Interactive Investor

Stockwatch: a small-cap software share I’d buy

A direct sales approach is bearing fruit for this stock following a recent slew of new contracts. Analyst Edmond Jackson believes the story could gain traction.

9th January 2024 11:57

Edmond Jackson from interactive investor

Four years ago, I drew attention to a £77 million AIM-listed niche software stock called D4T4, which I rated a “buy” after it had drifted from 270p to 190p. It had nearly doubled to 372p by August 2021, but I suspect was helped by ultra-low interest rates and stock speculation during the pandemic.  

Last November heralded a name-change to Celebrus Technologies (LSE:CLBS) – after the eponymous Newbury-based data capture and analysis firm that was acquired nine years ago. Helping clients better understand their customers, this introduced big names such as Citibank, HSBC and Qantas. 

Call it “Big Brother” but this kind of personal behaviour/preferences tracking is a sign of modern marketing times, where demand for data is unlikely to be affected by shifts in inflation and interest rates. 

Mind, this company has been around the block. Going back 25 years it was called IS Solutions, and its share price soared in the 2000 tech-stock bubble from around 50p to 280p before plummeting to just 6p. It then embarked on a steady climb back. A July 2016 name-change reflected a strategic shift towards data. 

On key financials, the table for the last nine years shows revenue and profit more than doubled, albeit from a low base and trending sideways-volatile since 2018. 

Scope for further recovery since last autumn 

Perhaps as holders became disillusioned about material growth showing through, and sentiment shifted against small-caps, the stock fell from near 330p a year ago to 155p last October, when the chart put in a semblance of a “double bottom”. 

I am inclined not to lose hope given Celebrus is a data specialist meeting essential needs of corporate clients. There is also a relatively new CEO since October 2021, who joined in 2018 as vice-president of North America and has invigorated a direct sales approach (versus an historic partner-led model) which is currently bearing results. 

Frustratingly, after I had drafted today’s article, Celebrus yesterday declared a slew of three-year contracts – with a leading European retailer, an existing global top 10 banking customer, a UK bank also US healthcare – two of which are in the multi-million revenue league. The stock rose 10% to 236p. 

Mind, this company’s revenue is already weighted to its second half-year to 31 March, and the update affirmed full-year market expectations, implying £4.2 million net profit and normalised earnings per share (EPS) of 10.3p, rather than guiding higher. The near-term price/earnings (PE) ratio is therefore 23x and, assuming consensus for a 3.25p total dividend, a near 1.4% yield. 

You could say that Celebrus has joined the “everything rally” since last autumn on hopes for interest rate cuts, and this announcement, broadly prices in the prospects.    

I still find the situation notable given this is a £93 million company potentially able to leverage greater revenue from the CEO’s initiatives. Over 2017 to 2020, the operating margin was in the order of 20% or better, so it would be good to see if that level can be recovered compared with near 10% in the March 2023 year. 

Celebrus Technologies - financial summary
Year ending 31 Mar

 2014201520162017201820192020202120222023
Turnover (£ million)9.812.818.617.718.425.221.722.824.521.4
Operating margin (%)9.85.317.724.318.225.122.713.47.29.6
Operating profit (£m)1.00.73.34.33.46.34.93.11.82.1
Net profit (£m)0.80.52.93.92.95.84.52.81.72.1
Reported earnings/share (p)3.11.97.610.07.314.511.06.84.15.2
Normalised earnings/share (p)3.11.97.610.07.314.511.06.85.06.3
Return on capital (%)  20.423.116.425.316.79.85.47.3
Operating cashflow/share (p)2.9-0.816.56.11.822.65.98.1-1.633.6
Capex/share (p)0.50.60.90.42.11.11.10.61.11.3
Free cashflow/share (p)2.4-1.415.65.7-0.321.54.87.5-2.732.3
Dividend per share (p)1.60.62.02.32.53.02.72.82.93.0
Covered by earnings (x)1.93.43.84.52.94.84.12.41.41.7
Net assets per share (p)21.333.640.046.252.963.372.776.879.368.7

Source: historic company REFS and company accounts

Curiosities in the interim results

In the first half to 30 September, revenue leapt 60% to £13.0 million but substantially reflected lower-margin hardware sales; a like-for-like £1.3 million loss becoming a £0.2 million adjusted pre-tax profit. 

Management said “the high visibility of opportunities expected to close in the second half underpin the board’s confidence” hence yesterday’s contracts were not unexpected. 

The story involves continued investment in sales and marketing and also potential acquisitions. The company said: “As we began to sell more directly to customers, we soon realised there would be more to deliver in data activation.” Celebrus had £14.7 million cash last September, albeit down from £26.2 million a year before, with some sharp moves in working capital chiefly responsible. 

A huge leap in balance sheet receivables looked odd. Over just six months they jumped from £7.6 million to £17.3 million with trade receivables constituting £13.9 million.  

Management explained the jump in trade receivables from £1.8 million like-for-like, as resulting mainly from contract wins and invoicing – as if they were yet to be paid for.  

Reassuringly, “the group has no overdue receivables of any significant size, and no bad debt losses have been recorded in the period.” 

It recalls the old dilemma about how software companies got a bad reputation for booking revenues that might be years from cash receipts. Admittedly, reporting needs to convey what has been signed for and is in the cash pipeline.   

Furthermore, non-current liabilities at 30 September contained £3.7 million of deferred income, which could have been a big client or two not yet having paid for multi-year services. 

Yet such an extent of receivables does not square with a narrative that likes to stress “recurring revenues”. If they are meaningful, then why have they not smoothed the numbers better? The interim results at least seemed a situation of bulk-booking revenue at the period-end with little received in cash. 

As and when the cash arrives, however, it should augment £14.7 million on the balance sheet as of 30 September. There is no debt beyond minor leases.

Such concerns should not distract from key matters 

In chart terms, the stock has lost its 2020 to mid-2021 froth and, if forecasts are fair, net profit around £5 million in the March 2025 year is back to what was achieved in 2019. 

Despite the recent receivables issue, if management delivers on its objective for recurring revenue to constitute 75% of group total, then a premium PE is deserved. 

Software development in fraud detection and prevention, initially launched in June 2021, looks an intelligent move given it draws on the Celebrus platform – providing real-time data to reduce fraud losses. 

A “customer success” team now exists, with direct sales aimed to constitute around 80% of the sales pipeline. Revenues are well-diversified by way of clients and sectors, if mainly consumer-facing such as financials, healthcare, insurance, retail, travel and telecoms. Diversification is expected to continue with new Celebrus applications. 

It requires some speculative faith, but potential exists for double-digit revenue growth say over the next two years – possibly longer – even if expectations for UK interest rate falls this year are misplaced.  

Return on capital employed should also improve with profits recovery to around 20% as was achieved for example pre-Covid.  

Admittedly, there is no real yield prop despite Celebrus paying out nearly a third of earnings. It’s why confidence is needed in underlying prospects, say if the stock drifts again according to general sentiment. In the very near term, however, a three-month buyback programme up to 500,000 shares instituted last November may continue to provide support. 

If you want to try and get clever, you might await possible general disappointment in a few months’ time, if interest rates are not coming down and inflation might even be rising again. In which case a medium-to-long-term “hold” stance applies, but hold back fresh money.  

Yet the Celebrus story could build well, especially versus more cyclical stocks, in which case there might be no real stock retreat like last year. On a two-year view I think the appropriate stance is Buy

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

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