Investors were clearly unnerved after Suresh Yezhuvath, the brother of the co-founder and chief executive Subash Menon of Aim-traded software company Pelatro (PTRO:78p) decided to sell down his 7 per cent stake in the company in early April. In fact, the share price has since retreated 20 per cent from a post-IPO high of 98p and is now back around my entry level when I suggested buying the shares ('Pelatro: Big data, big profits', Alpha Report, 4 February 2019).
It’s worth noting though that Mr Yezhuvath has no operational role in the business, nor is he employed by the company, and has been a passive shareholder since Pelatro was founded in 2013. Moreover, the £1.8m proceeds from the share sale will be used to fund his charitable work outside of the company, a notable cause. More important, Mr Menon, executive director Sudeesh Yezhuvath and their related parties (who between them control 40 per cent of the share capital) have committed not to dispose of any shares for a period of at least 12 months.
Equally important is this week’s news that the company has won another large contract, worth $1.5m (£1.18m), from a large telecoms company in Asia to implement Pelatro’s contextual marketing platform on a licence fee model. The company’s suite of five software solutions is now used by 18 telecom operators across 17 countries to boost their customer retention rates, average revenue per user and the share of spend from each customer.
Pelatro’s mViva software uses 'big data' analytics to study live streaming end-user customer data to reveal patterns, trends, associations and behavioural traits of telecom customers. These data-driven insights are then used in precision marketing so that telecom operators can be more customer-centric and not product-centric in their approach. Based on this analysis, relevant offers are then made to end users through a variety of channels such as SMS, email and apps.
Contract momentum is clearly building. When Pelatro announced a £700,000 award in late March with Advanced Info Services, a member of the Singtel Group and the largest mobile network operator in Thailand, this increased its revenue visibility to $6m for the 2019 financial year. That’s as much revenue as the company reported in 2018. The latest award improves visibility even higher still. Furthermore, Mr Menon notes that “we are benefiting from increasing levels of repeat business and cross-selling opportunities from existing clients, underpinning the directors’ confidence as we close the first half of the year.”
That confidence is based on Pelatro lifting annual revenue from $6.1m to $10.5m to double annual pre-tax profit to $6m this year, as analysts at house broker FinnCap predict. The projected eye-catching profit growth not only highlights the operational leverage of the business model, but also the high gross margin the company’s software commands on its sales.
On this basis, expect EPS of 15.4¢ (12p), implying that the shares are being rated on a PE ratio of 6.5, a massive discount to FinnCap’s Next50 group of technology companies, which trade on a forward PE ratio of 19. That huge valuation discrepancy to peers is not only unwarranted, but with contracts building and the bid pipeline strong, then an imminent rerating looks on the cards driven by the step change in Pelatro’s financial performance this year. Offering 50 per cent-plus upside to my 120p target price, Pelatro’s shares rate a buy.
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