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Pelatro’s bumper contract win and sales pipeline

Aim-traded software company is well placed to convert its pipeline of new business.
December 2, 2019

Aim-traded Pelatro (PTRO:40p) has won a massive five-year contract with a large [undisclosed] international telecoms customer to supply its mViva precision marketing software product.

The software uses 'big data' analytics to study live streaming end-user customer data to reveal patterns, trends, associations and behavioural traits of telecoms customers. These data-driven insights are then used in precision marketing so that telecom operators can be more customer-centric in their approach and make relevant offers to end users, thus boosting retention rates, average revenue per user and share of spend from customers.

The latest contract is worth $10m-$12m (£7.8m-£9.3m) in revenue to Pelatro over an initial five-year period, of which 80 per cent will be recognised as monthly recurring revenue and the balance as gain share. It will take six months to implement, so around $1m of revenue will be recognised in 2020. Pelatro has been awarded contracts with a total value of $16m to $18m in 2019, an all-time high.

As pure licence contracts these contracts would have generated current-year revenue of $7m for the company, but the directors took the strategic decision to shift away from the upfront licence model, although they could have insisted on that fee structure. The reason for doing so is that a repeat and recurring revenue stream model delivers a higher-quality, sustainable and visible income stream for the longer term. Also, the recurring revenue model generates steady cash flow, a higher income stream and reduces debtor days.

For instance, a typical deal (such as with Bahamas Telecom) could be worth just $0.5m as a licence, but produce $1.2m over a four-year contract period. I would also flag up that although Pelatro is a relative newcomer in this market, the company has won competitive tenders against major suppliers such as IBM, SAS and Oracle in the developing regions it targets, highlighting the value of its offering.

The other point worth noting is that if Pelatro had taken upfront licence fees then revenue this year would have been $13.5m, or 28 per cent ahead of house broker finnCap’s annual forecast of $10.5m. The fact that the board has shifted its business model towards generating a higher quality revenue stream means that 2019 revenue will rise slightly from $6.1m to $6.5m to deliver pre-tax profit of $1.5m and earnings per share of 4.1¢ (3.2p).

But the company will be starting 2020 with $4m recurring revenue already secured (a mix of support and maintenance, managed services and gain share contracts), and an effective annual run-rate of $5m given the massive new contract announced will take six months to set up secured. By comparison, Pelatro only had recurring revenue of $1.5m at the start of 2019. What this also means is that half of finnCap’s 2020 revenue estimate of $8m is already fully covered, adding weight to expectations that Pelatro’s pre-tax profits can rebound to $2.2m and produce EPS of 5.6¢ (4.3p) next year. Bearing this in mind, the directors confirmed this morning that the pipeline of new business is worth $15m, of which $5m is with existing customers and $10m with potential new ones.

The bottom line is that I can see material upside in the share price of the £13m market capitalisation company following the unwarranted 30 per cent de-rating since the half-year results (‘Pelatro’s second half weighting spooks investors’, 26 September 2019). Indeed, based on a 2020 target price/earnings (PE) ratio of 20, I have a target price of 85p. The massively oversold shares – 14-day relative strength indicator (RSI) is in the mid-teens – rate a strong recovery buy.

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