IDOX grows public sector software revenues

Specialist software provider Idox (IDOX) depends on interest from large engineering firms and local governments to sell its products. Historically, neither client base is known for expanding capital expenditure during economic downturns – which makes the company’s revenue growth in the six months to 30 April even more noteworthy. 

It would be a stretch to characterise Idox as a defensive stock, but it has certainly benefitted from an explicit pledge by the UK government to invest more heavily in IT infrastructure. The public-sector software division, which now accounts for 89 per cent of half-year turnover, continues to generate sales from an accelerated digital transformation, although the engineering information management business appears to be more exposed to wider economic uncertainties.

The change in the business mix reflects the sale of the content business during FY 2021. Management decided to offload this segment to focus more fully on the software offering. The net cash inflow of £10.7mn was reinvested in acquisitions through the second half of the year.

Although the company’s end markets have been the subject of much recent discussion, there has been little legislative action to shore them up. Management highlights the government’s proposed planning reforms, many of which yet to come to fruition, as missed opportunities. However, the public purse has remained resilient even as macro conditions deteriorate. Whether this situation will be maintained if we slip into recession is difficult to gauge, but the company believes that the ongoing need to realise corporate cost savings via technology will keep customers flowing in.

The operating profit margin has been maintained at 13 per cent, although perhaps a more encouraging metric is the 13 per cent increase in recurring revenue, which now accounts for 60 per cent of the top line. The shares change hands at 24 times FactSet earnings consensus. Not an unusually stretched multiple for a growing tech stock, but valuations are becoming more realistic by the day. Hold.

Last IC view: Hold, 67p, 27 Jan 2022