D4T4 Solutions – Trading Update #D4T4
D4T4 Solutions (#D4T4) – Latest share price: 220p, market cap £86 million
As readers will hopefully be aware from my podcast with Graham back in February this year, I’ve been invested in D4T4 for a number of years, my first purchases being made back in late 2011 when the business was called IS Solutions. Having initially invested in the business based on some simple screening for possible long term GARP stocks, the business has gone from strength to strength, particularly following the 2014 acquisition of Speedtrap Holdings, the holding company for Celebrus which has now become a force to be reckoned with in the Customer Data Platform (CDP) space.
Since 2011, turnover has increased 280% from £9.1 million to £25.2 million and EPS has risen even more impressively from 3.15p to 14.5p over the same period. The business also has cash of circa £11 million, owns its freehold HQ in Sunbury, Surrey worth £4 million+ and ticks each of my primary investment checklist items including:
- Dividend paying
- High gross margin (40%+) and net margin (15%+)
- High ROCE, ROE and ROIC
- Debt/Equity less than 0.8
- Strong free cash flow (FCF)
- Strong balance sheet with tangible equity
- Trustworthy and capable management team
Whilst the share price has risen strongly over recent years, it has been a volatile ride with the valuation reaching a high of 200p in December 2016 only to drop back to 100p in April 2018 on concerns over lumpy earnings and then rise strongly again to an (almost) all time high of 280p in April of this year. The current share price of 220p gives the business a market capitalisation of just under £86 million.
Some of this volatility is the result of its lumpy earnings and this financial year has also seen a change in CFO, the departure of their Chief Data Officer (CDO) and one of the Non-Executive Directors selling £3.1m of shares near the recent highs at 259p.
Whilst each of these is potentially an amber flag, some might argue that the combination is a red flag and although I don’t know the personal circumstances for the CFO departing beyond that already in the public domain, I hold the entire Board of D4T4 Solutions in high regard having met them over a number of years and hence I don’t persoanlly see a reason to be concerned.
I have similar thoughts re: the departure (after 3 years with the business) of Matthew Tod (CDO) who I believe played a key part in determining the strategy for the business and has taken the opportunity to now step aside; the business having employed some equally exceptionally talented and experienced media and analytics executives such as Bill Bruno within the last 12 months to fill the gap.
With respect to John Lythall selling 1.2m shares, John is 71 years old and co-founded the business back in 1985. Despite the likely excellent long-term future prospects for the company, I have no issue with a founding director reducing his holding near recent highs and he still holds 1.1m shares.
Anyway, back to this morning’s trading update – what did it tell us?
The headlines are:
- Trading in-line
- H1 revenue of £8.84 million
- Net cash of £11.24 million
- Prospects for H2 (forecast as £17.7 million) underpinned by the precedent set from contract renewals signed in H2/2019 and a significant pipeline of new business in negotiation with existing clients
- Ongoing geographic expansion
- Focus on new partnerships (this means the likes of Microsoft etc)
This is all positive but clearly we have a large H2 weighting again and its worth reflecting on H1/H2 sales over recent years to try and gauge any trend:
- 2016 – H1 £8.5 million / H2 £10.1 million
- 2017 – H1 £10 million / H2 £7.7 million
- 2018 – H1 £4.8 million / H2 £14 million (restated for IFRS)
- 2019 – H1 £14 million / H2 £11.3 million
- 2020 – H1 £8.8 million (actual) / H2 £17.7 million (forecast)
Anyone with an aversion to lumpy earnings will probably be having palpitations now. Although FY20 sales will be up 40%+ on FY16 and recurring revenue is equally building nicely, there is a clear argument that smoother earnings would help the valuation of the business and I am aware that management are already cognisant of this. Short-term I dont see this changing much so it’s a consideration investors have to take into account.
House broker finnCap have today reiterated their forecast guidance for FY20 showing sales of £26.5 million, adjusted EPS of 14.2p and a dividend of 3.3p yielding around 1.6%. Their target price remains unchanged at 310p – some 50% upside.
As a long term investor in the Group (as well as having a general long-term perspective on equity investing), I’m pleased that this update confirms business as usual.
Annual sales and earnings continue to grow year-on-year along with recurring revenue improvements, the Celebrus CDP and Hybrid Cloud continue to gain traction with new and existing clients and there is scope for further growth from new clients/partnerships both in the US and other geographies. It would be nice to see the muted Asia Pacific acquisition in the bag during this financial year but investors will have to be patient.
On a cash adjusted PE of <13 with a great balance sheet (13% in cash), excellent margins and with businesses around the globe clambering to leverage the plethora of customer data at their disposal to increase sales and drive marketing initiatives, I believe the Group is undervalued and can only see continued growth over the coming years.
With various M&A deals in this sector over the last 12-18 months at Price/Sales multiples of 10 or more (compared to D4T4 valued at 3.4 x sales), it’s possible the Group’s IP-protected ‘real time’ data capture capabilities could also catch the eye of an admirer and, even if not, it will certainly ensure they continue to maintain their edge in this fast growing and hotly contested space.
I’m happy to retain D4T4 Solutions as my second largest holding (now overtaken by Haynes Group #HYNS) and look forward to the interims next month.
At the time of publication to the author holds a long position in the company mentioned.
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