With the markets having delivered some excellent returns for many of us over the last ten months or so, particularly across specific sectors, finding new growth opportunities isn’t an easy task.
Many stocks are now standing on pretty punchy multiples, so a degree of caution is certainly required going forward. On a personal level, I’m happy to hold the stocks that are listed here on the blog, as I bought the majority at very good levels and whilst a number of them are perhaps for now looking fairly priced, their prospects remain exciting for continued growth and further medium-longer term appreciation. What about new subjects though, as whilst I’m certainly not itching to buy, I am nevertheless always on the lookout for something to whet my appetite.
To that end, I have decided to take an initial position in Cambridge based 1Spatial (ticker SPA) which looks as though it is on the cusp of real delivery, after years of notable underperformance. From a personal perspective I like to invest in companies on my doorstep and two of my greatest successes have come from local businesses such as SDI and FDEV and it is always good I find to go along and visit or meet management. In relation to SPA, it is actually very familiar to me as I am well acquainted with the technology background and actually visited the HQ about six years ago to interview the then CEO, who has since departed. I certainly wasn't sufficiently enamoured then to be tempted to invest, although I have kept a constant eye on the company for signs of actual progress. The SPA technology of today, has its roots firmly entrenched in Cambridge academia and from years back, where in 1969 three Cambridge University academics from the Cavendish Labs spun out its technology into a company that was to become Laser Scan. By all accounts Laser Scan boasted some excellent and highly regarded mapping technology, although as a quoted business it never really cut it on the performance front and capturing that all important ability to generate cash. That said, some 21 years ago (is it really that long!) I actually did well on the shares, having bought them as a punt at 15p and selling them a couple of months later for about 40p when the business was acquired by Yeoman Group. That deal at the time valued Laser Scan at around £13m and the geographic information systems (GIS) software which was used to manage large spatial databases such as those underlying maps, postcode locations and facilities locations was considered one of the best on offer. The Yeoman business subsequently ran into difficulties itself and after that was acquired by Trafficmaster, the Laser Scan software arm was eventually sold off to management paving the way for its evolving into what is today 1Spatial. So, what exactly is SPA and importantly, what is on offer that suggests the shares are worthy of a closer look, or as I have elected to do buy the shares as a starter position at this point in time. In short, SPA is a software business where its products and solutions are very much focused on the management of location and geospatial data, serving customers from different sectors and across the globe.
These include a broad range of clients spanning a whole range of industries and organisations that run from transportation, to government, defence and utilities. In an era of fast and evolving change, SPA’s offering sits well in the space of the Internet of Things, Smart Cities and Renewable Energy, where big data is a key component and it is perhaps the case that when it originally came to market in the form of Laser Scan it was somewhat ahead of its time. At the core of its growth strategy now is the company’s (Location) Master Data Management (MDM) software services, where the market size is expected to hit $26.4b by 2025 with a compound annual growth rate forecast at a significant 18%. Perhaps from an investment perspective, one of the issues with investing in this area is actually getting to grips with what MDM is, and understanding its importance right now, as there are some very different explanations out there which appear to be written by those that fully understand the concept and assume others will also quickly comprehend. From a personal level, I do like to invest in things that are arguably more tangible and easier to grasp, such as G4M selling its musical instruments. That said, some time and research spent can assist greatly and at least provide the basic understanding needed.
MDM for me, is perhaps best defined as the bringing together of vast amounts of data, analytics and information and managing that, which in turn helps businesses to both improve their own functionality along with planning for growth and expansion through connecting efficiently within its own operations as well as their customers and clients.
In SPA’s case, it develops and deploys software to manage location-based data within the Geographic Information System (GIS) market. Target customers within this large and growing global space include governments and major enterprises that have a regulatory or commercial need to create and maintain highly accurate and complex maps of their estates and assets. Obviously, it is a whole lot more in-depth than that, but hopefully my attempt at colour provides for a glimpse of where SPA sits and the potential for growth, in what is a fast expanding market that is likely to see significant acceleration post the pandemic. Of course, as investors we want to tap into something that is going to grow not only revenue, but profits too, through cash generation which in turn will bring the desired returns we seek, although it is clear that historically SPA has until very recently failed to deliver. The company, if we look at it, is regarded as a world leader in its field in what is a fast moving and growing space, and in the last few years it has been aligning itself with the right partners whilst winning new and sizeable blue chip customers.
The business has certainly taken time to show real signs of promise though and leverage the various aspects of its technology and services through both organic and acquisition generated means, where in relation to the latter, the most significant recent came in 2019.
This saw the Cambridge based operation purchase Geomap-Imagis for 7 million euros which was in part funded via a pacing at 31.5p raising £3.1m. Alongside that, the company entered into an additional strategic partnership agreement with ESRI the US based company that is focused on geographic information software and which enjoys annual revenue in excess of $1bn.
