Small Cap Value Report (Tue 15 Mar 2022) - WIL, APTD

Good morning! Jack's back, so we should have some content out a bit earlier than yesterday.

Agenda - to follow.

Jack's section:

Wilmington (LON:WIL) - the data and education specialist confirms that its important Rise face to face event has gone ahead and is therefore increasing FY22 adjusted profit guidance by another 10%. Wilmington itself has been around for a while but its outlook and prospects have improved more recently, so it’s worth revisiting.

Aptitude Software (LON:APTD) - acquisition costs and amortisation reduce statutory profit. The shares are down this morning and more than 50% down on recent highs - it probably became too expensive but is now more reasonably valued. There’s a lot of investment to come in the short term though, so profit progress could disappoint over the next year or two. There is a longer term investment case here, but I’m not sure if investors are pricing in muted short term absolute profit growth.

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Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

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Jack's section

Wilmington (LON:WIL)

Share price: 250p (pre-open)

Shares in issue: 87,599,530

Market cap: £219m

Trading impact of face-to-face events

We just looked at Wilmington last week, so it’s encouraging to see one of the potential positives flagged come to pass. The group confirms that, after recently upgrading FY22 guidance, the resumption of face-to-face events leads to additional upgrades.

The Group's major face-to-face event in the US - Rise National - has successfully taken place and therefore its profitability in FY22 is now expected to be at least 10% above market consensus expectations

Consensus for the year ending 30 June 2022 is adjusted profit before tax of £18.05m within a range of £18.0m to £18.1m, so we can nudge this up to £19.9m, which would put the group on about 11x FY22 adjusted earnings per share.

That strikes me as good value still for a higher margin company in growth markets (Wilmington provides data, information, education and training in the global Governance, Risk and Compliance markets), despite the strong share price recently.

The group changed its reporting structure and tightened up its strategy midway through 2021 after an extensive three year review of its operations. Prospects have since been improving.

I wrote it up in much more detail in the article linked to above, which is probably worth revisiting in light of this most recent upgrade.

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Aptitude Software (LON:APTD)

Share price: 322.8p (-19.3%)

Shares in issue: 57,202,709

Market cap: £184.7m

Preliminary results for the year to 31 December 2021

For most of 2021, Aptitude shares looked arguably too expensive. That’s changed over the past couple of months with the shares nearly halving from a high of 692p to this morning’s 322.8p.

At these levels, the free cash flow multiple looks more attractive although several other valuation measures continue to suggest the stock is not exactly cheap.

Results:

• Annual recurring revenue +33% to £41.8m,
• Total revenue +3% to £59.3m (with Software revenue up 21% to £36.9m and Services revenue down 16% to £22.4m),
• Adjusted operating profit +9% to £9.9m but statutory operating profit -20% to £6.5m,
• Cash and equivalents -35% to £29.1m,
• Adjusted EPS +8% to 14.2p, statutory EPS -28% to 9p.

The change in cash largely results from the group’s acquisition of MPP Global in October 2021 for £39.1m. At the time of acquisition, Aptitude wrote:

MPP Global's Annual Recurring Revenue ('ARR') at 30 June 2021 was £8.0 million across approximately 40 clients. MPP Global's revenue for the year ended 30 June 2021 was £10.4 million with a profit before tax for the year ended 30 June 2021 of £0.1 million.

That seems like quite an expensive transaction, so presumably the group sees some pretty substantial synergies / strategic rationale.

FY organic annual recurring revenue growth at constant currency was 10%.

Non-underlying items increased significantly from £1m to £3.4m due to acquisition costs and amortisation of £1.4m.

ARR is the key financial metric here. Included within this are Aptitude Software's annual licence fees, maintenance for its on-premise clients and subscription fees for the Group's SaaS clients.

During the year there was an acceleration towards SaaS deployment with all new clients after February 2021 choosing this approach. As a result of this dynamic the proportion of clients deploying software using SaaS has continued to grow with SaaS subscription fees accounting for 31% of the total ARR at 31 December 2021 for the core Aptitude Software business (2020: 23%), 43% including the benefit of the MPP Global acquisition.

As with other companies, this transition is balanced against declining revenues in other parts of the business and reduced short term profit potential in exchange for more visibility over future years.

Increased investment has accelerated the launch of Fynapse, which is Aptitude's next generation strategic digital finance platform.

The investments provide long-term and non-cyclical growth opportunities which the Board anticipates will lead to an acceleration in the growth of both Annual Recurring Revenue and margin in the medium term

Research and Development Expenditure

Total expenditure on product management, research and development increased in the year ended 31 December 2021 to £10.6 million (2020: £8.5 million) as the Group continues to invest in order to realise the opportunities across its two growth drivers of finance digitization and subscription management. Growth in expenditure focused on Aptitude Software's products was 15%, excluding the £0.8 million investment by MPP Global in its eSuite product during the period of the Group's ownership.

That’s a substantial level of investment. Near term profits are expected to moderate, so it’s all about whether you think Aptitude stands to grow substantially in the medium to long term. Between then and now, share price performance could be volatile.

Overall expenditure on product management, research and development is expected to increase significantly in 2022 by approximately 55%, growth of 35% after adjusting for the investment in MPP Global, which is principally driven by the strategic decision to accelerate investment in Fynapse to capitalize on the mid-term market opportunity. The Group is also continuing with the planned investment in eSuite to support the growth ambitions of the application.

Conclusion

I think the share price probably got ahead of itself here. There’s still a lot of growing and investment to come. And the MPP acquisition seems expensive.

The valuation has changed now though, with the share price more or less back to Covid lows.

Today’s mark down makes the shares more interesting, but it’s possible that people might be expecting too much too quickly from some of these transitioning SaaS businesses.

Aptitude’s organic software growth excluding the recent MPP acquisition was 15% with contractually recurring revenues now constituting 62% of total. This should increase as MPP is consolidated this year, but there’s also declining Services revenue and negative short term profit implications (due to growth investment) to consider.

I see Canaccord maintains its ‘Buy’ rating while marking the target price down 21% to 645p.

Aptitude might well become a much larger enterprise in time but it’s been a poor investment recently, which is a reminder of the importance of valuation. I don’t have any particular insight into the software, but if the shares settle at these levels or become even cheaper, it could be worth taking a closer look.