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 August 2021, the Company will conduct its Annual General Meeting.

The next dividend of GBX 4.50 per share would be paid on 3-September-2021 (final dividend).

Investment Rationale for Valuation – Speculative Buy at GBX 264.00

• Cloud computing is one of the critical areas which dominate the UK technology sector. Hence, IOM operating in this specific area has significant growth opportunities.
• There was 90% recurring revenue for IOM in FY2021, up from 85% in FY2020.
• On the profitability front, IOM has achieved a decent performance since FY2019, with the net margin outperforming the industry median of 6.6%.
• On the liquidity front, IOM has a higher current ratio than the industry median of 1.33x in H2 FY2021.
• From a technical standpoint, 14-day RSI at about 40.73 is moving towards the oversold zone. Hence, there could be an uptick in the stock price in the near term.

Key Risks

• High R&D costs could create liquidity risks for the Company.
• IOM could face delays in the transformation to managed cloud revenue, which could affect its margins and weaken its balance sheet.
• The payment of dividends could put stress on the Company’s liquidity.
  

Financial Highlights (for the year ended 31 March 2021 (FY2021), as of 15 June 2021)

(Source: LSE Website) 

• Driven by contributions from previous acquisitions but offset by lower non-recurring revenue, revenue in FY2021 was down slightly by 0.6% YoY.
• It led to adjusted EBITDA down 4.8% YoY. However, it met the management’s expectations.
• Profit before tax was down 25.7% YoY in FY2021, impacted by £1.3 million more depreciation due to acquisitions.
• However, due to IOM’s cash-accretive operations, cash position rose to £23.0 million in FY2021 from £15.5 million in FY2020. Also, net debt reduced to £54.6 million in FY2021 from £57.6 million in FY2020.

One Year Share Price Chart

(Source: REFINITIV, Analysis done by Kalkine Group)

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

Conclusion

Though there is macroeconomic uncertainty, IOM had a resilient performance in FY2021. The management has confidence in the Company’s prospects and new customer acquisitions due to its sales pipeline. The Company remains on track to meet the management expectations in FY2022, driven by IOM’s high recurring revenue business model. The stock made a 52-week low and high of GBX 259.50 and GBX 380.00, respectively. On the technical chart, the next important support level is GBX 218.00.

Based on better profitability and liquidity of the Company than the industry, decent growth prospects, high recurring revenue, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Iomart Group Plc at the closing market price of GBX 264.00 (as on 12 July 2021), with a lower double-digit upside potential based on 22.18x Price/NTM Earnings (approx.) on FY22E earnings 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).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

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

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