Iomart Group PLC (LON: IOM) – Recurring Revenue Stream a Key Driver

Iomart Group PLC is a Scotland based company that provides secure and managed services that include designing, delivering, and managing technology and cloud solutions. The Company helps the businesses in every phase of their digital transformation journey. The key services provided by the Company include Infrastructure, Data Protection, Security, Connectivity, Consultancy and Partner Programme. The services provided to the customers are on-premise of the customer, in Iomart’s data centres and in the hyper cloud. The Company has a workforce of around 400 people, of which 300 are technical specialists in infrastructure, cloud, network and security. The Company has low customer attrition and continued market-leading profitability. The Company got a strong customer base through the acquisition of ServerChoice in February 2020 and Memset Limited in March 2020. Iomart is listed on the FTSE AIM UK 50 Index.

Iomart will release H1 FY21 results for the period ended 30 September 2020 on 1 December 2020.

Brands of Iomart PLC

 (Source: Company website)

Growth Prospects and Risk Assessment

In order to meet the changing needs of the market cloud, the Company would deliver cloud-based solutions that are hybrid in nature or on-premise. Despite the existence of dominant players such as Amazon, Microsoft and Google in the market; Iomart believes that there is ample space for it to co-exist in the cloud architecture market. The differentiated services provided by the Company help to earn credibility and scalability among the customers. The bespoke cloud solution provided by the Company enables it to compete for head-on full life costs. The Company is ensuring that it innovates in the customer offering to increase its market share and win customers. It is growing its self-managed infrastructure brands by differentiating with products, solutions and support. It is also providing selective marketing and dynamic pricing to cater to the mass audience. The acquisition strategy remains the key to deliver future growth, and in the past, Iomart has acquired businesses, and integrated it well with the existing business.

             

The Company delivers a large portion of its revenue growth organically. The increasing investment in sales engines has translated into securing multi-year contracts that give better visibility to future revenue. On the financial front for full financial year FY20, the revenue of the Company grew at 9% year on year, and the adjusted EBITDA increased by 3% year on year. The profit before tax increased by 4% and the Company had healthy cash flow operations. The current financial position will support business continuity.

   

(Source: Company website)

Meanwhile, the Iomart’s business model exposes it to several critical risks, which include data centre operation risk. Any downtime experienced at the data centre will impact the services provided by the Company, and it could result in the loss of customer and reputation. The cyber & data related crimes are rising, and the security of customer, commercial and personal data presents both reputational and financial risk. The IT market’s remain highly competitive and new players with differentiated products enter the market often, and if the Company is not able to provide similar services at a competitive price, it could lose business.

Industry Outlook Dynamics

The IT infrastructure and cloud market are very dynamic, and new products and solutions developed at an increasing pace. The demand for data is growing, and the internet-connected devices are increasing. The long term trends in the market are machine learning, internet of things and big data. The outsourcing demand is increasing as the complexity of the hosting environment is putting pressure on resourcing and capabilities of in-house IT teams. The cloud computing solutions continue to have a strong market, and the covid-19 situation has led to greater adoption of digital transformation.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Iomart group Plc.

A Glimpse of Business Segments (FY20)

Pre-Close Trading Update (as on 1 October 2020)

• Despite the unprecedented uncertainty in the six-month period, the Company’s business model has performed well, and it was also in line with the expectations for H1 FY21, with growth from existing customers.
• For H1 FY21, the Board expects revenue growth of around 2% and adjusted EBITDA to be approximately £21 million.
• It witnessed a strong cash generation, with the period end cash position increasing to around £19 million at 30 September 2020.
• As announced on 9 September 2020, the Reece Donovan has now assumed the role of CEO (Chief Executive Officer) following the retirement of Angus MacSween.
• Overall, it has high levels of cash on the balance sheet and a strong ongoing customer relationship.

Financial Highlights (for the year ended 31 March 2020 (FY20), as on 24 July 2020)

(Source: Company Website)

• Despite the onset of Covid-19 outbreak, the Group witnessed a good financial position with revenue moving up by 9% year-on-year to £112.6 million.
• Driven by good growth from all the businesses in which the Company operates, the Group’s revenue and the profitability have improved for the current period.
• From the time the business has transformed to cloud services, the Group has consistently grown in the last twelve years since 2008.
• The adjusted EBITDA of the Company surged to £43.5 million and basic earnings per share to 12.5 pence, but the adjusted profit before tax declined by 10.6% year-on-year to £22.8 million.
• The cash position of the Group remained unaffected from Covid-19, realizing cash of £15.5 million by the end of 2020.
• Iomart declared a final dividend per share of 3.93 pence, down 22% from 5.01 pence in the prior year.
• The Company claims to have a strong business model, providing support in the tough times due to Covid-19 outbreak.
• However, the timing of new projects is likely to be more uncertain.
• The Company also have many projects under pipeline, which will help the Company to achieve strong organic growth.
• It maintained a market-leading position in term of profitability with low customer attrition. The recent acquisitions help them to offer better quality services to the customer base.
• The organic growth rate of Cloud Services business increased to 6% in FY20 (FY19: 2%) and increased investment in sales engine has resulted in securing multi-year and multi-million-pound contracts with future revenue visibility.
• Looking ahead, the Company said in the first two months of the financial year 2021, it has traded in line with Board expectations.

Financial Ratios

Share Price Performance Analysis

(Source: Refinitiv, chart created by Kalkine Group)

On 24 November 2020, at the time of writing (before the market close, at 8:21 AM GMT), Iomart group Plc shares were trading at GBX 325.00, down by 0.31% against the previous day closing price. Stock 52-week High was GBX 409.00 and Low of GBX 219.50, respectively.

From a technical standpoint, we could see a positive movement in the share price based on the 20-day SMA (321.0) and 14-Day RSI (54.74). Also, we could see a positive movement in the share price based on the 90-day RSI (48). The Company’s stock has delivered a positive return of around 3% in the last month.

In the last ten years, IOM share price has delivered around 270% return as compared to the approximately 0.65% return of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last ten years.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Peers used in the valuation methodology (Price/ NTM Earnings)

Business Outlook Scenario

The recurring revenue model of the Company has supported the financial performance during the pandemic. The integration of the newly acquired business is on track, and the Company will look for any opportunities in cloud businesses to increase customer base and further strengthen Iomart’s position in the market. Iomart has a strong business model with a diverse customer base with limited concentration. The Company provides web-centric services which give a protection cushion from the economic pressures. Once the businesses bounce back and regain the confidence to invest in infrastructure transformation decisions, the Company is well poised to deliver it through its sales & marketing operations. The long-term prospects of the Company remain strong.  The pandemic has affected the business activity of the Company as the timing of new projects have become slightly uncertain, and the visibility of sales pipeline conversion remains less clear. The demand for digital transformation would be supported by the remote working norm, and it will remain a long-term key driver to the cloud. The Company is well-positioned to deliver long-term growth and has a strong balance sheet to sustain the current challenges.

Considering the strong ongoing customer relationships, sequential improvement in the performance across all regions, a robust balance sheet, decent operating & financial performance, high level of cash generation capabilities, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Iomart group at the current price of GBX 325.00 (as on 24 November 2020, before the market close at 8:21 AM GMT), with lower-double digit upside potential based on 24.02x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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