Hunting For Multibaggers - Arcontech

22nd Jul '20 by Jack Brumby

34 comments 7918 reads

Mid and large caps can generate solid gains and reliable income but if you want compounding, life-changing investments it helps to move further down the food chain.

Here are the best opportunities: high quality, profitable, small businesses with ambition and the runway to grow at 20%+ per year for many years. That’s where the next 10-bagger is. It’s out there right now waiting to be discovered.

Two recent examples that spring to mind are Games Workshop and Best of the Best. Both are multibagging investments. I’ve struck upon many more disappointments than big wins - but you only need a few of the latter to materially transform the performance of your portfolio.

There are several features these quite different companies have in common:

They were both small at the time of initial purchase with plenty of scope for growth,
They were both high quality, with strong balance sheets, cash generation, and returns on capital,
They both had a sense of stewardship and shareholder alignment that was clear from the management commentary, and
They both had clear catalysts - with GAW it was a change in management, and with BOTB a pivot to an online only business model

Add to this double-digit historic growth rates (something GAW actually lacked back in 2016) and operational leverage and the result seems a reasonable framework for spotting similar opportunities in future.

Arcontech (LON:ARC) might be one such contender. At a market cap of less than £25m, the stock is illiquid but if you believe that stock could treble then building a position over time is an option.

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This is a small, fast-growing tech stock with positive relative strength, encouraging cash flow generation, and high double-digit growth rates.

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I’ll explore just what it does below, but for now suffice to say ARC has some attractive operating characteristics.

A high level of cash from operations drops straight through to free cash flow and shares stand to gain from operational leverage - if the company can continue to win new clients.

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Revenue and profit have increased every year since 2010. What’s more, the balance sheet is strong, buttressed by a growing cash pile that management hints will be used on strategic acquisitions.

In fact as of one of its recent…

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Jack Brumby

23rd Jul '20

That's extremely helpful, thanks for the input.

And the bobsguide tip is useful. I've had a quick look around - sadly no reviews as far as I can see, and it would be great if there was some sort of product tagging feature so that you could quickly find and investigate competing products... I've barely scratched the surface though - I'll take a closer look at it in my spare time

Here's the Arcontech page for anyone interested.

Jef Warwick

Actually Jack - they do sort by product category. And this is for market data, as you can see there are a lot of them:

https://www.bobsguide.com/mark...

I did a bit more reading and my concerns on the potential of the company is

- I mentioned Fixnetix who were / are very successful - I met with their former global head of sales (Jason Mochine) core original developer (Dr Markus Perret) and COO (Paul Ellis) a few years ago.

The former head of sales Jason, has a similar profile to the CEO of Arcontech - however he was more senior and always London focussed and I could feel that the Fixnetix team was very high quality and they grew the business rapidly expanding in lots of areas.

I did a linked in search on arcontech and they have 19 People - and I can clearly see they are not anywhere near as high caliber as the Fixnetix guys as a whole.

Also concerns in terms of scaling aside from the current team is arcontech is focused on Open source and just being adaptable - and that generally (in my experience) just means cheap as an element of closed source allows higher margins and a bigger revenue stream from support

Also the current CEO has been in his role for quite some time now and to still be that small in the “market data”’space and no clear plan for how to move into a different more lucrative area gives me concerns they are likely to be more like activ financial (nice small business) rather than Fixnetix that scaled rapidly and then was sold
Anyway - with all that said, as I have been working in market data and with financial vendors for many years now - I’m still tempted to buy a few shares as “you never know” and they do have a small market share albeit in not the most lucrative areas of finance.

I would just be happier if the current CEO announce that he had a Jason Mochine / Markus Perret or other solid looking name join him to help him get out of the small area they are In.

jonesj

Thanks for an interesting article Jack.

With Arcontech, I presume people who work in the City and use such systems, or know people who use such systems are better positioned to appraise their product and the competitors than I would be.

abtan

Thanks Jack

I used Excelerator in the past, albeit 10 years ago, so my memory on specifics is hazy. Having said that I do recall being impressed with the product, though it was one of many we used at the time.

I guess my main concern was that it's still around 10 years later and doesn't really seem to have done much in that time. As you said, maybe things have changed in the last few years?

As an aside 2 other negatives that I have from my notes (from 2018):
- 59% of revenue from 3 customers (up from 55% in 2016/17)
- Asia Pacific revenue dropped from £27,000 to £2,000

That was enough to put me off so sadly it's not one for me.

rleonardw

No idea why I’m reading yet another puff piece. At some point Stockopedia needs to decide whether it’s a qualitive research site allowing users to use the excellent, clearly laid out financial company metrics Or a get rich quick ‘ ie. ‘multibagger’ fantasy.

MiserableJacktPotato

If you're here for the metrics (which you say are excellent), then why worry if someone writes an article you don't like?

That line of reasoning makes no sense to me

kgb1953

24th Jul '20

Grow up

ken mitchell

rieonardw

What an extraordinary and ungrateful post!

