Stockwatch: This AIM share could be a new growth play

by from interactive investor |

This is a higher-risk small-cap stock, but a major paradigm shift in its industry is underway and companies analyst Edmond Jackson believes this business has bags of potential.

Though it's hard currently to find emerging growth stocks of calibre, at a fair price, latest prelims from this £43 million AIM-listed provider of cloud services for financial traders twig my attention.  

Beeks Financial Cloud Group reminds me of the now £1.5 billion Mid 250-listed Fidessa Group 20 years or so ago when called "royablue".  It developed and sold software for both the buy and sell side, and among its long-term shareholders was fund management group Lindsell Train, who clearly liked the IT so much they continue to own a 15% stake worth £225 million.  

Thus, a conviction holding by an "establishment" fund manager who normally avoids unnecessary risk, despite this stock rarely selling under 30-40 times earnings, a premium to its underlying earnings growth.  Even in 2018 Fidessa has averaged an annualised historic price/earnings (PE) of 37.7 times (if nearer 30 times in recent past years) versus earnings growth bumping along in a zero to 20% range annually. 

Fidessa shares have even doubled in the last 12 months despite earnings growth only of about 9% projected for 2018.  I've come to regard this as a curiosity of a specialist financial stock with a firm fan base, presumably among business clients who are also shareholders.  

Now, Beeks has appeared in a similar vein albeit focused on the trend to "cloud" services, which ought to have a lot of mileage as trading firms embrace this format and Beeks' offering is market leader.  Given its small financial base as yet, a miniscule tax charge and depreciation/flotation costs splitting headline versus normalised profit, it’s possible to reckon the PE on latest results to end-June 2018 is about 24 times upwards, and forecasts seem elusive.  

Net assets at end-June constituted 60% the remaining cash from last November's £7 million flotation/placing at 50p a share, otherwise some £2 million property/plant/equipment, so Beeks' valuation is based on earnings. 

 'Glass half empty' versus 'half full' views 

While the PE looks up with events (though like Fidessa's always has) and £43 million market cap approaches 8 times annual revenue, risk is on the upside long-term if management can roll out its products extensively, given its gross margin has risen from 39% to 53% June to June, and the normalised operating margin from about 14% to 35%.  

Thus, Beeks' chart has seen a jagged-upwards trend in its nine-month history as traders grapple whether this stock typifies small cap exotica in a mature bull market, or a long-term emerging growth play.  

As with royalblue/Fidessa, this is a specialist financial software company delivering a state-of-the-art platform attuned to modern investor/trader needs.  Cloud computing uses remote servers hosted on the internet to store, manage and process data – witness on a personal level the proliferation of "Chromebook" computers and telecom firms offering cloud storage within your phone/broadband package.  A major paradigm shift in data management is underway.

Beeks proclaims a unique offering; a self-service portal enabling clients to build their own infrastructure; thus "a rapidly deployed, secure and scalable cloud environment for traders...a major milestone and we believe gives the group competitive advantage in terms of deployment speeds against our peers."

The glass half-empty rejoinder would be, something else more attractive may come along in due course, or what if there's some kind of failure with such a platform that compromises clients and generates bad publicity?  

Yet trading firms will know they need to take steps in the "cloud" direction, similarly as individuals realise we really have no excuse nowadays if photos/documents are lost because a hard drive has crashed, or a laptop is stolen.  

Beeks is growing its client base nicely from 156 to 192, June to June, the top 10 clients accounting for 29% of revenues and the largest at 5%.  Our addressable market is extensive with up to 20,000 financial institutions as potential customers.”  On a glass half-full basis, prospective clients may see the growth as an endorsement, and dilly-dallying involve costs. Further services will be added to the platform, e.g. data feeds from additional trading venues, cloud data recovery and more.  

So, despite an inevitable risk of rivals and new technologies, Beeks' prospects bode well. The new financial year is said seeing continued momentum amid a near-term objective for cloud hosting roll-out and a strategic focus on Asia.

Beeks Financial Cloud Group        
year ended 30 Jun 2015 2016 2017 2018
         
Turnover (£ million) 1.34 2.68 3.97 5.58
IFRS3 pre-tax profit (£m) 0.42 0.15 -0.76 0.75
Normalised pre-tax profit (£m) 0.42 0.27 -0.03 1.79
Operating margin (%) 31.8 10.6 17.0 30.2
IFRS3 earnings/share (p) 0.62 0.29 -1.55 2.37
Normalised earnings/share (p) 0.62 0.52 0.95 3.52
Earnings per share growth (%)     82.7 271
Price/earnings multiple (x)       24.1
Cash flow/share (p) 1.26 1.71 1.08  
Net tangible assets per share (p)       7.87

Source: Company REFS                Past performance is not a guide to future performance

Extending across most financial asset classes

Beeks' present area of focus in automated trading is foreign exchange and financial futures products, although "we have now entered into equities, fixed income and cryptocurrency markets."  The latter may explain why some UK retail brokers' share trading platforms query clients' risk preference before permitting you to buy Beeks equity; although it is not exposed directly to the risks of crypto volatility, instead whether crypto might get dealt a credibility blow that sees a general reduction in trading.  

Yet there has recently been a major de-rating in bitcoin without this becoming existential.

"The cryptocurrency markets continue to evolve at break-neck speed and we are seeing a maturing in exchanges' hosting and connectivity requirements.  [Together with rising solutions' needs in the foreign exchange market] we anticipate these factors as being continued drivers for demand for our service in the year ahead."

 

Thus:

"We now have a foothold in all asset classes of note, meaning we can enter into contract discussions with any financial institution... we are now one of only very few businesses with this breadth globally and are unique in delivering these services via the cloud..."

 
Recent initiatives have included establishing connectivity and cloud compute capability in the Singapore Exchange, Asia's leading multi-asset exchange; a new data centre in New Jersey as a means of WAN (wide area network) connectivity into the US, enabling a wide variety of internet service providers to extend Beeks' WAN presence and other offerings. Locations are also being assessed for further expansion in Asia and a first deployment in South America.

Expect ongoing share price volatility

A challenge with this kind of stock is the impossibility of setting a target fair value; the stock price also subject to sentiment in a relatively tight market.  "Normalised" versus reported earnings will continue to gap, and the appropriate PE be subjective.  A ballpark estimate is to target earnings per share of about 5p within the next two years, and if the narrative remains consistently strong then a PE around 30 times i.e. a rough target of 150p.  

One way to approach this - especially if you are wary how small caps are high risk if liquidity preference kicks in (say Argentina, Turkey and Italy create debt-havoc) - is to broadly buy weakness.  

Beeks' chart already shows three material drops of 20% or more in its nine months listed history. More jolts are likely, especially if markets enter turmoil.  That said, Beeks' narrative may go from strength to strength.  There’s no margin of safety, hence: Long-term speculative buy.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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