Our columnist has run his expert eye over a cloud computing firm with plenty to be optimistic about.
Robust annual results to 30 June from £100 million cloud computing company Beeks Financial Cloud Group (LSE:BKS) and a strong first-quarter trading update has seen its stock rise 12% to 190p.
While that may put the trailing price/earnings (PE) multiple at over 60x and looking forward it may still be over 50x, in this case I temper my wariness of highly-rated growth stocks. Beeks Financial Cloud is growing from a small base and enjoys a strong reputation among clients.
It enables them to connect to a variety of futures and currency trading exchanges, plus cloud service providers, at a fraction of the cost of building their own networks and infrastructure. From a UK base, 18 data centres support global customers in main financial centres.
Admittedly, in technology you never know what might appear and trump a current leader, nor if a surprise problem could hurt its reputation. Yet when small technology companies get their marketing pitch right, they can leverage value impressively from a small base.
- Have you examined our award-winning stocks and shares ISA?
- Don't be shy, ask ii...how do I tidy up my investment portfolio?
While the last year or so has offered a beneficial environment overall, for small-cap growth plays, Beeks’ stock and underlying prospects appear to affirm my early hunches.
A potential parallel with Fidessa’s long-term success
When I first drew attention to Beeks as a long-term “buy” in early September 2018 at 80p, I drew a modest parallel with mid-cap Fidessa Group – as it was 20 years before, called “royalblue”. That company developed and sold software for portfolio managers and its stock rarely traded an historic price/earnings of 30 to 40x, versus earnings growth in a zero to 20% range. In early 2018 it was subject to a bid battle and taken over for £1.5 billion which affirmed a long-term buy/hold stance.
While I do not predict a repeat of such size, it was a sense of déjà vu that forced me to swallow valuation concern - to re-iterate buying Beeks at 94p in March 2019 and keeping hold of them at 113p in January 2020. As yet, this company is operating in a niche than mass market; but the fact its stock has doubled in a couple of years or so and its commercial story is strengthening, is notable as an all-round “momentum play”.
|Beeks Financial Cloud Group - financial summary|
|year end 30 Jun||2015||2016||2017||2018||2019||2020||2021|
|Turnover (£ million)||1.3||2.7||4.0||5.6||7.4||9.4||11.6|
|Operating margin (%)||34.5||8.4||-17.0||16.1||16.2||10.1||-4.3|
|Operating profit (£m)||0.5||0.2||-0.7||0.9||1.2||1.0||-0.5|
|Net profit (£m)||0.3||0.1||-0.8||0.8||1.1||0.6||1.3|
|EPS - reported (p)||0.6||0.3||-1.6||2.3||2.1||1.1||3.1|
|EPS - normalised (p)||0.6||0.5||-0.1||3.0||2.3||1.6||3.0|
|Price/earnings ratio (x)||63.3|
|Return on equity (%)||44.2||33.9||20.3||9.3||11.6|
|Return on total capital (%)||118||45.8||-756||17.0||18.6||7.6||10.5|
|Operating cashflow/share (p)||1.4||1.9||1.3||1.3||4.1||6.3||10.5|
|Capital expenditure/share (p)||0.6||1.6||1.7||4.3||5.5||6.9||12.9|
|Free cashflow/share (p)||0.8||0.3||-0.4||-3.0||1.4||-0.6||-2.4|
|Net debt (£m)||0.05||0.2||0.3||-2.1||-1.0||0.8||-1.9|
|Net assets (£m)||0.3||0.4||-0.4||4.8||5.6||6.7||13.8|
|Net assets per share (p)||0.6||0.8||-0.8||9.7||11.1||13.1||24.6|
|Source: historic Company REFS and company accounts|
Mixed numbers but overall strong, going forward
Annual revenue is up 24% to £11.6 million versus consensus for £12.2 million; however, three new contracts announced simultaneously will enable Beeks to surpass £15.5 million expected for the current year to June 2022.
Percentage growth is helped by a low financial base and the April 2020 acquisition of Velocimetrics Ltd. A £2.4 million depreciation charge on “computer equipment” at the heart of the business, meant 17% growth in gross profit to £5.3 million became a £0.5 million operating loss. This compared with nearly £1 million operating profit in the previous year.
