Aptitude justifies is pricy valuation

Aptitude Software (APTD) makes software that helps companies with finance and subscription management. It has a product called eSuite which is used by media companies, and everything associated with subscription products, including identity management, automated billing and payment processing. Then there is a recently launched finance management platform Fynapse which is integrated into Microsoft Dynamic 265 Finance and can operate on the Azure Cloud.

As a software business a lot of its revenue is repeat. Last year, out of the £74.4mn of group revenue, £50.5mn was recurring and £23.9mn was non-recurring, up 26 per cent and 24 per cent respectively.

Despite the rising revenue, statutory operating profit fell from £6.5mn to £3.7mn. This was reflected in the operating margin which slipped from 17 per cent to 10 per cent because of investment in Fynapse. Also, some of the clients aren’t on inflation-linked contracts so rising costs couldn’t be passed on.

The rule of thumb is that good software businesses have a combined revenue growth and cash profit margin of 40 per cent. Last year, revenue growth was 25 per cent and cash profit margin was 10 per cent, so it is not far off and management expected margins to improve as more revenue comes from high margin subscriptions. 

The brokers clearly think it is a high-quality business given FactSet consensus has it trading on a one-year forward price to earnings ratio of 27.2. There is likely to be a headwind for subscription services next year which will slow demand for Aptitude's software. But last year wasn’t ideal economically and the company still delivered. It’s priced expensively but looks fair value given the quality of the business. Hold.  

Last IC View: Buy, 419p, 26 Mar 2019