Oxford Metrics PLC (LON: OMG) – Strong financial position shall support further growth plans.

Founded in 1984, Oxford Metrics PLC (LON: OMG) is a FTSE AIM All-Share quoted Company, which provides software services globally to government, engineering, entertainment, and life science markets. It also provides market analytics for infrastructure asset management and motion measurement in over 70 countries. It operates through two divisions, namely motion measurement division (comprising Vicon), and infrastructure asset management division (comprising Yotta). The Company is listed on the London Stock Exchange since 2001.

  (Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

OMG has improved the quality of earnings as Annual Recurring Revenue surged to £6.8 million in FY20 from £6.2 million in FY19, while the net cash increased to £14.9 million at the end of FY20. Despite the slight decline in revenue, the Board has maintained the final dividend, which underpins confidence in the outlook. Under Yotta division, digital transformation and new business wins shall support the profitability in the future. The Company is diversified across multiple vertical markets with favourable long-term growth drivers. Further, it offers clearly differentiated products and services from competitors which underpins the strong position in the market for long-term growth. The Group also remained debt-free with a strong cash position, and held a competitive advantage with product differentiation to navigate the Covid-19 challenges.

However, the Covid-19 pandemic can cause a significant delay in order shipments, and thus, can disrupt the cash flow cycle. Moreover, the fluctuation in the exchange rates can negatively impact business operations. In addition, the Company operates in a competitive and complex technological environment, which requires continuous investment. Also, the supply chain disruption amid Covid-19 pandemic can increase the operating cost. Furthermore, as it operates in multiple geographies, global macro-economic conditions and exchange rate fluctuations could also impact the business performance.

Industry Outlook Dynamics

The UK tech sector is both diverse and broad as it is involved in the development, scaling, and implementation of various technologies, including the Internet of Things, 5G communications, and artificial intelligence. As per the Valuates’ publication, the market size for global Software as a Service is projected to reach from US$158.2 Billion in 2020 to US$307.3 Billion by 2026, representing a CAGR of ~11% during 2020 to 2026. The drivers that will influence the market size includes the convergence of artificial intelligence, increased usage of smartphones and laptops, and increased adoption of SaaS solutions for human capital management. However, the increased threats to data security could impact the market growth.

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

Financial and Operational Highlights (for the financial year ended 30 September 2020 (FY20), as on 3 December 2020)

(Source: Company Website)

• The Company has improved the quality of earnings, with an increase in Annual Recurring Revenue of 9.7%.
• The revenue for the first half of 2020 decreased by 14.3% YoY, due to the impact in all market segments, mainly the USA market suffered.
• Also, there was a decline in adjusted profit before tax and adjusted earnings per share compared with the last year's corresponding period.
• In Yotta business, the Company has achieved several milestones during the period, with improved quality of earnings and achieved the highest ARR level. Also, it secured several new flagship partnerships.
• In Yotta division, the Company delivered a strong sales performance for the Connected Asset Management Software-as-a-Service (SaaS), Alloy.
• Oxford Metrics witnessed a strong balance sheet, with net cash of £14.9 million (H1 FY19: £10.9 million), and no debt position.
• The Company was not facing any supply chain issues and was planning to take prudent actions as needed.
• In Vicon division, the revenue declined by 19.6% YoY during the period, and signed four new Location-based Virtual Reality partners.
• The Board proposed a final dividend per share of 1.80 pence.
• OMG is diversified across multiple vertical markets with favourable long-term growth drivers.
• Further, the Company has started well in the new financial year, with a healthy pipeline in Yotta's ARR sales and a stable cost base.
• In addition, the Company is seeking earnings-accretive acquisitions to grow market share, extend product range, and increase differentiation to augment the growth.

Financial Ratios

Share Price Performance Analysis

On 19 January 2021 (before the market close, at 8:43 AM GMT), Oxford Metrics PLC shares were trading at GBX 88.99, down by 1.12% against the previous day closing price. Stock 52-week High was GBX 127.40 and Low of GBX 70.00.

From a technical perspective, 14-day RSI (36.45), 100-day SMA (86.45) and 100-day EMA (88.15) is currently supporting an upside move, which means the stock price could increase in the short term.

In the past six months, Oxford Metrics PLC’s stock return has outperformed the benchmark sector and underperformed the benchmark index as it has delivered a positive ~21.62% return as compared to ~3.92% return of FTSE AIM All-Share Technology index and ~33.79% return of FTSE AIM All-Share Index.

In the last five years, Oxford Metrics Plc share price has delivered around 114.28% return as compared to the approximately 78.68% return of FTSE AIM All-Share index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Business Outlook

Both the divisions of OMG started the FY21 well; however, the uncertainty remains in the short-term with ongoing Covid-19 disruption. Vicon’s sales are also in line with pre-Covid level now, and there are ample of opportunities for further growth. Adjacently, the pipeline of Yotta division is also healthy and expects at least an addition of a minimum £1.0 million in annual recurring revenue, reflecting full-year profitability and stable cost base. In addition, the Company is seeking earnings-accretive acquisitions to grow market share, extend product range, and increase differentiation to augment the growth. In a nutshell, it has improved level of revenue visibility, remained debt-free, stayed diversified across multiple vertical markets, held powerful competitive positions, offers clearly differentiated products to emerge stronger in the future.

Considering a strong financial platform, signs of recovery, decent operating & financial performance, resilient business model, high level of cash generation capabilities, no debt burden, decent dividend yield, solid liquidity position, robust balance sheet, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Oxford Metrics Plc at the current price of GBX 89.99 (as on 19 January 2021, before the market close at 8:43 AM GMT), with lower-double digit upside potential based on 4.90x EV/NTM Sales (approx.) on FY21E sales (approx.). 

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

* The dividend yield is subject to change as per the stock price movement.

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