In recent weeks, I have undertaken a number of company calls, which has left me with a fair amount of catching up to do on the writing front, just as summer appears to have arrived!
The first of those companies which I am taking a closer look at today, is a software as a service (SaaS) focused business in the form of AIM quoted Microlise, which provides a vast array of products and services.
The company is very much concentrated across the Telematics space which sees it serving more than four hundred enterprise customers on a global basis and incorporates many well-known big blue-chip names.
These include the likes of Carlsberg, JCB, Tesco and Travis Perkins to name but a few, which sees the long established business collecting, analysing and correlating data from customer assets spanning numerous countries and providing them with systems with which to make their operations more efficient.
Having come to the market as recently as 2021, Microlise has already demonstrated traction and delivered strong revenue growth, which makes it a prime candidate for further progress in the coming years.
This has seen the 2022 sales figure of £63.2m rising to £71.7m last year, which in turn has paved the way for an expectation of £83.5m for full year 2024, according to the broker Singer.
Of course, the old adage of “revenue is vanity and profit is sanity” often springs to mind when looking at software businesses, where it can often be an age before recognizable profit and cash generation come to the fore.
In the case of Microlise, it certainly appears to be bucking the trend, where it arguably stands out as one of the better and more well-placed sector opportunities around.
A look at last year, saw the company delivering adjusted EBITDA of £9.4m with adjusted PBT at £5.3m giving EPS of 3.8p, whilst net cash came in at £15.2m.
Although the numbers look pleasingly impressive, at the current price of £1.42p and a market cap of £165m, the shares trading on a PE of 37 are already rated highly, so I am keen to see what the medium-longer growth trajectory looks like.
It is often the case that paying more today can prove highly rewarding further down the line, where something that appears expensive now, may ultimately prove cheap as a long-term hold proposition.
Indeed, Singer has some decent looking numbers pencilled in for the year in play and next year, which points to EPS increasing to 5p and 6.2p respectively, which sees the PER falling to 28 and 22, thus suggesting Microlise looks potentially interesting.
In order to hear more on the story I caught up with CEO Nadeem Raza, where at the outset I wanted to gain some insight into Microlise’s apparent success in what I perceived to be a crowded market.
Raza was quick to enlighten me, being keen to expand on where the company sits across the sector in which it operates.
“A good thing to do straight away,” he said, “is to correct a misconception, where when a lot of people look at us and see us as just another telematics business, being like Quartix or the Trakm8’s etc. So, we spend a lot of time with people explaining that this isn’t what we are. We do telematics absolutely and we have our own hardware and software that does telematics, but that is only a small part of what we do.
The bigger products that we have are all about helping our customers run their transport and operations, which sees a whole suite of other functionality that those other companies don’t have.”
This, according to Raza sets the business out from the crowd and underpins the growth runway for the business, where he added that Microlise now resides over a huge product set that covers amongst others transport and delivery management systems.
This enables the successful moving of goods from A-B, along with the organisation of drivers and other key aspects of the operations.
“There really are a whole lot of things that we do outside of telematics, which is why we win business with the likes of Tesco and Sainsbury’s, where we cover all types of their operational requirements.”
Such contracts as Microlise sign, obviously don’t happen overnight and Raza told me, that typically for an enterprise deal they will only come to fruition after a period of some six-nine months.
“Much of it depends on which type of our products the customer is interested in buying at the outset, as they don’t purchase everything on day one, as nobody does that.”
Additionally, it would be an extremely difficult and disruptive process for any customer to embark upon and fully adopt at an early juncture.
As a result, the CEO says that customers generally buy one or two products in order to solve a specific issue they have, but over time, that is extended along with the buying of other products.
The beauty of the Microlise product set, is that it is a joined up process with integration and compatibility across the board, making for an easy route to additional adoption and expansion by the customer.
Another highly pleasing aspect of the business model from an investment perspective is that customers typically sign up for five years at the outset. This provides for significant and welcome visibility and predictability and would appear to stand the business in good stead on its growth aspirations.
Indeed, Raza says some customers actually sign up for longer, where he cited the recent instance of an existing client buying some additional product, which has seen it commit to signing up for a new contract running for ten years.
As one would expect from the length of contracts secured, Microlise sees little in terms of churn, which is running impressively at less than 1% and the length of time customers have been with the company arguably speaks volumes.
Although UK based, Microlise is a global operator, with offices in a number of countries including Australia, France and India, whilst they sell or have systems deployed in every country across the globe aside N. Korea.
As an example of its worldwide footprint, the CEO points to Carlsberg as a case in point of its activity, where it operates in numerous countries across Europe with the Microlise products being used to assist with deliveries and schedules to pubs and restaurants.
The UK is however, the single biggest market for the business and Raza said that penetration across the wider global markets is still in single digits, which provides for significant growth opportunities ahead.
Thus far, organic growth has been around 10%-15% over the last five or six years and that is the kind of field the company is looking at moving forwards. Overlaying that though, is growth from further acquisitions, as Microlise has successfully concluded three in the last eighteen months.
The strategy on M&A has been all about expanding the product portfolio, thus increasing the opportunities, which as part of that process also aids an expansion of its geographic footprint.
Although to date, acquisitions have been UK based businesses, Raza talks of companies being targeted in further M&A will certainly be more focused on helping Microlise grow Internationally, which could see an acceleration of the growth path.
Despite already boasting a diverse product suite, there are other important initiatives coming through, as the company doesn’t merely rely on acquisitions to boost the product set, rather, it has its own in-house development team.
As with other SaaS focused players Annual Recurring Revenue (ARR) is a key and integral aspect of the business and an important ingredient in the investment case.
To this end, the CEO said that ARR currently stands at around 67% of the total revenue, but that the goal and the next target and milestone is to get that up to 80%.
Raza added that he is confident on both increasing the revenue through new business wins, whilst also driving that ARR number as a percentage of that, which if achievable should ensure that Microlise becomes a more notable investment proposition.
Another positive aspect for buyers or holders of the shares is that of a seemingly progressive dividend policy now in place, where the CEO commented. “we always said when we came to the market that we intended to become a dividend paying stock at some point and we have now just paid out our maiden dividend payment.
Three years in, we decided that now was a good time to start paying a modest dividend to attract different types of investors and as we are very cash generative, we can do that.”
This looks like a positive strategy, which should provide for a wider appeal, particularly if revenue and growth continue on the more recent trajectory.
As for headcount across the business, Microlise now employs in excess of seven hundred people and continues to expand across specific areas, particularly that of sales.
To provide a further flavour of the potential here, it is worth just touching on some recent contract wins that have been announced from earlier this year.
These include a significant £10.6m win in Australia with the Woolworth’s Group that runs for five years, whilst most recently, contracts with both Foodstuffs South Island and GSF have also been unveiled alongside a key win in France.
The latter concerns Société de Transports Alimentaires et Frigorifiques (STAF), which is a specialist in the transportation and distribution of agri-food and serves to illustrate the overseas traction that is building.
Currently, Microlise boasts a 60% market share across the UK’s largest HGV fleet operators and with its extended and enhanced suite of offerings appears ideally placed to expand and grow further afield.
Despite its current premium rating, the company is still somewhat off of the wider investor radar, although there are a few notable Institutional investors holding stock.
These include Liontrust, BGF and Columbia Threadneedle, whilst Raza himself sits on a considerable 50% holding.
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