For some weeks now, investors have been debating the much anticipated and longed for Santa rally, which sadly to date, has proved somewhat elusive.
Markets and the economic climate remain both turbulent and choppy, although there has been some positive movement with specific stocks in the small cap arena I like to frequent.
On a personal note, ADF, Calnex and Fonix have all held up well of late, along with G4M, the latter of which I added to last month, when the shares sat at just 92p against the current £1.12.
That said, the market remains something of a minefield to navigate with the rate of warnings from companies on the back of the inevitable slow down and a burden of increasing costs now beginning to weigh down.
One stock that has caught my eye though and saw my buying in a couple of weeks back at 77p is ActiveOps (AOM) which is a software company (SaaS) that provides back office digital operational services for the likes of financial services customers along with healthcare and government organisations.
At the upper end of these customers in terms of size we can find Barclays and Nationwide amongst others, which suggests that AOM clearly has something going for it in its chosen market.
Perhaps the most attractive aspect of buying into the story at the current time is that its products and services are - if the past and current trends are anything to go by - somewhat recession proof and therefore can limit the downside, whilst ongoing growth opportunities provide for some positive upside momentum.
The key reason for this, is that AOM’s products and services actually help customers in improving both productivity and efficiency, particularly where the process of streamlining their business and operations takes precedence.
Data from the 2008-2010 recession confirms that it certainly looks well placed to continue growing, as during that tough period strong growth was achieved in its software licence space, particularly across the financial services field where it is extremely active.
At the current price of 75p the shares look highly attractive to me for both the near and longer term in order to achieve attractive upside, despite growth stocks currently being out of favour.
Although AOM has been in existence for many years now, it only came to the market in the spring of 2021 where it debuted at £1.68p per share before surging to £2.12p followed by a reversal which saw it drifting away and falling back to a low of 62p this year.
The retrace perhaps wasn’t totally unexpected, as sentiment shifted from such growth opportunities as the Ukraine conflict raged, along with inflationary headwinds prompting for a sell-off in such stocks in preference for more value based opportunities.
Add to the mix that AOM in keeping with many quoted SaaS focused businesses is not yet visibly profitable, then making out the bull case in such markets can be a hard task.
However, AOM is actually tantalisingly close to making that all important transition to profitability, which could gather momentum on the back of continued growth expansion and an increasingly high level of recurring revenue.
Indeed, the latter sees an estimated £90m ARR opportunity for the company to go for in the coming years, which given its increasing scope is viewed as being achievable.
Having last month announced its Interim Results, I have subsequently been able to catch up with CEO Richard Jeffrey in order to hear first-hand a little more on the business and prospects going forward.
Firstly though, in relation to the H1 numbers to September 23rd the performance looked very positive, in that total revenues across the group for the period increased to £12.3m against the corresponding year of £11.5m.
As part of that, annual recurring software revenue increased by 10% to £10.9m, which was aided by three new wins along with twelve expansions.
Jeffrey certainly sounds positive on the prospects going forward and the strategy for further driving growth and the all important transition into sustainable profitability.
Speaking of its software services, the CEO explains that it is very sticky, where it solves backroom issues that businesses often struggle with in order to achieve their own economies of scale.
The focus amongst others, includes providing improvement on the day-to-day running of service operations, along with products tailored for employees engaged in transactional processing of payments, claims, application processing etc.
Expanding, Jeffrey says that businesses operate within their own structure, their own silos which often results in teams that are connected through objectives and tasks not communicating in the most effective and efficient way.
He likens it to various aspects of a business operating in different languages creating barriers to the operational efficiency, as opposed to what AOM brings to the table, namely being a single and effective way of communicating and operating.
The result of adopting AOM's software, is that of processes being standardised in what can be considered the same language, which in turn both manages and utilises masses of data to the benefit of a business.
Jeffrey is also keen to stress that with and since the onset of the pandemic and a shift to hybrid working, businesses have become more acutely aware of their needs and requirements in relation to important back-office operations, which has arguably further opened the door for AOM and its services.
Despite having delivered positive Interim Results, the shares continue to remain largely subdued, perhaps suggesting that in keeping with other sectors AOM is likely to be hit by a slowdown.
That could prove to be wide of the mark though, as the CEO refers back to the last severe recession of 2008/2009, which saw the company enjoy a big international expansion from the period up until 2011.