Not surprisingly, management strips out this charge to highlight underlying EBITDA (close to operating profit, subtracting goodwill) up 24% to £4.1 million and underlying earnings per share (EPS) up 22% to 3.0p.
- Don’t be shy, ask ii...when should I sell and lock in profits?
- ii Super 60 investments: quality options for your portfolio, rigorously selected by our impartial experts
Net profit was boosted to £1.6 million by a £2 million “gain on revaluation of contingent consideration” and a £0.3 million tax credit. This revaluation relates to a downwards reassessment of the final payment for acquiring Velocimetrics because its minimum earn-out revenue target was not met.
While the semblance of failing promptly to meet an earn-out does not reflect well, Beeks’ annual financial review says: “the deal was structured in a way that missing the revenue targets was binary and that not achieving the targets would mean a nil pay-out to the ex-owners”. Velocimetrics has now been fully integrated and re-branded as Beeks Analytics.
Overall, monthly committed recurring revenue rose 23% to £13.8 million and 91% of total revenue now derives from financial institutions. The technology would therefore need a big let-down or be surpassed by a new rival, for Beeks to lose this image of quality.
The late Jim Slater, who re-invented himself as a growth stock guru in the 1990s, used to stress “something new” in the story.
Beeks has just recently launched Proximity Cloud – a pre-installed, physical trading environment which is “a transformative solution for capital markets and financial services”. There is also Analytics as a Service “which we consider to be an industry-first, monitoring solution”.
Dividends justifiably dropped in favour of re-investment
The cash flow statement shows a 32% advance in operating cash flow to £4.0 million which became a 67% advance to £5.5 million after working capital movements.
With £6.6 million going out on investment however, it needed £5.2 million proceeds from an equity issue last April at 115p to support the situation – such that year-end cash (equivalents) rose from £1.4 million to £3.4 million.
Following the equity raise, it was decided to abandon the modest dividend pay-out – and prioritise re-investment. While there is an argument, dividends at any stage reflect good financial discipline and shareholder priority, I could not really understand a small-cap like this paying out, given it shows some high double-digit percentages for return on equity (see table).
Admittedly, the dynamics affecting Beeks’ net profit can skew this figure around, but £1.6 million against £13.8 million net assets approaches 12% for latest return on equity. Respecting £1.5 million debt, return on total capital was over 10%.
Pipeline of opportunities stands at a record level
Management cites Covid having some impact, meaning they will take time to convert, however the business overall looks to be growing through various challenges.
The working team has grown from 65 to 80 over the financial year, primarily in sales and product development which augurs well for growth. Another risk factor in a people business is key individuals moving on; yet Beeks currently looks more likely to attract brains.
Three contracts worth over $5 million (£2.2 million) have been won in the new financial year: a first for the newly-launched Proximity Cloud offering at $1.0 million and with “a substantial pipeline continuing to build”; a $1.1 million multi-year analytics deal with a leading Asian bank; and a $2.7 million deal for private cloud development with a European bank.
They nudge annualised monthly recurring revenue up to £15.0 million; also, there is £1.3 million revenue from non-recurring product related bookings during the financial year to date. Cash flow arising from higher revenue due this financial year will be largely re-invested in Proximity Cloud, to capitalise on sales opportunities.
Valuation suggests a 'hold' stance but long-term 'buy' feels appropriate
It would be pushing luck to assume that the frothy environment that has supported small-cap growth stocks especially, can persist, even if inflation leads to interest rate rises.
In such a scenario, a stock like Beeks is liable to fall, even if its narrative and numbers continue to strengthen.
But on say a long-term view, the progress announced yesterday underlines how the investment rationale remains intact; hence, over two years I would expect another step-change in value even if markets hit turbulence. My stance therefore is: Buy.
Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.
We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.
Please note that our article on this investment should not be considered to be a regular publication.
Details of all recommendations issued by ii during the previous 12-month period can be found here.
ii adheres to a strict code of conduct. Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.
In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.