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This is ‘officially’ the second part of a small Blog Series but in fact an Additional Blog got produced which you can find here along with the first Blog:
EUSP put out a Trading Update on the 25th January which you can read here (although I have put most of it just below anyway !!):
This Update was pretty decent and they said Full Year Results for 2017 would be in line with Expectations and it was following this that I bought my Position. This bit below shows how fast the Revenue is growing and how 2/3 is Recurring Revenue which is growing strongly as well:
“Revenue grew by 38% for the year ended 31 December 2017 (32% on a constant currency basis) to approximately £4.7m (2016: £3.4m), of which approximately 66% (2016: 71%) is expected to be of recurring or repeated nature. The Company ended the 2017 financial year with revenues of recurring or repeated nature up 29% from the end of the 2016 financial year.”
Profit is clearly moving the right way fast - look how it has gone from Negative to slightly Positive with a move of £0.9m. If you look at the Table in the ‘Valuation’ section just below, you might see that the move forecast between 2018 and 2019 on Profit before Tax is £0.6m (£0.7m minus £0.1m) - it wouldn’t surprise me if they beat this although I am being very simplistic in saying that:
“Profit before interest and tax is expected to be approximately £0.1m (2016: loss of £0.8m), despite the negative impact of foreign exchange movements.”
This next bit is important because I do think the Cash is fairly tight - however, if you have seen the Additional Blog I wrote regarding EUSP which was a response to Comments from Andrew Latto, you should see that Andrew reminded me that the CFO mentioned at the Show about how there were a lot of payments expected in soon:
“The cash balance at 31 December 2017 was approximately £0.65m (31 December 2016: £0.97m). The Company is also due to receive significant payments early in 2018 in respect of several ongoing projects.”
This bit from the CEO will please many Readers I am sure as so many Software businesses blur the line on Capitalisation of R&D Spend:
“I am pleased to report the Group’s first profitable year. This has been achieved with no capitalisation of R&D. The application of IAS 38 Intangible Assets will be reviewed by the Board for the current financial year.”
And this final bit is extremely important when you consider the ‘Target’ Section further down - remember, with a fast growth rate you can justify a higher P/E Rating - “acceleration“ is a word I like to see as well:
“Compounded annual revenue growth of 27% has been achieved during the last four years, with an acceleration during the last two years. This growth has been all organic. We continue to build both our order book and pipeline of new customers for 2018 and beyond.”
Normally I would show the ShareScope ‘Details’ screenshot here but for a change (and because I thought Readers might like to see it) I have bunged the SharePad ‘Brokers’ Screen in here and if you look at the graphy thing you should be able to see it is ‘TURNOVER’ and if you look just below there is a Drop-Down Menu and I have selected the ‘Turnover’ option. Anyway, this in essence is just showing how the Sales have grown over time and they are projected to keep growing quite nicely (of course it might not happen !!).
If you click on the picture it should get bigger for you to see more clearly.
In terms of the Valuation, my favoured Metric is the good old fashioned Forward P/E Ratio (Price divided by Earnings) - it has its faults but on balance it is the most widely used measure and I tend to find this is the yardstick used by the majority of other Market Participants and therefore it is a reasonable judge of how the Market will price any Stock - it is not perfect but I think it is the best tool in the garage.
If you look in the Bottom Left Hand quadrant then you should see the table marked ‘FORECASTS’ and the bit I am interested in is the ‘EPS (p)’ (Earnings Per Share) and for 2018 the Consensus Forecast is 0.2p and for 2019 it is 0.9p. I say “Consensus” but that is slightly misleading - there is only one Broker (I think this is probably from Stockdale Securities - I picked up a Report at the Shares/Cenkos Show and that was from Progressive Equity Research but I am sure the CFO told me that Stockdale was the source, but more importantly he told me that he was comfortable with these forecasts. Actually it was quite funny because I picked up the note and told him I thought the figures were wrong and he looked at them and agreed with me that the figures for 2019 were missing !!!).
So on a Current Share Price of 12p to Buy (I have chosen this number because it sort of represents the Buy Price for EUSP at the time of writing - the Spread is quite wide remember. I actually paid a lot more at 14.5p), on the Forecast for this year we have a Forward P/E of 60 (12p divided by 0.2p) which is extremely high but next year this falls to 13.9 (12p divided by 0.9p).
For a tiny Company with the potential to grow very fast in coming years, this seems a reasonable Valuation. At the moment there is no Dividend as the Shares is in growth mode and Cash is being used to invest, which is clearly the right thing to do.
This is really a guessing game. Simplistically, based on the Forecasts of 0.9p for 2019 (Next year) and giving it a higher P/E Rating of 20 (this could happen with some good news on Contract Wins and suchlike), then we would get a Target of 18p (0.9p times 20).
OK, to rev this up a bit, let’s say things go well and in a few Years we foresee a Forecast of 1.5p Earnings Per Share (I don’t think that is at all ridiculous) and if we put that on a Forward P/E of 15 (this is pretty conservative I think) then we get a Target of 22.5p (1.5p times 15).
If the Company does well (and if it hits 1.5p of EPS then clearly it will have been doing ok), then perhaps a Forward P/E of 20 is possible. If so, we would get a Target of 30p (1.5p times 20).
I don’t think any of these Targets are stupid and with patience and things going well for the Company (they might not !!!!), then they are achievable in a couple of years. It is very possible that they can do even better especially if the Market gives them a higher P/E Rating which happens quite often with small Software Businesses (with lots of predictable Recurring Revenue/Income) - as always patience is essential but I think there is plenty of value here to justify me holding a Position.
It’s no surprise to find a pretty choppy Stock and the Full Chart below from ShareScope since EUSP came on the Market in 2013 really is a story of a Downtrend through to the middle of 2016 where my Green Shading is which was followed by a shallow Uptrend which is where my Yellow Box is and then it has dropped out of the bottom.
Due to the choppiness of this Stock it is not a great one to produce a meaningful chart on - you can see this choppiness in how the Price is all jerky and spiky. On the Chart below I have zoomed in to about the last 2 years and my Black Line at the bottom (marked with the Black Arrow) is a bit of a ‘best fit’ attempt to draw a useful Support Line but with only 2 ‘touch points’ this is not necessarily all that valid and I am guessing really - but it is all I have to work with.
Other than that, my Green Line (Green Arrow) is the 14.5p Level where I bought and note how I managed some impeccable and outstanding timing of Buying right at the Top of a Spike up !! Doh !!
My Red Line (Red Arrow) is a Downtrend Line which needs to be got over first before the Price gets on to try getting higher than my 14.5p Buy in Level - Green Line. If I was looking to buy now, I would probably wait for the Price to get through the Red Line which would mean a move to about 13p would be a Buy Trigger for me.
So there we have it. I have a small Position in EUSP because I quite like it but it is one of the smallest Market Cap Stocks I have ever bought and it is clearly very high risk because of this one factor alone. It is the kind of Stock where something could go horribly wrong and they would quickly end up short of Cash and would need to do a Placing which would dilute Shareholders or they might need to take on Debt which would obviously not be good either.
So there are clearly Risks here and this ensures that I will never have a huge Position in EUSP but I think it is a decent little business with a lot of potential and some degree of Track Record in actually achieving something (unlike most tiny AIM Stocks !!!). The Management seem pretty trustworthy and knowledgeable and the Sales growth in recent years has been strong - so with the stars aligning in my favour this could work out well.
I hope Readers have found this useful, and please pray along with me for a good outcome for the good ship EUSP and all Shareholders who sail in her.
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