Buy into Ideagen's growth potential

The group targets £100m in run-rate revenues by 2022 – more than double last year's sales – and recurring revenues representing at least 75 per cent of the total. Management reckons that around £70m of sales will stem from organic growth, and £30m from acquisitions. It aims for cash-profit margins of 30 per cent, with operating cash collection constituting more than 90 per cent of cash profits.

Failing to meet these ambitious goals would cause considerable disappointment. But the full-year results to April 2019 suggest that it’s on the right track. Recurring revenues represented 67 per cent of the top line, up from 62 per cent. Fuelling this uplift – and reflecting Ideagen’s shift towards a software-as-a-service model – so-called ‘SaaS’ revenues rose by 63 per cent to £13.7m. True, the less desirable consequence of such a shift is that the organic growth rate dipped from 11 per cent to 8 per cent. Still, this setback is somewhat mitigated by the advantage of better visibility. More than three-quarters of its clients are international, with 28 per cent in the US.

As a highly acquisitive business, Ideagen is vulnerable to the risk of unsuccessful or complicated integration processes. It purchased three companies – each of which helped to scale and diversify its customer base. Among these, Morgan Kai – which was bought last September for £20.5m, and which offers a leading internal audit management product – doubled the size of Ideagen’s existing internal audit business, while also offering geographical diversification. Post-period-end, in June 2019, Ideagen bought Redland – a fast-growing and profitable regulation technology SaaS business, focusing on the financial services industry – for £15.8m.

Evidently, such deals haven’t come cheap. The latter is being funded by an extended £28m revolving credit facility with NatWest, spanning three years. Ideagen also raised £20m last September, via an oversubscribed placing of 14m shares (6.9 per cent of its issued share capital) at 142p each – a slight discount to the prior day’s close. Further placings could, feasibly, ensue.