Big Technologies is cash-generative but doesn’t come cheap

Big Technologies (BIG) sells monitoring tags to keep track of criminals. The criminal justice sector accounts for 98 per cent of revenue, with the remaining 2 per cent coming from the care sector, where the tags are used to monitor older people for safety purposes.

An eight-year national monitoring contract with the New Zealand Department of Correction signed in 2021 started to deliver revenue. This helped drive the group revenue increase of 33 per cent. Meanwhile, monthly recurring revenue was up 44 per cent to £4.6mn at the end of the year.

The most impressive thing about the business is its margins. The gross margin rose 1.7 percentage points to 72.5 per cent while the adjusted cash profit (Ebitda) margin was up 6 percentage points to 60.7 per cent. This profitability fed through to cash generation from operating activities – up 61 per cent to £25.7mn and a net cash position at the end of the year of £66.8mn.

This fast growth, profitable and cash-generative business doesn’t come cheap, though. It is currently trading on a FactSet consensus forward price/earnings ratio of 30. Although, recent weakness in the share price means this is down from 37 at the time of the last results.

The bullish case is that it is cheaper to monitor a prisoner than it is to have them incarcerated. This is presumably why Big Technologies can generate such high margins. However, high margins usually bring competition, and there is nothing about its technology that seems obviously exceptional. Nonetheless, the company has performed well since we initiated coverage, and given a 29 per cent discount to the consensus target price, we move to hold.

Last IC View: Sell, 224p, Sep 15 2022