First Derivatives Plc

First Derivatives PLC (LON: FDP) is a FTSE AIM UK 50 Index listed Software & Computer Service Company. It provides consulting services to the world’s leading companies from the technology, energy, and finance domain. Its Kx technology provides pioneer in-memory computing, operational intelligence, and high-performance streaming analytics.

Rationale for Valuation – Speculative Buy at GBX 2,600.00

• In H1 FY21, the Company reported revenue growth and has maintained a substantial cash collection and reduced debt.
• In the longer-term, it is confident of the growing demand for Kx streaming analytics from both partners and potential customers.
• On the liquidity front, the current ratio was 2.33x in August 2020, which was higher than the industry median. Also, the liquidity position stays strong, with the confidence to increase the investment for the future.
• As per valuation metrics, EV/Sales multiple is currently lower than the Software & IT Services industry multiple.
• From the technical standpoint, 14-day RSI stood at around 21.52 (oversold zone), which is supporting the upside movement.

Key Risks

• The industry is increasing incidents of cyber-attacks that can put data security at risk.
• Also, travel restrictions can have an impact on new business and pipeline opportunities. Similarly, lengthening of the sales cycle could have an impact over cash flows.
• Adjacently, increased competition can affect the Company's leadership position and its growth trajectory.

Recent News

On 1 March 2021, the Company stated that it had appointed Eric Raab as Chief Technology Officer for KX and Scott Matthews as Chief Executive Officer for MRP.

On 23 February 2021, the Company had agreed to sell part of its investment in Quantile Technologies to Spectrum Equity, for a cash consideration of £11 million.

Financial and Operational Highlights (for the six months ended 31 August 2020 (H1 FY21), as on 27 October 2020)

(Source: Company Website)

• The Company delivered a highly resilient performance, with an increase in Group revenue of 3% YoY.
• FDP witnessed 12% YoY growth in software license revenue driven by 46% growth in recurring revenue in Industry and 10% growth in recurring software revenue in FinTech.
• As per the segment, the total software revenue surged by 4% YoY and Managed services & consulting revenue were in line with the previous period, while delivering a software gross margin of 52% and Managed services and a consulting gross margin of 21%.
• Adjusted profit before tax for H1 FY21 declined by 19% YoY, driven by increased financing costs and higher depreciation and software amortisation charges.
• Over the period, the Company saw strong cash conversion, with net debt falling substantially to £30.6 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

The Company entered FY21 with good momentum and a clear strategy to deliver strong growth. It has a high financial liquidity level and a robust balance sheet to weather any disruption and grow the business further through strategic investments. Moreover, it has increased its demand for digital transformation, with the release of version 4.0 of Kx. Further, the medium-term outlook for First Derivatives stays positive.  Looking ahead, the Company remains confident that demand will recover to pre-crisis growth patterns over the medium term. Overall, the underlying performance stays consistent with the AGM trading update. The stock made a 52-week low and high of GBX 1,700.00 and GBX 3,625.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on First Derivatives at the current market price of GBX 2,600.00 (as on 12 March 2021, before the market close at 11:57 AM GMT), with lower double-digit upside potential based on 52x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Camellia Plc

Camellia Plc (LON: CAM) is a FTSE AIM 100 index listed Company, which is involved in agriculture, food, and engineering services. Its crop includes tea, macadamia and avocado.

Rationale for Valuation – Speculative Buy at GBX 6,725.00

• The underlying profit before tax in FY20 is expected to be higher than market expectations, despite the volatile market environment.
• The debt/equity ratio recorded by the Company in the past two years was considerably below the industry median. In H1 FY20, the debt/equity ratio was 0.06x.
• On the liquidity front, the current ratio was 2.52x in June 2020, which was higher than the industry median. Also, the liquidity position stays strong, with the confidence to increase the investment for the future.
• As per valuation metrics, EV/Sales multiple is currently lower than the Food & Tobacco industry.
• From the technical standpoint, 14-day RSI stood at around 32.74, which is supporting the upside movement.

Key Risks

• The Company operates in highly competitive markets, which could adversely affect the Group’s results.
• In the COVID-19 situation, the Company increased reliance on online platforms, which needs to be maintained properly to avoid cyber-attacks or frauds, failing to do so will deteriorate the reputation of the Company.
• Changes in environment-related laws and regulations could affect the overall business of the Company.

Trading Update (as on 11 February 2021)

• The Company made a stronger contribution to the citrus and soya crops.
• On 31 December 2020, the cash and cash equivalents net of borrowings was £87.8 million, with a further £50.5 million of market value of the investment portfolio.
• The Company confirmed that 2020 underlying profit is expected to be significantly higher than the market expectations, which expects around £15 million.
• In January 2020, the Company faced legal claims against two businesses in its African operations, but these claims have been resolved with costing up to £6.9 million.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

In 2020, the Company expected the underlying profit to be significantly above market expectations. The demand for tea in India remained strong, while soya crops made a stronger contribution, and Group macadamia volumes have exceeded expectations. It has already settled its claim related to African operations. In April 2021, the Company will announce the 2020 dividend. In the long-term, business prospects appear to be bright, which is allowing investment. Meanwhile, in Q3, CAM saw a stronger operating result, with a good cash position. Also, the Company remained in good shape to tackle the impact of the Covid-19 pandemic and will emerge even stronger once the current crisis is passed. The stock made a 52-week low and high of GBX 6,155.94 and GBX 8,421.32, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Speculative Buy” stance on Camellia at the current market price of GBX 6,725.00 (as on 12 March 2021, before the market close at 8:00 AM GMT), with lower double-digit upside potential based on 0.73x EV/NTM Sales (approx.) on FY21E sales (approx.).

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

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

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