Investors were clearly unnerved by today’s half-year results from Aim-traded software company Pelatro (PTRO:55p) after the company guided shareholders to expect a heavy second-half weighting to this year’s results. The shares lost over a quarter of their value, dropping below my recommended buy-in price of 78p ('Pelatro: Big data, big profits', 4 Feb 2019).
I feel they have grossly overreacted as the board has not changed its sales or profit guidance and still expects to deliver the step change in profits that house broker FinnCap is predicting this year. Analysts are forecasting full-year revenue of $10.5m (£8.5m), up from $6.1m in 2018, to underpin a rise in annual pre-tax profits from $3.1m to $5.7m and a 50 per cent-plus hike in earnings per share (EPS) to 15.4¢. Moreover, both chief executive Subash Menon and finance director Nic Hellyer gave me an insight into how the company’s contract pipeline is progressing, and one that is very supportive of hitting analysts' forecasts.
Big data analytics drives contract momentum
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. The offering of five software solutions offers tangible benefits to clients, boosting their retention rates, average revenue per user and share of spend from customers, so it’s not surprising that Pelatro is winning new business.
In the first half, five customers in the Asia Pacific region signed contracts to use Pelatro’s contextual marketing platform including Advanced Info Service, the largest mobile network operator in Thailand, and a member of the Singtel Group, which has 1bn subscribers across its global operations. The AIS acquisition highlights how Pelatro is winning business in other territories from large telecom operators as it now serves two of the seven markets of the Singtel Group. Pelatro now has 18 telecom operators across 17 countries. The company is also monetising the data it analyses; Tele2, the Central Asian subsidiary of a Western European telco, which has more than 6m customers, signed up for the company’s data monetisation platform in the first half.
It’s worth noting that of the aforementioned six new contracts, four are recurring in nature and have a contract value of $5.4m (£4.4m) over the next three years. The other two contracts are licences which will contribute $1.9m of revenue in 2019. Moreover, of the $2.7m revenue reported in the first half, three-quarters was repeat business from existing customers (change requests, revenue gain share contracts, managed services, and support), thus highlighting the shift towards an annuity-style business model. In the first half of 2018, recurring revenue only accounted for a third of the total.
So why the share price drop?
The reason why the share price was marked down is because Pelatro needs to book $7.8m of revenue in the second half to hit house broker FinnCap’s full-year forecast of $10.5m, up from $6.1m in 2018.
The second-half weighting clearly increases execution risk. That’s because having ramped up investment in the business, mainly additional headcount, Pelatro’s profits are operationally geared to rising sales. To put this into perspective, and after factoring in a slight decline in operating expenses in the second half as the directors forecast, then first-half adjusted operating profit of $200,000 on revenue of $2.7m surges to a second-half operating profit of $5.6m on revenue of $7.8m, given that a high proportion of incremental revenue will be converted into profit on a relatively fixed cost base.
Bearing this in mind, the $7.8m second-half sales target, Pelatro has booked a further $2.5m of revenue in the third quarter, and has visibility over $1.1m of additional revenue. This leaves $4.2m of revenue still to book from a near-term pipeline worth $9.2m, split $3.7m across three new customers and $5.5m from eight or nine existing customers. Mr Menon told me that all of these existing customers are repeat customers already, which clearly improves the chances of landing new contract work with them. It also explains why the directors remain confident that they can book the $4.2m of outstanding revenue needed to deliver on FinnCap’s full-year forecast. If they do then the shares are simply too lowly rated on a price/earnings (PE) ratio of 4.5.
Furthermore, around 50 per cent of Pelatro’s revenue is repeat business, and the directors are targeting contracts with more than 20 new customers worth $9.2m in additional sales opportunities, excluding the $9.2m near-term pipeline. Conversion of only a small proportion of that pipeline, in addition to the growing repeat revenue stream, would set the company up for another year of growth in 2020. The directors’ optimism looks justified. Buy.
