Oxford Metrics PLC (LON: OMG) – Addressing diversified markets with product differentiation to remain resilient.

Founded in 1984, Oxford Metrics PLC (LON: OMG) is a FTSE AIM All-Share listed Company which is involved in the development and sale of computer software to government, entertainment, life sciences, and engineering markets. It develops and markets analytics software for infrastructure asset management and motion measurement to clients in more than 70 countries worldwide.

It also supports highways authorities to manage their road network and the Hollywood studios in creating visual effects. It trades through two divisions - motion measurement division (which includes Vicon), and infrastructure asset management division (Yotta). Vicon is involved in high precision motion measurement analysis, and its clients include NASA, EA Sports, Guy's Hospital, among others. On the other hand, Yotta is engaged in cloud-based infrastructure asset management software and serves infrastructure owners and local government agencies. It has been listed on AIM market of the London Stock Exchange since 2001.

 (Source: Company Website)

Growth Prospects and Risk Assessment

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. Its Yotta division has won eight new contracts since April 2020 across a range of service areas, which will shape the business for better prospects in the long term. Adjacently, Vicon also had notable wins in Japan (Konami) and China (Tencent and miHoYo) during H1 FY20, which shall strengthen its market-leading position. Moreover, the Company’s accelerating recurring revenue provides considerable visibility for the future.

 (Source: Refinitiv, chart created by Kalkine Group)

 (Source: Refinitiv, chart created by Kalkine Group)

However, there are certain principal risks and uncertainties, such as risk associated with customers delays or defer system acquisitions. Moreover, the Company requires continual investment and innovation to maintain its competitive advantage. 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 date security could impact the market growth.

Key Fundamental Statistics

Key Shareholders Statistics

Recent Developments

On 9 September 2020: The Company stated that Yotta (asset management software and services division) had continued to adapt and was operating well throughout Covid-19 period, with securing eight new contract wins since April 2020. Also, during the lockdown period, eleven customers who have signed contracts earlier in the year, successfully went live with Yotta software.

On 4 August 2020: The Company announced that Vicon had signed a contract with Electric Playbox, which is for the use of the technologies at their latest location in Manchester's Arndale Centre.

Business Segments

(Source: Company Website)

Financial and Operational Highlights (for the six months ended 31 March 2020 (H1 FY20), as on 21 May 2020)

(Source: Company Website)

• The Company reported second-highest ever first-half revenue performance; however, there was a delay in shipment of Vicon orders during the final two weeks of H1 FY20.
• The revenue for the first half of 2020 decreased by 6.5%, due to global operations shutdowns.
• Also, there was a decline in adjusted profit before tax and adjusted earnings per share, as compared with the corresponding period of the last year.
• During the period, the Company had a notable contract wins with Tencent and miHoYo in China, and gaming company Konami in Japan.
• Oxford Metrics witnessed a strong balance sheet, with cash of £10.8 million (H1 FY19: £10.9 million) and no debt position. On 20 May 2020, the cash position stood at £14.2 million.
• In Yotta division, the first half delivered a strong sales performance for the Connected Asset Management Software-as-a-Service (SaaS), Alloy.
• With the strategic actions, the Company increased Annual Recurring Revenues by 14.6% year-on-year to £6.8 million (H1 FY19: £5.9 million).
• Total equity shareholders' funds increased by around 7% year-on-year to £29.3 million.
• The Company was not facing any supply chain issues and was planning to take prudent actions as needed.
• OMG is diversified across multiple vertical markets with favourable long-term growth drivers.

Financial Ratios – Strong Liquidity Position

Reported profitability metrics for the first half of 2020 were lower against the corresponding period of the last year, but it had generated a decent revenue and better control over expenses. On the liquidity front, the current ratio was higher than the industry median of 1.38x, reflecting sufficient current assets to pay short-term obligations and robust liquidity profile to tackle the challenging market dynamics. On leverage front, the debt-equity ratio was 0.08x, which was lower as compared to the industry median of 0.19x, reflecting that the Company is less leveraged as compared to the industry.

Share Price Performance Analysis

 (Source: Refinitiv, chart created by Kalkine Group)

On 13 October 2020, at the time of writing (before the market close, at 8:05 AM GMT+1), Oxford Metrics Plc shares were trading at GBX 82.00, down by 1.80% against the previous day closing price. Stock 52-week High was GBX 127.40 and Low of GBX 70.00, respectively.

From the technical standpoint, 14-day RSI (oversold zone) is currently supporting an upside move (around 37.44 level), which means the stock price could increase in the short term. The Company’s stock has delivered a positive return of around 15.49% in the last three months.

In the last two years, Oxford Metrics share price has delivered 25.15% return as compared to the 0.69% return of FTSE AIM All-Share index, which shows that the stock has outperformed the index during the last two years.

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

Business Outlook Scenario

OMG has not faced any material supply chain issue and continued adopting prudent actions as required. Considering the prevailing unprecedented macro-economic uncertainties, it decided to withdraw market guidance for the FY20 and shall provide guidance when visibility improves. Nevertheless, the Company’s strong fundamentals reinforce its ability to navigate the current challenges. As of H1 FY20, it had no debt obligation and substantial cash position after the payment of the final dividend. Adjacently, Yotta has improved visibility with 95.8% retention of growing SaaS customer base and 14.6% year-on-year growth in annualised recurring revenue.

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 the signs of recovery, decent operating & financial performance, high level of cash generation capabilities, no debt, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Oxford Metrics at the current price of GBX 82.00 (as on 13 October 2020, before the market close at 8:05 AM GMT+1), with lower-double digit upside potential based on 3.48x EV/NTM Sales (approx.) on FY20E Sales (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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