Accumuli - Acquiring Secure Growth

http://www.accumuli.com/


Accumuli (LSE:ACM) is a small cybersecurity company that, unlike many software companies at the moment, does not come across as being valued at a premium at the moment. The company has grown in size significantly over the past 12 months through a range of acquisitions, and through organic growth to a lesser extent. This has had the combined effect of pushing the market cap of Accumuli up to £32.8m compared to comfortably less than £5m a few years ago. Accumuli shares currently trade at 20.75p and are up ~69% on a one year time frame. Clearly, buying in now would not be buying in near a minor low, but do the fundamentals justify an investment on their own merit?


The technical position of Accumuli is pretty encouraging with plenty of downside support, albeit with there being a similar amount of upside resistance. Positively, the shares are consolidating nicely within the rectangle shown, and that is often good news when they have risen substantially, which they did from ~15p to almost 23p. The direction of the rectangle break will ultimately determine the short, and possibly medium-term, trajectory of Accumuli. An upside break would target as high as 28p (as an initial target), whereas a downside break would probably mean a re-visit to 17.5p (as an initial target). In either case, there is very little resistance above the rectangle, and very little support below the rectangle (down to 16p). On balance, I expect that momentum will probably remain with bullish investors for the time being, although a return to ~20p is certainly not out of the question before that.

The less obvious benefit derived from recent market interest is that there is increased liquidity with more investors aware of Accumuli. That can be seen on the chart, as there are not far fewer days on which the share price is level, plus volumes have grown materially, even when you factor in the higher share price. This improved liquidity has improved the spread attainable, although the spread itself can be volatile - sometimes it is just a couple of percent, but other times it can widen to as much as 5%. That is partly down to the strong institutional interest in Accumuli, and the relative lack of institutional 'trading'. There are a number of reputable institutional holders of the stock, including Oryx International Growth Fund, and Hargreave Hale. Several directors hold shares in Accumuli with a non-executive holding over £250,000 worth, but in the grand scheme of 158m shares in issue, that is a small percentage.

Accumuli describes itself as a "Leading, rapidly growing, UK-based independent specialist in IT security". Boasting a global customer base including numerous blue chip clients, the company has offices scattered around the UK in Basingstoke, Leeds and Cambridge. The company's operations can be placed into three sections, although the business is very much one which is fully connected.

- Technology Solutions: Accumuli finds possible IT weaknesses that clients may have and recommends appropriate third party or self-owned technologies. Accumuli also deals with the implementation of SIEM (Security In Event Management) solutions and the implementation of security intelligence platforms
- Professional Services: Accumuli are involved with the scoping/design of solutions, implementation of technology and with training on technology solutions
- Managed Services: This includes services such as DDOS and Firewall management

The cybersecurity sector is certainly one that is growing, and that is down to cybercrime becoming an increasingly common, and sophisticated issue. Given that cybercrime can lead to data leaks or cash being stolen, it is not an issue that firms take lightly thus spending in the sector is increasing. Indeed, last year both the UK and US governments pledged to ring fence, and increase cybersecurity spending given the very real risk that is poses - take into account that comes amid a raft of spending cuts. However, research from BT last month showed that less than a fifth of surveyed UK business leaders perceived cybersecurity to be a major priority. That compares to over two fifths of respondents in the US. Of course, Accumuli's product suite covers many other facets aside from cybersecurity, but that situation is only likely to improve, especially since spending on IT security is set to continue rising at a strong pace.

Despite that, Accumuli's interim report for the six months ended September 2013 showed that organic growth was fairly slow with underlying sales growth of 6% and underlying gross profit growth of just 3%. In any ordinary scenario, it would be difficult to class those results as being those of a growth company. Although they did have tough comparables, the real growth of Accumuli (to date) has been acquisitive. This has been pursued by CEO Gavin Lyons after he joined the group in August 2012 - he has done a sterling job in growing the company since. The business shift towards acquisitions started in 2012 with a couple of a company called Edge7, which has since been integrated well.

However, the real pivotal moment was when Accumuli actually disposed of a subsidiary called Webscreen Systems back in February 2013. The consideration was £6.3m and that reflected a major percentage of the market cap at the time. $1m was deferred and has been paid to Accumuli just last month - the sale value actually returned 4 times Accumuli's investment in just 21 months, which is a good feat. As part of the sale, Accumuli retained the right to sell Webscreen's products on Juniper's behalf, although disappointingly no sales materialised during H1. Importantly though, the sale unlocked a large cash reserve that the company could use to fund acquisitions, and that is exactly what it has done, completing two milestone acquisitions in short order.

The first of these came to light in June 2013 and was of Signify Solutions, another managed service IT provider. The cost of the acquisition amounted to £2.6m, which compared to 1-year revenues of £2.9m, generating EBITDA of £0.56m. More significantly, Signify had a 250 strong customer base and that presented excellent cross-selling opportunities. Moreover, 88% of revenues were recurring, which enhanced the attraction of the company.

The second acquisition was of Eqalis; the leading UK partner to Splunk; a NASDAQ $9 billion+ big data company. The cash cost for Eqalis was £0.7m (net) with £1.2m in deferred cash payable over the following three years. Eqalis carried a 150 strong customer base, to which Accumuli only sold to 10%, so once again there was excellent potential for cross-selling and synergies across the board. The two acquisitions look smart as they position Accumuli towards the forefront of technological developments, place them with more customers, and in the case of Eqalis, with Splunk. However, the financials are fairly unexciting - Eqalis generated £1m in revenues over the most recent 6-month period, generating £0.2m in EBITDA.

