SIF Folio: IEnergizer Could Deliver 6% Yield And 20% Growth

17th May '22 by Roland Head

10 comments 2765 reads

The recent stock market wobble has combined with growing caution economic growth to cut the results of my SIF folio share buying screen to just eight stocks. Most of them are already portfolio members, or else are unsuitable for some reason.

By disabling individual screening rules, I can see that valuation and weakening momentum are the main roadblocks. Disabling either my earnings yield or 1yr relative strength rules increases the number of qualifying stocks from eight to over 30.

In search of new ideas, I’ve turned to the relaxed version of my screen. This offers a wider range of stocks, due to slightly more relaxed valuation criteria.

My rules stipulate that I shouldn’t buy from the relaxed screen unless I’ve been unable to buy a stock from the main screen for at least four weeks. For this reason, I won’t add a new stock to the portfolio this week. But I might be able to line up a potential purchase for some time in the near future.

iEnergizer (LON:IBPO)

The company I’ve chosen to look at is £746m AIM stock iEnergizer, an outsourcing group based in India. iEnergizer’s services are divided into two segments:

Business process outsourcing (63% of FY21 revenue): providing services such as call centres, technical support and back-office services. Sectors include healthcare, banking, insurance and gaming.
Content delivery (37% of FY21 revenue): outsourced provision of eLearning and digitisation services

It’s a fairly sizable business, with revenue of $200m and $60m of profit last year. I’m not sure if the company has much of a following among UK investors, but the shares have been a multibagger for investors who have spotted the opportunity in recent years:

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These share price gains have been backed by solid profit growth:

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And the business appears to have gained the support of a number of well-known institutions:

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The elephant in the room here is the presence of controlling shareholder and founder/CEO Anil Aggarwal, who effectively retains complete control over the business. iEnergizer’s free float is small, at 17%. Although liquidity does not seem too bad, I’d guess it could be a problem during a sell-off.

iEnergizer is well-rated by Stockopedia’s algorithms and has strong quality and momentum scores.

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BnB

17th May '22

Hi Roland. You've identified the most obvious risk embedded in the whim of the largest shareholder. From an operational point of view I would highlight that India is losing competitive advantage in outsourcing to eastern Europe and Latin America because of spiralling wages on the sub-continent. This has to hit margins or quality of service (less able employees). Secondly, business process outsourcing is threatened as more and more processes are conducted via automation in the form of UX, AI and digital assistants. Finally the accelerating trend towards onshoring is not supportive.

Perhaps those risks are reflected in the lowly rating next to IT outsourcers like Infosys. And the operating numbers are certainly very attractive. But I rejected after some consideration because I perceive this is not a long term winner, even if it could be good to run with for a short period.

Alsatia

I have just sold my shares in IEnergiser. I have received a Corporate Action Notice regarding a possible suspension and delisting. IEnergizer Limited has announced the appointment of Strand Hanson Limited as the company’s Nominated Advisor. Arden Partners plc will continue to act as Joint Corporate Broker. Given the timing of the completion of the recommended takeover of Arden Partners plc, the London Stock Exchange plc has agreed that subject to initial due diligence being undertaken, Strand Hanson Limited has until 5pm on 27 July
2022 to complete its full due diligence.

There is a risk that if Strand Hanson Limited does not continue to act as nominated adviser following completion of its full due diligence and the Company has not found an alternative nominated adviser, the Company's AIM securities may be suspended pursuant to AIM Rule
1. If within one month of that suspension, the Company has failed to appoint a replacement nominated adviser, the admission of its AIM securities will be cancelled.

As I understand it if the shares are delisted they are no longer eligible for inclusion in an ISA or SIPP.

I would think this scenario would deter most investors from buying these shares, at least until the situation becomes clearer at the end of July or even later.

bryaz

With ref to alsatia it is possible to hold delisted shares certainly in a sipp i currently hold a company that delisted a couple of years ago. As for IBPO there was a fund raising which was a bit underhanded i think it was in 2015.I do currently hold this stock

Roland Head

Hi BnB,

Thank you for your comments. I agree that we may now have passed peak outsourcing, especially to India - but I think it's still a sizable business.

I'd guess that to become a long-term winner, iEnergizer (LON:IBPO) may need to focus on moving up the value chain. Without more in-depth research, I'm not sure to what extent this might be happening (or not).

Roland

Hi Alsatia,

Thanks for flagging this up. I have to admit that I saw the "Appointment of Nominated Adviser" RNS but didn't read it. It looked routine and I didn't make the connection with Arden.

I agree that I certainly wouldn't want to end up holding an unlisted stock. I'm not sure how likely this is to happen with iEnergizer (LON:IBPO) but there does appear to be a theoretical risk.

My guess is that it's not a big risk. iEnergizer has a £750m market cap, is highly profitable and has been listed for over 10 years. However, as outside investors we can't ever be quite certain, so I think such risks are always worth considering.

Regards,

LittonOwl

18th May '22

WRT New Nominated Advisor - Would have thought if this had been a genuine risk of this there would've been quite a sharp share price reaction on the day of the RNS (27 April 2022), with those 'in the know' heading quickly for the exits. As it happens the SP finished slightly positive on both the day of the announcement and the following day.

Cuddlesticks

I previously held but sold as I didn't like the ownership concentration both in light of the large dilution (albeit a few years ago) but also due to poor transparency. Being domiciled in Guernsey interims and annual reports are light in detail and there is little in the way of investor presentations or engagement/communication. 'Less is more' seems to be their approach re transparency.

Whilst the underlying business appears to be strong and growing, I don't see a coherent strategy or if they're simply opportunistic around delivering services to a small number of key clients. In FY21, 49% of revenue was from 5 customers and there are sizeable provisions and rebates which makes me question how robust revenues are and whether there are multiple customer disputes, potentially increasing the risk of losing a cornerstone customer. In summary, while the high level financials look good governance concerns keep me out of this one.

Benson

Like other contributors I have held these shares on 2 occasions in the past On both occasions they were difficult to buy and to sell ie 3 to 4 weeks on each occasion! But on both occasions my profit was 100% so perhaps I am prejudiced and it was a much smaller company? For all of the important issues pointed out previously it still seems a well managed business capable of finding new areas of expansion

Brothersinarms

20th May '22

I seem to remember the founder doing a placing to himself at an 80% discount to the market price a few years ago. Bargepole for me since then.

TheRaven

13th Jun '22

Today's news - good or bad? Share price down, unlike Go Ahead Group.

SIF Folio: iEnergizer could deliver 6% yield and 20% growth

iEnergizer (LON:IBPO)

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Roland Head

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