Idox growth portfolio candidate

The Company is engaged in the development and supply of software solutions and services to the United Kingdom public sector and asset intensive industries worldwide.  It operates in four segments: Public Sector Software, which delivers software service solutions to mainly local government customers across a broad range of departments; Engineering Information Management, which delivers engineering document management and control solutions to asset intensive industry sectors; Information Solutions, which delivers both an information service and consultancy services to a diverse range of customers across both private and public sectors and Recruitment, engaged in providing personnel with information, knowledge, records and content management to a diverse range of customers. It also provides information management, Web development, online publishing and training services. I have a holding in my growth portfolio (epic code: IDOX)

Market	Aim	Industry	S/ware & IT services
Sales	£57.9m	Earnings	£6.71m
Market Cap	£170.5m	Share Price	48.9p
Norm. EPS	2.23p	Historic P/E	22.0
Est. 2013 growth	79.5%	Prospective P/E	12.2
Est. 2014 growth	10.6%	Prospective P/E	11.1
Rolling PEG	0.33	SGR	11%
PBV	4.36	Historic Yield	1.38%
ROE	18.3%	Operating Margin	14.1%
5 yr BV + Div return	16.97%	5 yr FCF return on BV	16.4%

 

IDOX predominately sells into the UK where 69% of its sales are generated, the second largest market is the USA at 18%.  They have a dominant position within local authorities in the UK, where they sell document control systems to over 90% of them.  Although there are restrictions on Government spending, IDOX supply cost saving solutions for paper management and appear to have been unaffected by the Government cuts.

 

IDOX has started this year well with a stronger pipeline than the year before across all of the divisions, giving some weight to the expectation of a near 80% growth in earnings for this year.  Although following on from the AGM statement on 28 February the SP declined from its 52 week high of 58.7p.  To summarise the statement the Public Sector Software division (representing 52% of sales) saw continuing progression of new business, this is expected to result in further growth in the first half and an increased order book of contracted services to be delivered in the second half. The Engineering Information Management division (representing 31% of sales) though saw a quieter start in license sales compared to last year, as there are no global contracts currently planned to be signed in the first half.

 

The company acquired a French engineering document control business on 11 April 2013 for £2m, specialising in the oil & gas sector, which has been the only acquisition so far this year (they have a 31 October Y.E.), having spent £24m in their last financial year.

 

IDOX own a recruitment services business that is loss making (sales of £2.5m, operating loss £1m)and does not fit well with the rest of the business and it would be good to see them dispose of this.  They will probably have to wait until the sector improves before this can happen.

 

They have a healthy operating margin of 14% (16.5% if they sold the recruitment business) and a good ROE of over 18%.  Over the past 5 years they have grown the book value per share and returned dividends at a compound rate of almost 17% pa, with the FCF almost matching this return at just over 16%.  This demonstrates that over a reasonable period the earnings are being converted in to cash.  Sales and EPS over the past 5 years have grown at a compound rate of 23% and 24% pa respectively and they have a manageable level of gearing at 55%, with interest covered 6.5x.

 

 It is likely there will be a trading statement in late May and their interims announced in late June.

 

The slower start from the EIM division has concerned some and depressed the SP, so many may be waiting for the trading statement in late May before making decisions on investing or increasing their holding.  If IDOX can achieve these growth numbers then a 2014 P/E of 11 looks cheap, there is obvious risk here, but this level could be a speculative buying opportunity.