He certainly sees similarities and a correlation, highlighting that at times such as now, businesses tend to look inwardly to improve yields, which as a result sees AOM well placed to expand and increase its footprint, leading him to conclude that recessions, historically have been good for the company.
The focus for growth is very much on the organic element, although acquisitions have featured and look likely to continue to be on the agenda in the future.
Three buys have been achieved since 2014, the most recent in 2019 which saw AOM gaining access to the US health care function, which the CEO describes as fantastic for the business and where there is lots to go for.
In terms of the possibility for further additions to the company, Jeffrey says that they have no wish to become some kind of conglomerate, so another acquisition would be selective and meaningful in what it brings to the operations.
Expanding, he tells me that the 2019 purchase of OpenConnect was undertaken via a debt facility which AOM paid back very quickly via its ability to generate a lot of cash.
Although another addition to the company could be executed the same way, with debt perhaps not such an attractive proposition as it was back in 2019 there are other options.
On this front, Jeffrey is keen to point out that AOM has a strong balance sheet with a sizable net cash position, which could provide for firepower should it be needed.
Equally, I enquire about the prospect of a future placing to support any potential buy, particularly given its impressively positive Institutional base.
To this end, the CEO says that they certainly wouldn’t consider that as an option at the levels of where the shares now sit, as it would be a very expensive way of making such a purchase.
Returning to the Interim Results performance, Jeffrey says that he was pleased with the outcome and believes that AOM is ahead of the curve and is confident that by the end of the year they will exit on a run rate that is EBITDA positive.
He also emphasises that AOM is already strongly cash generative and is knocking out 80% gross margins, so there appears to be real confidence in delivery, even factoring in a degree of exchange rate flattery.
Indeed, looking ahead, he adds that around 90% to 92% of revenue for next year is already in the bag and with no debt or gearing and a net revenue retention rate of 109% the business looks well placed to make further notable progress.
In terms of competition, the CEO sounds relaxed, highlighting their increased product diversity in a market that whilst it does see a couple of big players, they arguably don’t provide such an effective solution.
As a testament to its products, AOM serves, as previously mentioned, some big blue-chip customers and enterprises which are not easy to gain traction with.
Additionally, from the moment conversations commence relating to a potential sale, it can take up to a year until actual implementation is reached.
However, as Jeffrey explains, once the product has been successfully implemented, the customer typically and quickly enjoys a pay-back benefit, whereas in one recent case a 7%-8% improvement on productivity was gained in just a few months.
With no apparent near-term acquisition as yet seemingly in sight, it is also positive to hear that the man at the helm is upbeat on prospects for organic growth.
Historically, AOM has achieved organic growth in the mid-teens and although for perhaps obvious reasons such as a pandemic it hasn’t’ been at that level over the last couple of years, it is firmly in target again now.
Jeffery says that he would be disappointed if AOM didn’t achieve that level going forward and sees no reason now why that cannot be delivered.
Perhaps further underlining his confidence in the business, the CEO has been a buyer of the shares this year, picking up 157k back in March at 95p, before his wife purchased 125k at 79p as recently as September.
Looking at Broker Singers forecasts there is an expectation for full year 2023 revenue of £25.1m, rising to £27.5m next year, the latter of which is anticipated to deliver positive EBITDA of £0.5m.
Net cash in both years is pencilled in at £12.4m and £13.1m, further highlighting the strength of the balance sheet and providing for some ammunition, should an acquisition opportunity emerge.
The Broker also adds “EBITDA is tracking in the right direction: with the company on-track to hit run-rate break-even by y/e. So, in all, a very respectable H1, which again highlights ActiveOps’ resilience and differentiated value proposition, and in a very large market, this should translate into low-risk growth story... with the added kicker of enhanced returns should margins meaningfully trend up. None (or very little of this) is currently being priced in on 1.6x EV/sales. Good risk/rewards”.
Two other brokers also cover the stock, namely Investec and Canaccord, where the former with a £1.50p target price estimates that after next year's numbers, AOM will, for 2025 deliver a maiden pre-tax profit of £1m.
The Broker also states, “Since IPO ActiveOps has marginally beaten revenue expectation and materially beaten profit and cashflow expectation, but the shares have declined c.60% as sentiment has shifted away from loss-making growth stocks. Updated forecasts now assuming a move into sensible profitability, reflecting a period of leveraging investments made since IPO, should therefore act as a positive catalyst”.
I plan to catch up again with management in due course, with the next update likely to be a pre-close announcement early next year.