This software company has failed to shine since its IPO, but its time may be coming:
Rosslyn Data Technologies has hardly covered itself in glory since its IPO back in 2014, the share price largely telling the story with a one way trip southwards.
One of the early backers taking a significant bite of RDT was Cambridge based IQ Capital Partners, which has enjoyed some impressive returns from various early stage investments over the years.
Clearly, that investor identified something in RDT that led to its taking a significant stake in the business and which saw it coming to market at a price of 33p.
Despite the shares of this software (SaaS) business now sitting at a subdued 5.3p which values the company at just £18m, much appears to have been happening here over the last year, not least a serious and substantial placing that was oversubscribed.
This saw £7.3m raised at 5p representing a slight premium to the then share price of 4.75p and saw some big hitting and well respected institutions taking part.
Gresham House which invested currently sits on a substantial 25% of the company, which also sees Amati on 10% and Octopus with a 4.2% holding. IQ didn't join in the raise, as it is I understand, effectively in the process of being wound down and not embarking on new investments, so has been diluted.
In terms of its business, Rosslyn provides via its own platform, extensive data and analytical services to a very broad spread of customers that includes some well known blue chip clients many of which are now using its RAPid such as BAE Systems, Heineken, Hitachi Rail and Sony to name but a few.
The offerings include spend and procurement analytics amongst others, which are said to assist clients in decision making and maximising efficiency and returns.
From an investment perspective, I often find this area somewhat underwhelming and the terminology used often seems rather abstract and often difficult to put into a meaningful context.
Suffice to say though, the space is one that is enjoying growth in the current unsettling period and is likely to continue to do so, given the changing economic climate that has been forced upon us and which will see many alterations becoming firmly entrenched.
As an investor, one thing that I do like with these kind of companies is the high level of recurring revenue where stickiness reduces churn and which, if new customers can be won, often drives substantial cash generation, particularly when operational gearing kicks in.
Rosslyn certainly enjoys significant recurring revenue levels that last year accounted for £6m of the £7m achieved and this highlights that if a now much strengthened management team backed up with fire power can drive the product, there could be some serious upside ahead.
That certainly appears to be the aim having taken a close look recently at the company and which will see me speaking with management on results day in a couple of weeks time.
A new and experienced Chairman was appointed in 2018, followed by a highly experienced NED and just last year a new and impressive CFO in the form of Ash Mehta.
A further and also highly significant appointment was announced just last month which implies that the company, which is expected to move to positive EBITDA for the first time when it reports, is now set to accelerate to another level.
There would appear to be real potential to leverage the product and seriously grow the business and with the large slug of cash to support its expansion plans from organic and acquisition derived growth the opportunity should now be grasped.
Timely and suitable acquisitions to complement the organic growth should be well set to come through and with the company announcing earlier this year that it had moved into the area of master data management (MDM) prospects arguably look extremely positive.
MDM, particularly in light of the current technology drive provides significant challenges for companies, particularly where they are migrating from a proprietary database system towards an open source environment.
As a result, Rosslyn is now increasingly being asked by customers to manage multiple terabytes of data that resides within corporate cloud and internal databases.
As there are significant security issues around the handling of such data across the corporate spectrum Rosslyn is well placed to prosper as it is already a highly trusted supplier in an area that actually has a very high barrier to entry. Importantly, MDM can provide for more lucrative contract values which plays in to Rosslyn's strategy of pursuing higher margin areas of business with scope for solid organic growth.
Another aspect in the aim for growth is to expand further beyond the UK and that is now resulting in a growing presence across the US and Europe and one can perhaps expect to hear more on that front moving forward.
Since the advent of Covid19 the company appears to have seen plenty of demand for its services having stated last month that it had seen a very sharp increase in levels of engagement across its RAPid platform, with clients scrutinising their activity/ spend data and searching for further opportunities within their supply chains.
For one client alone, Rosslyn identified potential savings in the region of €12 million from these activities, thus highlighting the added value from it services. There have also been recent announcements on further contract renewals and with no one customer accounting for more than 4% of total turnover and a very broad spread of clients from Banks to Pharmaceuticals, then it does appear to be in a decent spot.
Rosslyn to date though has been a serial under performer for its shareholders and understandably private investors have, by and large given the shares a wide berth.
Despite failing to make progress on the share price front revenues have actually been building and have moved from just £2.8m in 2015 to the £7.1m forecast for this year and which in turn is expected to move to £7.5m next year.
The fund raising concluded earlier this year is something of a clear endorsement too, as RDT had embarked on raising between £2m-£3m and which insiders say saw Institutions ready to offer as much as £11m.
Understandably, potential dilution was a factor in deciding on a £7m figure, which now sees the business firmly underpinned and provides it with plenty of ammunition to push on.
The real problem with the business thus far though is that it as yet hasn't delivered on profits with significant cash burn and losses being recorded, where more than £2m of negative EBITDA having been registered in each year.
However, the major board changes and what appears to be a more refined and focused strategy that has also seen cost controls implemented seems to be delivering and repositioning RDT into serious growth territory.
EBITDA losses last year were down to £0.5m and that, as previously mentioned, is expected to see further improvement this year with the move to positive territory.
The team have now targeted the delivering of revenues to up to twenty plus million within three years, so expect further action on additional contract wins and quite possibly a decent earning enhancing acquisition in due course. At the current price, for a SAAS business with a beefed up balance sheet and solid growth prospects the £18m market cap looks very modest and is well below the valuation attributed to that of peers.
Typically, data analytics businesses with such a high recurring income base are valued at circa 5x revenue, which puts Rosslyn very much in a discounted spot. Applying that methodology would attribute RDT with a £32m market valuation, some way north from where it sits today.
Obviously not without risk, as it still has to demonstrate an ability to deliver on cash generation and profit.
However, the signs are looking positive, it is now well funded, has a strong and revitalised management team, excellent recurring revenue and is operating in a sector that is not only proving resilient, but is actually on a growth trajectory.
I have already taken a position in RDT and will keep close tabs on events as they unfold and will add a further write up after catching up with management on results day.
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