times adjusted cash profits.

Shareholder returns have ratcheted-up again. Directors are proposing to pay a final dividend of 4.5p per share, taking the total for FY2021 to 7.1p, equivalent to the maximum pay-out ratio of 50 per cent of adjusted earnings per share.

The first two months of the new financial year have performed in line with management expectations, and the group is mulling over a handful of potential acquisition targets to enhance the most profitable segments of the business. The shares have lost a fifth of their value over the past 12 months, leaving them at a relatively undemanding 18 times broker Shore Capital’s adjusted EPS forecast for FY2022. Buy.

Last IC View: Buy, 352p, 24 June 2020