Rosslyn Data Technologies (RDT) may not feature on the radar of too many investors, being at the micro cap end of the market, but for those that do take a look, there may well be something on offer for positive returns over the medium-longer term.
In the past, this (SaaS) software/analytics focused business has failed to make its mark as I previously commented, despite in more recent years making steady progress on building its organic and recurring revenue base.
For those unfamiliar with the name, the company is in the business of largely providing procurement and master data solutions which incorporates spend analytics enabling amongst other things a business to best access and utilise its supply chain.
On releasing its full year 2020 results yesterday (Tuesday 22 September), the tide appears to have turned with a moving into positive EBITDA territory for the first time since coming to the market in 2014, which perhaps marks a pivotal point and sets a trend to follow.
Speaking with CEO Roger Bullen and CFO Ash Mehta following the delivery of those results, there certainly appears to be a quiet confidence in the camp, as the business now has both the opportunity to scale up and importantly, the means with which to now achieve it.
Bullen says that they went to the market earlier this year which saw the board looking to raise a few million, but in the process following a very well received presentation, they took a more substantial and meaningful £7m that was offered in an oversubscribed placing and which could actually have been a lot more.
For what is small player with a current market cap of £19m at 5.5p per share, RDT boasts some pretty big and impressive customers of which Mehta says the largest of those is Heineken, although he stresses that no one customer accounts for more than 4% of revenue.
“Not only do we have a really broad spread of customers across different areas of business, it is also very global" he says.
And that sees the company providing its services for customers from here in the UK, to Europe, the US and the Caribbean, differing regions providing for diversity and increasing growth potential.
Whilst growth perhaps hasn't been spectacular at RDT to date, arguably more steady, Bullen says that they had been working within their resources and that in such a context the sales team had been relatively small, so arguably the last couple of years performance has been commendable.
The picture has shifted somewhat significantly now however, as the CEO adds that they have now doubled the size of the sales team and with a new and highly experienced Chief Customer Officer recently installed there will now be a particular focus on supplier master data management (SMDM) which will bring in larger contract values.
As a result of this focus and with a now much strengthened balance sheet, RDT is in a far stronger position to accelerate on its growth path than it has been for some time.
The company has also now exited its low margin areas of business, which included some licensing and in its place concentrated on higher end higher return products and services, where Bullen says every sale now is at an 80% margin rate.
With the shares standing at a considerable discount to peers, the jury is still obviously out at present and no doubt would-be investors will be looking for further solid evidence of progress.
That provides an opportunity for investors buying into the story and the anticipated elevated progress should now follow through, as the building blocks are firmly in place and management is intent on driving revenues from both organic and acquisition targeted means.
RDT enjoys very strong recurring revenue and Bullen sees it is a key metric with clients, where he says that if they forecast £7.5m revenue and £6.3m of that is recurring and covers the costs, then everything else drops straight to the bottom line, meaning further or any significant contracts could make a marked impact.
Although the company has clearly committed to increased sales and marketing spend moving forward, that should begin to pay off well and the talk from the company is of a delivering for shareholders as the revenues rise.
It has already demonstrated a key ability to win new and sizeable business even during the recent months, as much of what it provides around procurement is clearly in demand and can assist companies during such difficult periods, when every pound counts.
Notable wins of late were with a global manufacturer and distributor of superior building materials and products, a multinational general insurance company with operations in more than 140 countries, and a science-led sustainable technologies business employing 15,000
people.
Looking at areas for further progress Bullen mentions that the US also offers significant opportunities going forward and that could prove positive, whilst closer to home Brexit is now as previously expected also throwing up openings for progress.
“There is a lot of uncertainty around this area which hasn't been talked about lately until more recently.
As a result, there is going to be more and more customer declarations and red tape which will also see procurement elevated and
we have certainly seen an increase on engagement over recent weeks, particularly around digitalised procurement solutions”.
Aside any potential upside from that area though, the CEO is also hopeful of making an acquisition or two to complement the organic growth and is clearly on the front foot.
On this, Mehta says, “We have strict discipline's with a focus on key metrics, so we won't be overpaying for any potential bolt-on-buy”.
Bullen adds, “Anything we buy certainly has to be a strategic fit and we aren't going to go out and overspend, so it will come from existing cash resources and it wouldn't amount to more than £2m-£3m.
If you look at the Langdon purchase we made last September, that has proved to be a real steal and has fitted in very well”.
RDT has also seen some major board changes over the last year or two including Mehta's appointment and more recently this has been bolstered on the general staffing front which now sees the business looking well set, which clearly attracted the likes of Gresham House in its oversubscribed fund raise.
With annual recurring revenue now covering a hefty 84% of broker Cenkos's forecast revenue for full year 2021, plus the now much bolstered balance sheet, the risk/reward looks very much skewed to the latter.
Indeed, the same broker points out that RDT trades on a 1.7x EV/sales ratio for FY21E against its UK recurring revenue software sector average of over 5x. That is a substantial discount which leads it to taking a Buy stance and implies for a share price north of 9p being achievable in the short term against the current figure and which in turn provides for more meaningful longer term share price appreciation prospects.
Churn however is a key point for investors eyeing SaaS companies and the rate here had been running close to 10%. Whilst that isn't much removed from many in the field, more importantly and comforting is the direction, as it is reducing, where Mehta says that it is currently running around the 7% level.
Typically, contracts signed run for periods of up to five years at RDT says Bullen, so visibility is evidently strong and with the company also now residing over a range of new products coming through alongside a strong pipeline of opportunities RDT looks to be in a perfect spot in an accelerated digital world.
The company states that COVID-19 has highlighted the importance of data quality and accessibility and its relevance in determining the resilience of the supply chain and this has resulted in a higher level of engagement by its clients.
From an investment perspective, although RDT already stands at a significant discount to peers, it isn't a stock for a fast buck, rather, it looks like a great opportunity for a growth/bolt-on-buy play that in three-four years time could see Bullen's goal of tripled revenue delivered, thus providing for a move to long term solid cash generation and the path to sustainable profits.
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