IDOX – a painful kickin...
Idox (LON:IDOX) released a trading statement today, sending the shares down a whopping 20% to 36.25p. The good news was:
The Company is encouraged by the underlying progress made in all of its businesses during the first half and continues to be excited by the multiple growth opportunities available to it.
The bad news, which clearly wasn’t received well, was:
However, in light of a slower than expected first half of the year, the Board now thinks it is prudent to anticipate full year EBITDA is likely to be no less than £18 million, which reflects uncertainty of timing as to when those opportunities will crystallise.
At the yesterday’s closing price of 45.80p, the company had a market cap of £159m, giving it an EV/EBITDA of about 10.8 (=(159 mkt + 21 net debt) / 16.7). This put is at around about average for the market, I reckon. IDOX had a PE of 11.9, which was hardly stretched.
If I compute a new market cap based on 36.25p, and use the company’s forward EBITDA of 18m, I get a new EV/EBITDA of 8.2 (=(126+21)/18), which is probably a bit less than the market.
It constitutes about 5% of my portfolio, and I’m receiving a fair amount of pain from it today.
Where from here? Well, I’m sticking with IDOX for now, as I think that the market has severely over-reacted to the news. The company is still expected to grow revenues, debt seems modest, and valuation levels are not high.
Interestingly, IDOX showed a relative 6 month strength of -15% (before the drop today), so momentum would have given you a clue that things might not be all they seem. Still, I know most of you don’t believe in momentum.
Happy investing all, and I hope your day turns out to be better than mine has.
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2 comments
Hi Mark,
I've only looked at Idox (LON:IDOX) in a very superficial way, but what put me off is the Balance Sheet.
Looking at the last reported one, dated 31 Oct 2012, intangibles total £71.4m, so stripping out those you're left with net tangible assets of minus £32.5m. They also seem to have taken on quite a lot of debt during last year to finance 5 acquisitions (too many in one year, surely?).
£18m EBITDA does sound good though, and if it's just a glitch then this could be an attractive buying opportunity perhaps?
I wonder what proportion of revenues are recurring? That's always critical for software companies too.
Also, they are exposed to public sector, and I wonder how much public spending restrictions are going to impact on revenues there? Or at least squeeze the company & inhibit growth perhaps?
Finally, I always worry that software companies bury a lot of costs in capitalised development spend, thus presenting an artificially positive picture in EBITDA, but looking at least year's results from IDOX they only seemed to capitalise £1.24m in development spending, judging from the cashflow statement.
It doesn't scream value to me, but if it's a good business, then buying on this dip might turn out to be a good move, after all we all should be focussed on BLASH!
Cheers, Paul.
Hi Paul,
According to S'pedia, total debt was £25.2m vs operating cashflow of £9.7m (no indication that cashflow will be lower this year). Considering also a market cap. of £126m, that hardly seems excessive to me? Piotroski, Beneish and Z scores all sound, recognising that.
I bought some after they presented at a Mello Central two years ago @ around 20p. Topsliced half last year, so I'm free-carried on the rest. V happy to continue holding those & would consider a top-up after the interims, if they remain at current levels or fall further (subject to no nasty surprises in the interims!).
Cheers,
Mark
PS I see from my notes that when I made my last sale @ 50p last December, I thought the price was a bit frothy then, though it subsequently went higher.