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.
The good news here is that we believe after this morning’s upbeat trading statement, this process is now firmly underway. Possibly leading to a near 3-fold increase in the shares over the next 12 months, as SVR migrates towards our target price of 11p (up from 10p) – that is excluding any further upside in the event of corporate M&A.
None of this should come as a major surprise though.
We said back in March at the prelims, that the business was making great strides operationally, but this considerable progress hadn’t yet translated into the numbers. Well this morning arrived clear evidence of all the hard work, as H1’15 sales and adjusted EBITDA came in at £7m (+13% vs £6.2m LY) and -£0.1 (vs -£0.7m LY) respectively - with net cash closing 30th June at £0.7m after redeeming £0.2m of the £1.3m convertible debt and swapping the rest (£1.1m) into equity
This much improved performance was powered by a clutch of new customer contracts and strategic partnerships, the natural flow though from business wins in 2014, key product launches and improved gross margins (up 5% to 48.5%).
What’s more, 81.5% of H1 revenues were described as “recurring in nature” (eg SaaS, support, operations, etc), thus providing excellent forward visibility and giving us confidence that the company will meet FY expectations. In fact, thanks to the positive first half, we have even nudged up our 2015 turnover estimate from £13.4m to £13.6m – the second time in only 16 days.
With regards to earnings, “the directors anticipate a return to profit” in H2, along with “a significant improvement in cash” due to normal seasonal working capital swings and post conversion of the £1.3m loan notes.
Marne Martin, CEO, adding “ServicePower has had a strong start to 2015 and … we are confident that the full year will be successful.”
Finally, ServicePower shares at 3.65p trade on a paltry 2015 EV/sales multiple of less than 0.6x – materially less than its software peers (see next table).
It is worth noting too, that our 11p/share TP also attributes no value to SVR’s £16.9m of carried forward tax losses as at the end of December 2014