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Following the release of its interim results, we upgrade our 2017 forecasts for ServicePower and reiterate our 6p target price.
Servicepower Technologies
The group retains a high visibility to revenue (79% recurring), and as the recently launched products gain traction under the revised strategic focus – combined with planned cost-reduction initiatives – we expect improvements in financial performance.
Turnarounds are notoriously tricky even at the best of times. Inevitably once one problem is fixed, another crops up – which is what has happened this year at ServicePower. H1 revenues at £6.8m showed impressive growth of 12.8%, after a series of blue chip contract wins. Since then, like many small caps, the going has got progressively tougher – characterised by longer sales cycles as clients have become increasingly nervous due to slower global growth, emerging market instability, terrorism, lacklustre demand in China and falling commodity/oil prices.
Microcap software is a stock-pickers paradise par excellence. Not only is the sector poorly covered by the City, but also the returns can reach nosebleed levels. Here the technology is often niche and difficult to copy – hence creating predictable revenues, healthy margins and positive cashflows. But the really exciting bit comes when growth is added; effectively turbo-charging profits as incremental sales largely drop down to the bottom line.
Following the results, our 2015 forecast and 10p share price target remain unchanged, implying potential upside of 105%.
Earnings upgrade cycles are like gold-dust. Get on board early, and the returns, especially for off-the-beaten track stocks like ServicePower, can lead to very rich-pickings for investors.
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Ultra-low interest rates and improving corporate balance sheets have helped drive M&A activity to record highs – climbing 47% in 2014 to $3.5 trillion in terms of announced deals, and up another 38% to $2.2 trillion in H1’15 (source: Reuters).
The recent full year 2014 numbers reflected the transition that ServicePower is undergoing, as it moves away from low margin service contracts towards higher margin recurring SaaS revenues. However, they also pointed towards significantly enhanced prospects for the future, as the new business model powers up.
