Iomart Group Plc

Iomart Group Plc (LON: IOM) is an FTSE AIM All-Share index listed Company engaged in providing secure managed hosting and cloud services under two segments: Cloud Services and Easyspace.

In June 2021, the Company will release its FY2021 results.

Investment Rationale for Valuation – Speculative Buy at GBX 267.50

• Cloud computing is one of the critical areas which dominate the UK technology sector. Hence, Companies operating in this specific area have significant growth opportunities.
• Covid-19 pandemic brings a sort of tailwind for the Company. It has enhanced the value and importance of technology during times of uncertainty and remote working environment.
• The UK technology industry would remain one of the fastest-growing sectors with high levels of investment driven by digital transformation efforts.
• In the last ten years, the Company delivered a higher return than its benchmark FTSE AIM All-Share index return, i.e. the stock outperformed the index. It could be a positive signal to the shareholders that this trend would continue in future.
• On the technical front, the 14-day RSI (GBX 37.62) indicates an upside for the stock.

Key Risks

• Failure to advance in technology could negatively impact the financial position of any company in the sector.
• High R&D costs could create liquidity risks for Companies.
• Macroeconomic uncertainties could impact consumer confidence and reduce non-discretionary expenditures.
• Iomart may fail to refine its strategy, which could delay the transformation to managed cloud revenue and weaken the balance sheet.

Recent News

Appointment of Head of Product: On 6 May 2021, the Company announced the appointment of Andrew Sinclair as Head of Product to oversee the new product and service development.

Appointment of COO: On 14 April 2021, the Company appointed Neil Christie as the new Chief Operating Officer.

Pre-close Trading Update (for the year ended 31 March 2021 (FY2021), as on 7 April 2021)

• Iomart expects a stable financial performance in H2 FY2021. It will drive the top-line, and the Company could reach a revenue figure similar to FY2020. The management anticipates revenue of approximately £112 million.
• Due to not using any government support and cost incurred from maintaining the sales team throughout the pandemic, the Company’s adjusted EBITDA margin went down to ~37.1% in FY2021 from ~38.6% in FY2020.
• This also led to adjusted profit before tax going down to ~ £20 million in FY2021 from £22.8 million in FY2020.
• However, the Company’s operations are cash accretive, and cash position rose to £23 million on 31 March 2021 from £15.5 million on 31 March 2020.
• The board expects net debt to be ~£56 million, slightly lower than the FY2020 level, driven by unchanged revolver loan drawn amount.

One Year Share Price Chart

(Source: Refinitiv, Thomson Reuters)

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

Conclusion

Increased automation and agility, the need for enhanced customer experience and the high demand for cost savings are driving the cloud computing market. Also, the Covid-19 pandemic accelerated the digital transformation. For Iomart, the revenue continues to transition away from legacy self-managed infrastructure revenue to managed cloud revenue. However, the Company’s market-leading cloud expertise would transition to growth over the medium term, while in the short run, there could be lower margins. The stock made a 52-week low and high of GBX 259.50 and GBX 380.00, respectively.

We have valued the stock using the P/E based relative valuation methodology and arrived at a target price of GBX 320.01. On the technical chart, the next important support level is GBX 224.90.

Based on the strong prospect of the business and the cloud computing industry in the medium term, continued transition of the Company to managed cloud revenue, market-leading expertise, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Iomart Group Plc at the current market price of GBX 267.50 (as on 12 May 2021 at 8.20 AM GMT), with a lower double-digit upside potential based on 21.71x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

LoopUp Group Plc

LoopUp Group Plc (LON: LOOP) is an FTSE AIM All-Share index listed Company providing software services for remote meetings in the United Kingdom and internationally. Its product, LoopUp, is a real-time remote meetings solution.

Investment Rationale for Valuation – Speculative Buy at GBX 69.00

• In this age of globalization and multinationals, providing remote business meeting solutions is a key trend in the technology sector. As it saves both time and cost for Companies, the players offering solutions in remote meetings space has significant opportunities for growth.
• Covid-19 pandemic brings a sort of tailwind for the Company. It has led to lengthy lockdowns and work from home trends which increased the importance of remote business meetings.
• The Company plans to migrate to a broader cloud platform from its remote meeting business. Cloud computing is one of the areas which would dominate the technology landscape. It launched Cloud Telephony, its first step in that direction.
• Driven by digital transformation efforts, the UK technology industry would remain one of the fastest-growing sectors with high levels of investment.
• On the technical front, the 14-day RSI (GBX 28.51) indicates that the stock is oversold. Hence, the stock price could have an uptick in the short term.

Key Risks

• The IT sector is highly competitive, and new players with differentiated products and disruptive technologies could enter the market often.
• The Company has to provide its solutions at a competitive price, or else it could lose business as barriers to entry in this sector is low.
• The Company has high R&D costs to adapt to new competitive landscape. It could create liquidity risks for the Company.
• Any downtime in remote meeting offerings could result in a loss of reputation for the Company.

Financial Highlights (for the year ended 31 December 2020 (FY2020), as on 30 March 2021)

(Source: LSE Website)

• Driven by a material increase in business volumes at the beginning of the pandemic, LOOP achieved a strong trading year in FY2020. It led to revenue rising ~18% YoY to £50.2 million.
• Due to cost savings and fixed costs, this top-line increase resulted in adjusted EBITDA being up ~239% to £15.3 million while diluted EPS was up ~760% to GBX 15.2 per share.
• The Group’s cash accretive operations and substantial rise in bottom-line led to a stronger gross cash position of £12.1 million as compared to £3.0 million in FY2019.
• LOOP used its cash flows to deleverage significantly. The net debt reduced to £0.7 million from £11.5 million in FY2019.
• The board wants to reinvest its earnings in the business. Hence, the Company would not offer any dividend in FY2020 like in FY2019.

One Year Share Price Chart

(Source: Refinitiv, Thomson Reuters)

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

Conclusion

The pandemic has accelerated the trends of more technology adoption, digital transformation and remote working. The Company is utilizing this opportunity to drive its growth faster. It is also transitioning to a broader cloud-based technology platform and has launched Cloud Telephony as the first step in that direction. The board believes that FY2021 is going to be a transitional year for the Company to become a specialist in the broader cloud platform. The stock made a 52-week low and high of GBX 67.00 and GBX 250.00, respectively.

We have valued the stock using the P/B based relative valuation methodology and arrived at a target price of GBX 110.83. On the technical chart, the next important support level is GBX 39.00.

Based on the strong prospect of the business, the Covid-induced tailwind to its remote meeting offerings, its upcoming transition to the broader cloud platform, strong liquidity and decreasing leverage, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on LoopUp Group Plc at the current market price of GBX 69.00 (as on 12 May 2021 at 8.13 AM GMT), with a lower double-digit upside potential based on 1.03x Price/NTM Book (approx.) on FY21E book value per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*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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