Iomart's cash generation comes cheap

Iomart Group (US:IOM) is currently switching its focus from self-managed infrastructure to cloud managed services; the problem with this shift is that self-managed infrastructure (SMI) is higher margin: in that business, as the name implies, customers are responsible for upkeep, which means fewer costs for Iomart.

But cloud managed services are performing well. Recurring revenue rose 15 per cent to £64mn, driven by a return to organic growth, the acquisition of Concepta and the passing through of energy price rises. Meanwhile, the 7 per cent growth in SMI mainly came from energy price rises rather than from customer acquisitions.

The acquisition of Concepta, with its lower margin managed services business, diluted the group's overall profitability. The adjusted cash profit (Ebitda) margin fell 5.6 percentage points to 31.3 per cent. This is still high, but as the revenue shift changes further broker Peel Hunt believes that margins will resemble those of a consulting business.

The good thing for Iomart is that over 90 per cent of its revenue is recurring and its cash conversion ratio is 94 per cent. The share price is well off its peak, meaning Peel Hunt currently has it trading on a forward free cash flow yield of 15 per cent.

The margin may be falling and overall organic revenue growth fairly non-existent, but the order book growth for the cloud managed services business was in the double digits. Companies are only going to need more cloud services and the cash being pumped out means Iomart is still interesting for investors. Hold. 

Last IC View: Hold, 169p, 14 Jun 2022