When considering the investment case for an Aim-traded technology company, some initial questions come to mind. Are sales growing? Is there strong revenue visibility? Is it profitable? Are there sufficient resources to sustain future growth? Will it ever pay a dividend? Many contenders would fail to meet all these criteria. But 'big data' specialist First Derivatives (FDP) can answer with a resounding ‘yes’ to all of the above. Moreover, management cites industry analysts that suggests a huge addressable market for the group’s software – branded as ‘Kx’ – of more than $60bn (£45bn) per year.
Earning forecast upgrades
Good revenue diversification
Steady dividend payments
Huge potential market
Staffing issue
High rating
The software division, which accounts for three-fifths of sales, comprises two main segments: FinTech (financial technology) and MarTech (marketing technology). FinTech serves clients including financial regulators, stock exchanges and investment banks. It captures and analyses large volumes of data, helping with risk management, balance sheet optimisation and compliance. Demand for this platform has grown consistently with software sales up 31 per cent in the first half to £31.2 driving overall FinTech sales, which include non-software consultancy work, up 18 per cent to £66.8m. Sales are enhanced by original equipment manufacturer (OEM) arrangements with the likes of Thomson Reuters.
MarTech, meanwhile, offers customers “actionable insights” through the analysis of various data sources. Revenues here jumped 30 per cent to £18.3m in the first half. Future trading should be buoyed by the launch of an updated predictive analytics tool (MRP Prelytix 2.0); already, clients using the tool have a 197 per cent higher chance of converting business leads.
The group is also working to diversify software revenues, taking Kx into new areas such as sensor analytics, commercial space, healthcare and telecoms. First-half sales from these markets were small at £2.7m, but this represents an impressive 74 per cent uplift year on year. And significant contract wins included a Red Bull Racing deal for sensor analytics, agreements with NASA and the European Space Agency, and a healthcare partnership with BrainwaveBank. More recently, First Derivatives announced its purchase of Telconomics, which provides telco analytics software, for up to €2.5m (£2.2m). This should enhance earnings in its first full year. First Derivatives has also recently announced a “major investment” in machine learning for the Kx platform, which could expand future opportunities.
With such a range of target markets, one might expect escalating costs. But the group’s software products all stem from the same technology platform, sharing one research and development team. This brings “significant economies of scale” and the prospect of hand-in-hand growth of margins and sales. All in all, software revenues rose by 32 per cent to £52.2m, with recurring revenues up 44 per cent to £19.6m – providing greater sales visibility going forwards.
Aside from software, the group generates a further two-fifths of sales from managed services and consulting work. Revenues here were dampened by the reassignment of some data scientists to meet rising demand for Kx implementations. But growth was still decent at 8 per cent, with sales reaching £35.6m. And bosses have employed nearly 400 graduates since January to ensure all teams are fully resourced. Two multi-year contracts in the respective period – one with a New York-based investment bank, the other with a major European financial institution – reflect the division’s strong market opportunity.
FIRST DERIVATIVES (FDP) | ||||
ORD PRICE: | 3,690p | MARKET VALUE: | £937m | |
TOUCH: | 3,690-3,723p | 12-MONTH HIGH: | 3,799p | LOW: 2,065p |
FW DIVIDEND YIELD: | 0.6% | FW PE RATIO: | 91 | |
NET ASSET VALUE: | 543p | NET DEBT: | 10% |
Year to 28 Feb | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
2015 | 83.2 | 17.5 | 70.6 | 14 |
2016 | 117 | 10.4 | 31.3 | 17 |
2017 | 152 | 12.5 | 34.4 | 20 |
2018** | 175 | 12.9 | 34.2 | 22 |
2019** | 192 | 15.4 | 40.6 | 24 |
% change | +9 | +19 | +19 | +8 |
Normal market size: | 150 | |||
Matched bargain trading | ||||
Beta: | -0.03 | |||
*Includes intangible assets of £158m, or 625p a share**Investec forecasts £1=$1.34 £1=€1.13 |