Interactive Investor

Stockwatch: this AIM stock has scope to multiply in value again

28th September 2021 10:19

Edmond Jackson from interactive investor

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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.  

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
Dividend/share (p) 0.0 0.0 0.0 0.30 0.35 0.35 0.0
Cash (£m) 0.07 0.03 0.02 2.9 2.3 1.4 3.4
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. 

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.

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