I was first introduced to ASW back in May when I received a
tip from Shares Magazines. As a contrarian and a sceptic I immediately
dismissed the subjective claims of “a fantastic track record”, “genuine growth prospects”
and “an abundance of cash” as well as the deal-maker “shares could hit 120p
before the year is out”… early in the first paragraph. It struck me as having
already risen strongly early in the year from around the 68p range in January
2013 to 95p just two months later. Since then they have been stuck in the
80-90p range rarely moving above or below until recently breaking out in late
November. Having held on I’m finally in profit and will try and explain why I
will continue to hold ASW.
The business plan is centred around helping organisations strip
out unnecessary costs in order to increase efficiency. It’s flexible means of
applying these packages to customers allows a quick payback, often in weeks and
months rather than years. All businesses are susceptible to weaknesses at times
in human resources, payroll, document management and procurement and this where
ASW comes in.
Vin Murria, the chief executive of Advanced Computer Software
has been running the company for over 5 years now, turning it from a microcap
with approximately £6 million revenue into a mid-cap making a record £99 million
in the first half of this year. Back in May when I was looking into ASW they
were making around £120 million per annum. Valued today at £460m (97p) they
hold approximately £40m in cash.
If you’re new to the story then read on with this summary to
date. ASW raised £44 million from investors back in February 2013 at 80p partly
explaining the gradual retrace back down from a 95p peak to around the 80p
level, however this has twice acted as support since. Soon after the company announced
what the funds would be used for, placing an offer to buy Computer Software
Holdings (CSH) in a £110 million deal.
According to SharesMagazine, buying the legal back office
solutions specialist was “an intriguing move” since Vin Murria had been part of
the team behind CSH before it was sold to private equity in 2007. Was the chief
executive keen to acquire the company for a purely business purpose or was there
a sentimental element to it? Well it’s hard to argue against the business case,
CSH made earnings before interest, tax, depreciation and amortisation (EBITDA)
of £15 million on £62 million of sales in 2012, 85% of which was recurring
business from around 12,000 customers.
“This means the enlarged Advanced Computer will be able to cross-sell a host of business analytics, data management, mobile delivery tools across its healthcare, business solutions and managed services divisions to some 20,000 clients.”
Of importance in December 2012 the £7.25 million acquisition
of Serco Learning opened the door to the new education market and may prove a
platform for further related buys in the future. Apparently, Advanced Computer Software
has already spotted £2.5 million of duplicate costs that can be stripped out of
the combined business, although this looks like an underestimate.
Compare the company back in May when Shares Magazine wrote;
“Advanced Computer has net debt of £65 million; £40 million shy of its new banking facilities. With EBITDA margins of over 20% and a cash flow yield in excess of 6% expected by analysts for the year to February 2014, expect the borrowings to be paid down fast. This puts the company on an enterprise value (EV) of about £440 million and implies a current year EV/EBITDA multiple of 10. The price/earnings (PE) ratio is 13.6, about a 30% discount to the UK software sector.”
In September 2013 ASW released it’s Half Year trading update
and its share price reacted favourably closing over 10% up for the week. Net
debt is down to less than £51 million. EBITDA margins of 25% don’t tell the full
story as in fact the EBITDA has more than doubled in the year to date to £16.9m
in the first half (H1 2012: £7.4m). The price/earnings ratio is now 13.5 even
after the recent rise and presumes a conservative estimate for second half
earnings.
“Advanced 365 Managed Services has continued to benefit from cross-selling to the Group's large, high quality customer base where the division's unique proposition has minimised the impact from continued price pressure from customers as Cloud offerings become established. Advanced 365 Managed Services' service and delivery models were comprehensively reviewed in the first half year to optimise scalability, which enabled the division to secure its largest managed services contract to date, just after the period end – the sum of £14.5 million over a 5 year period.”
Underlying trading
continues to beat forecasts with organic growth up strong across all divisions.
The market has begun to react to recent results but will have to adjust for increasing
profits from 2015 onwards. According to the Half Year update, 38%
of the August 2013 contract value will be recognised by February 2014 so we
should expect further positive developments in line with expectations. ASW will
realise 42% of the contract value in FY15 and the balance from FY16 onwards.
“Material profits growth, rapid debt reduction, more cost savings and a maiden dividend could all prompt further share price appreciation.”
Future growth is expected to come from a variety of
customers but the NHS is a priority. There has been a surge of interest in
workforce mobilisation across health and social care mainly due to the healthcare
demands of an ageing population. The London Community and Mental Health
procurement project reaches a key stage in the next six to nine months with 68
contracts in community and social care expected to come up between 2014 and
2016. ASW is already working with two NHS trusts, Medway Community Health Trust
and Kent Community Health Trust and are well placed to gain further contract
wins during this period.
The focus on mobile products iNurse and iConnect is also key
with more than 31,000 users signed at the half year, up by 6,000 since the year
end. The Group's Adastra 111 solution has been very well received by the market
and is now the preferred supplier to NHS 111 providers, servicing over 85% of
NHS 111 delivery in England. Growth will be slower now that ASW has 85% of the
market but this is repeat business and unlikely to change in the short term. Following
the acquisition of CSH, ASW now provides over 5,000 private sector law firms
with legal and back office software and services and is the fastest growing
solution in the market. Cross-selling of the wider Advanced portfolio of
products is expected to underpin further growth in the near term.
Further growth opportunities will come from Group products
and services in both the public and private sectors, driven by the continuing
need for efficiency, cost savings, workforce mobilisation and regulatory
compliance. Healthcare demands are only likely to go one way, with increasing
growth in the community and social care sectors and the continued demand for
effective mobile applications. The company has shown its capable of absorbing
smaller businesses and is looking for “further potential acquisitions to consolidate
Advanced's position within its markets” which will enable it to push it’s
effective cross-selling strategy.
The case for ASW remains strong but I would advise caution
in choosing a point for entry. We are in uncharted territory right now,
things could get rather rough. But if you can appreciate where this company is
headed you will probably agree that they look comparatively cheap on a sector
and p/e basis. I think a share price of £1.06 valuing the company at £500m will
be achievable come the next set of results in March 2014.
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