Jack’s article is full of quality and well balanced information that makes Arcontech well worth checking out, including making use of the excellent company metrics you refer to. No way is it another “puff” piece. It’s far better either to say nothing if you don’t Like something here or alternatively for you to post a similar detailed quality article that will take you hours to prepare and write.

I wonder how you would feel if you then got a reply like yours today. It’s thoughtless at best.

Anthony Ashworth

As a longtime holder of Carclo shares I really hope you are right. I've always felt that at the core of the company there's a really solid profitable business - but the last 5 years have been one problem after another. At this point I'd be happy to get to break even.

25th Jul '20

Thanks Abtan, yours and Jef's experience-backed insights are very useful. Client concentration does appear to be a key risk - it would have been nice to see this acknowledged more in the reports.

And yes, the theory would be that things have changed for the better in the past five years and ARC is now in a good spot to grow organically, win new clients, pay dividends, and make selective acquisitions.

This isn't nailed on obviously - I'm sure it's also possible that over the next two years nothing big happens (neutral), or the company even loses a client/s (negative). Not without risk then, so DYOR!

27th Jul '20

Hi Jack,

To follow on from this - as I still work in the financial data space - there has been a big step towards using Kdb - which is a fancy new database system for using data.

I work with quite a few of the big banks and those who are innovating in this area are all looking for Kdb developers.

So I had a look if any Market Data system vendors are using KdB and this company is:

https://kx.com/solutions/capital-markets/

They work across industries and not just finance and they also have a lot of offices and more people and they are a division of first derivatives (who are a massively successful financial vendor company - also listed, but I was too late to the party on that one).

Note they arent "real time market data" but as we all know "market data" these days is available to everyone and not for a large fee - so real time market data is not a big business for banks as you and I could get it for next to nothing. kdb is usable for HFT and other areas of trading that are on the up and thats why first derivatives are looking to use data in "better" ways.

Ive reached out of Arcontech to have a chat - as Ive found I have a few links to them - but I would be more inclined to back a "first mover" in the kdb space - rather than arcontech who are just "opensource" and that means cheap + it also means that the internal developers of a bank can take over the support of it.

So subject to my chat with arcontech (which Ill update) I think Ill skip this one - they are in a crowded market, with only a few clients and they are working with yesterdays technology.

However that is my take and its up to you if you want to jump in.

William K

Excellent post Jack. I like the fact the profit margins on Arcontech (LON:ARC) are steadily rising - usually a positive sign. Worth a punt. I now hold a very small holding and will follow with interest.

andrea34

28th Jul '20

I hold a small number of Arcontech (LON:ARC) shares, while I'm reassured by the in-line results indicated in the latest update I found the lack of comments on outlook somewhat concerning.

Bluesky Ventura

Hi Antony,

I think FY21 Carclo (LON:CAR) should turn cashflow positive. Expecting to see an uplift in technical plastic revenues due to its exposure to the medical devices market. (I've pencilled sales of £129M for FY2021). I I'm hopeful shares could be rerated as per the graph below.

As always DYOR.

BSV

14th Aug '20

quality and multibaggers are essentially the same things. £arc may well be the next quality company that multibags.

allanatsp

24th Aug '20

I'm interested to know if HL is one of their clients because I find the reliability of HL s data is absolutely appalling. I prefer to use LSE. The other consideration is that they are in a market which has a very limited number of possible customers (unless they go multilingual) i.e. their market could saturate very quickly.

Retireyoung

1st Oct '20

Multi-bagger or multi-sagger? This share seems to be quite out of favour at present. I wonder where this fall will end... it hasn't been this low since April when it was recovering from the March Covid-fall.

5th Oct '20

Haha - replying to my own message is surely an early sign of madness... but it looks like you spoke too soon Retireyoung! Seems the market is very concerned about the small number of clients this growth company has, so getting one more is big news...

Boon

17th Apr '21

Looked quite interesting.... until I saw that they're only at £3m revenues having done this for 10-15+ years!

I'm not doubting that their market data or data processing platform is superior, but it looks like either it is too niche to really scale up, or that its not that important and hence they don't have pricing power (aka Bloomberg terminals nosebleed fees).

At sub £5m revenues, and no visibility to get to £10m+ revenues in the future, why are they even listed? Makes more sense to run it as a private company.

I will wait for the magical words in the Outlook of increased pricing, development of new products to further cross-sell, up-sell opportunities, geographic expansion, client type expansion, etc before this can become a serious multi-bagger...

JonnieRed

18th Apr '21

So from a low back in Dec 2012 of around 8.5p a reasonably steady climb up to a peak of just over 230p in Feb 2020 - and the arrival of COVID. Not a bad rate of return over that 8 year period.

With a ROCE, ROE, ROA, CROCI all currently above 15% things look quite healthy but since the COVID disruption the shares seem to be stuck bouncing between a high of around 210p and low of say the 150s / 160p.

If the share price was to break out above its previous pre-COVID high then I could get seriously interested, but at the moment I think this is more of a wait and see.

Hunting for multibaggers - Arcontech

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Jack Brumby

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