On the acquisition, CEO Lyons commented: "Eqalis is a business which has excelled in the areas of Big Data Monitoring and Analytics. It has prospered through its very close relationship with Splunk, through the excellence, knowledge and expertise of its directors, trainers and consultants, and through the great results it has delivered for its customers. Big Data monitoring and analytics is now intrinsically linked with security and operational excellence and Eqalis have been addressing these challenges for the last 6 years."

The 2013 FY results consequently made for good reading (albeit the Signify and Eqalis acquisitions occurred afterwards). Revenues rose to £14.1m from £12.1m with a stable gross profit margin of 53%. Encouragingly, the company announced a maiden dividend of 0.4p/share, which currently equates to a 1.93% yield, which is not too bad at all. Accumuli also stated its intentions to follow a dividend policy whereby around 30% of pre-tax group EBITDA will be paid out on an annual basis, which is a reassuring commitment.

The interim report (the most recent financial report), had the following figures:
- Revenues up 23% to £7.7m
- Gross profit up 28% to £4.5m. 62% of gross profit is recurring
- Group EBITDA up 7% to £1.1m
- Cash generation of £1.2m
- Loss after tax of £0.1m (a result of amortisation and acquisition costs)
- Net payables of £4.5m
- Cash and equivalents of £3.6m [-£0.7m Eqalis payment + £0.6m from Webscreen] = £3.5m pro forma at H1 end

The only broker forecasting figures for this year and next are Finncap. They have pencilled in £2.8m in pre-tax profits for 2014, giving 1.4p EPS and a 0.6p dividend. They are then forecasting £3.4m pre-tax profits for 2015, 1.8p EPS and a 0.7p dividend. If those figures are met (they are probably adjusted to remove exceptionals and amortisation), then the shares are trading on a current PER of 14.8, which is low even given that organic growth is a little slow and the balance sheet isn't particularly strong.  On the other hand, organic growth probably will pick-up again with the cross-selling technique and there is probably some room for manoeuvre on the PER - it could realistically stretch up to 18 or even beyond, given the buoyant market conditions. The forward PER is just 11.5, which looks a lot more attractive, and given that the financial year for Accumuli will roll over at the end of March, all eyes are on the trading statement in early April. At 0.6p, the dividend yield would be 2.89%, which is good, and that would supposedly rise to 3.37%.

I was initially sceptical of those dividend figures. Taking the 30% of EBITDA as being a dividend payment, at 0.6p and with 158m shares in issue, Accumuli would need to generate full year group EBITDA of £3.16m. Group EBITDA for H1 was £1.1m. Assuming a 40:60 EBITDA split over the course of the year, as the company says it has a H2 weighting, H2 EBITDA on those figures would amount to £2.75m. However, we have to add in 6 months performance for Signify and 4 months performance for Eqalis. Using the figures provided by the company, Signify EBITDA could amount to £0.28m with Eqalis adding a further £0.13m. Those figures assume no cross-selling has taken place, which is probably unfair, so there is upside potential on those. Adding that back to the £2.75m, the estimated group EBITDA actually rises to £3.16m so those dividend estimates look reasonable, thus the potential yield is attractive. The dividend would cost £948,000 and is covered 2.3 times over, by forecast earnings (which are probably adjusted for exceptionals). Combined with forecast cash outlays for the Eqalis transaction, cash could become an issue, albeit it is largely mitigated by the strong cash flows - that is why the nature of any further acquisitions is important.

The company now finds itself in a position where it has circa 700 customers, and the focus being to cross-sell across them. That is the primary focus as opposed to searching out new customers and potentially sacrificing margin, which seems sensible. They do state though that they are open to further acquisitions if they match all the right criteria. That is both positive and negative dependent upon how it is funded. Cash funded acquisitions is preferable given the strong cash generation as it prevents further dilution, although the cash balance itself isn't great. A mixture of cash and shares (or deferred cash) would be the best method if further opportunities were to arise.

Choosing whether or not to put a Buy tag on Accumuli was extremely difficult. On one hand it is a fast growing business with attractive valuation metrics, but on the other hand I intend to limit long exposure as there is the potential for a market pullback. As with a lot of software companies, there is a lot of goodwill and intangible assets, and that leaves the risk of asset write-downs. Virtually all the non-current assets are intangibles and current assets are slightly less than total liabilities. That's not a terrible situation to be in by any means, but it's not rock solid. On the other hand, Accumuli has a high level of recurring revenues, which gives enhanced earnings visibility. The technical position is also encouraging, and any upside breakout could be particularly rewarding for shareholders. Broker Finncap currently have a 25p target price for the company, up from 18.5p in December.

The shares are far from expensive, a number of valuation metrics look good and the chart position looks potentially quite strong, but the balance sheet is not quite as strong as I'd like it to be for a £33m company. Whilst the investment case here is actually very compelling, the limited number of portfolio slots left means that a No Rating tag is the most appropriate for now as I intend to see how the wider markets move in the coming weeks. Any further drop in the Accumuli share price towards 19p would probably be enough to tip the balance. In the meantime I will keep Accumuli on the site watchlist. No Rating.

3 comments:

  1. You make some interesting points. A per of less than 15 is fine with me but they are going to have to put in a superb H2 to meet the Eps targets after h1 was skewed downwards. It still looks to be a very robust company but I think they could do a £5m or so equity raise standalone or with an acquisition as there are too many payables. That could cap the price.
    Strange dilemna Accumuli is but i suspect that holders probably wouldnt go too far wrong!

    The wider market is poised at the moment between reversing yet again and forming a multiDECADE triple top, or pushing forward and breaking out. I think it is best to keep some powder dry.

    Good work El1te. Ricky

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  2. Very nicely summarised

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