Both these deals now appear to be coming to fruition and supporting the growth strategy where evidence of the more recent ESRI connection can be seen through SPA’s multi -year contract announcement with Northern Gas Networks, that was released just a couple of weeks back.
SPA is assisting NGN with its migrating to a new utility data network model supplied by ESRI and the deal is worth in excess of £1m to SPA, with a £0.2m recurring revenue element.
The contract is actually the first major UK collaboration by SPA with ESRI and importantly, has the potential for further wins with other utilities potentially adopting the new ESRI model as the energy space evolves at pace. Prior to that deal being announced, in January SPA revealed it had won a multi- year contract with the State of California’s Office of Emergency Services for a SaaS offering worth $0.6m over 2 years with a recurring $0.1m per annum.
Although the numbers may not be of note, it is nevertheless a further positive endorsement for the company where its software data validation is being adopted to improve the highly important public emergency communications services that span from the US across to Canada.
The real importance of this deal however is that the scalable platform can be easily replicated to serve other states across the US, so there would appear to be plenty of additional upside in a region where SPA had already made its mark. Last year the company announced a significant $2.6m multi-year contract with the State of Michigan which further highlights the potential for the company and its services moving forward. The recent news hasn’t been restricted to the deals mentioned though, as just last week the company announced an interesting collaboration with Ordnance Survey which sees SPA being awarded a proof of concept from the Energy Networks Association to provide a digital map of the UK’s energy system. Again, although in financial terms it currently doesn’t appear to be great in numbers, what it does do is show the strength and depth of SPA’s services, particularly as the collaboration has emerged in direct response to the UK governments energy data taskforce recommendations.
Although there are numerous companies of varying sizes operating in and around the space, SPA has a very rich history with a highly regarded software focused offering spun out of the Cavendish Labs which puts it in an ideal position in a very complex market that is now expanding across the globe.
Whilst SPA provides a whole raft of software services that are implemented either on-site or over a cloud environment, next year it is due to launch its own full cloud platform which broker Liberum believes could be a real game changer for the company.
In terms of the financial performance and numbers, there now appears to be evidence of real delivery at long last, as the company has been moving through a three year transition programme where revenue is beginning to gain traction and which in turn is seeing positive cash generation.
In 2017 turnover was £15m with a large loss in part due to reorganization costs which then moved to £16.9m of sales a year later.
Following that, the number had increased to £17.6m, which was succeeded by last years £23.3m that also saw a welcome positive EBITDA number of £1.67m.
The company is due to update the market with a Trading Statement in the next few weeks and I will be speaking with the CEO following that and plan to add further to this piece.
For now, Liberum is looking for full year 2021 revenues similar to last year ( Covid headwinds a factor) but importantly it expects to move to £25.8m and £28.5m in the following years.
A key factor in the investment case is that the company is now generating cash and the forecasts are for positive EBITDA next year of £3.7m rising to £5m in 2023 and with both periods expected to deliver adjusted pre-tax profits.
This paves the way for expectations of a pre-tax profit of £1m in 2022 with £2.4m the year after, the latter of which would see EPS of 2.3p which at the current price of 31p would result in the shares trading on an attractive PER of 13.
The cash position is also anticipated to show strong progress, with this years final numbers expected to show a £7.1m position, rising to £8.5m and £10.8m in two years time.
Although taking a look at SPA on the very useful Stockopedia it not surprisingly fails to score on a number of fronts, it does however register well with a PEG of 0.5 and strong EPS growth which arguably highlights that the company is now emerging positively and transitioning following the strategic changes made.
Given the recent strong contract news from the company and the expansion of the market it serves, then it seems reasonable to assume that SPA certainly has potential for future upgrades as it moves forward, which in turn would drive the share price onwards and quite likely attract a wider audience in the process.
A key point within this story is the ongoing transition to a SaaS model as opposed to the lumpiness of a license based business, which by 2023 Liberum believes will see 50% of total revenue being of a recurring nature.
Although that may not be a match for many SaaS businesses and I would personally like to see a higher level, I take it in the context of where SPA has come from and where it may now be heading.
The market cap is currently £34m where the shares at 31p actually trade at a 50% discount to peers, although it is worth noting that some of those are trading on some punchy multiples.
That said, SPA looks an increasingly interesting growth prospect in the making, operating in a hot spot with a valuable offering and further sizeable contract wins with blue chip names could see the shares track northwards towards the current broker target price of 55p.
There are some notable institutional holders on board here too which can provide for reassurance and these include Columbia Threadneedle on 20% followed by Azini, Harwood Capital, Business Growth Fund, JO Hambro and Herald with varying holdings.