Eckoh - buy into a secure structural growth story

We’ve identified one such company, Eckoh (ECK). Its shares' current forward rating of 25 times forecast 2019 earnings looks justified by, amongst other things, the growth prospects of e-commerce and its attendant cyber security market, especially in the US.

Eckoh provides secure payment technology aimed at protecting organisations when transactions are made with a card that's not physically present, for example over the phone, web or mobile – the type of transaction that most of us now complete as a matter of course. The group operates in both the UK and US. Its HALOH product suite includes CallGuard, DataGuard and EckohPAY solutions. All these businesses are tapping into a structural growth story.

According to trade association Payments UK, the number of debit card payments rose by 10 per cent in 2015, exceeding 10bn payments for the first time, while 9 per cent growth in credit and charge card usage saw 2.5bn of these payments. Debit cards are forecast to overtake cash as the most frequently used method of payment in 2021. In 2025, there will be 17.3bn debit card payments completed and 3.6bn credit card payments. The opportunity in the US is even more exciting, with the market estimated to be about six times the size of that of the UK but significantly less mature, although the adoption of chip and pin technology means this is fast changing.

Eckoh reported an impressive 30 per cent increase in revenue to £29.1m from £22.5m for its financial year ended 31 March. This was its fourth successive year of double-digit top-line growth. Revenue from the UK increased by 5 per cent, but in the US it soared by 145 per cent and now represents a third of the group's total revenues.

The US growth figure, which includes contributions from acquisitions, actually understates last year's order boom due to Eckoh's transition from 'capex pricing' to 'opex pricing'. Under the former model, the group receives a large initial payment and then small annual increments, while under the latter revenue is recognised across the term of the contract. The new model means higher recurring revenues (up from 70 per cent to 76 per cent of last year's group total), which investors tend to put a higher value on. However, opex pricing meant only a fifth of the $8.3m US secure payment contract value won in the year was recognised. US contract wins themselves were up fivefold by value. Key to the group's success at boosting contract wins has been its focus on higher-value customers, with the number of wins in the year static at nine but the average contract size soaring from $173,000 to $918,000.