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UK software stocks swing to positive year-to-date

UK small-cap software stocks extended recent gains and are now up 2.5% for the year-to-date. This compares with an 18.1% decline for the FTSE-100 in the same period.

UK software stocks swing to positive year-to-date

At a glance

The sector was boosted by the proposed acquisition of SDL PLC (LON:SDL), the language translation software business, by RWS Holdings PLC (LON:RWS) via share exchange. SDL initially jumped as much as 45%, but the gains pared back as RWS shares declined and SDL finished the week 22% higher. The sector also received support from Alfa Financial Software Holdings PLC (LON:ALFA), which jumped 21% after news that its expectations for FY20 (full-year 2020) trading are now ahead of current market expectations.

Our UK large-cap software index recorded an even stronger performance, rising 4.1% over the week, and is also in positive territory for the year, up 0.5%. Among the software majors, AVEVA Group PLC (LON:AVV) surged 19% after the provider of industrial software announced the acquisition of private California based rival OSIsoft for about US$5bn.  Consequently, AVEVA has surpassed The Sage Group plc (LON:SGE) as the largest software company in the FTSE-100 in terms of market capitalisation. This will be extended by the roughly US$3.5bn proposed rights issue which is intended to part-finance the OSIsoft acquisition.

Small-cap tech news roundup

Last week saw interim results from Sopheon PLC (LON:SPE), trading updates from Proactis Holdings PLC (LON:PHD) and Alfa Financial Software Holdings PLC (LON:ALFA) and a commercialisation announcement from Blackbird PLC (LON:BIRD).

Proactis, the business spend management solution provider, said that trading in the year to July 31 had been in line with board and market expectations for the year despite the emergence of the coronavirus (COVID-19) pandemic during the period. The company expects to report FY20 revenues of £49.2mln and adjusted underlying earnings (EBITDA) of £11.8mln.  New business deal intake for the year was at a record high as total contract value increased by 29% to £14.6mln. Net bank debt as at July 31, 2020 was £37.1mln. Regarding the pandemic, the company says demand has been marginally subdued through this period and sales processes have been more challenging. While the outlook remains encouraging, the board is cautious given the macro-economic backdrop and associated risk across new business trends, project implementation deferrals, volume-based contracts and customer solvency.

Alfa Financial, the developer software for the asset finance industry, said that as a result of strong trading along with good progress on securing revenue, that the board's expectations for FY20 results are now ahead of current market expectations. The news follows the July update which reported first-half (H1) trading had been better than expected and that demand had been largely resilient to the COVID-19 pandemic and the company said the strong H1 performance had continued into July.  For H1, the company expects to report total revenues of circa £38m with an EBIT of around £10mln and a net cash balance of about £68mln; however, the company remains cautious on the outlook due to the pandemic, noting that the early-stage pipeline remains weaker than it would like and the medium-term economic outlook is uncertain. 

Blackbird, which provides a cloud video editing platform, announced that Live X selected Blackbird for cloud video editing and publishing at the US Democratic National Convention that was held on 17 - 20 August 2020.

Sopheon, which provides software and services for enterprise innovation management solutions, grew revenues by 1% to US$13.9mln in the six months to 30 June, while adjusted EBITDA eased by 7% to US$2.6mln. The annual recurring revenue (ARR) increased by 8% over the 12 months to stand at US$16.5mln. The business added US$1.5mln of new ARR since the start of the year, when ARR stood at US$15.9m, outweighing churn of around 6%. Cash generated from operations rose by 15% to US$5.0mln and the group finished the period with net cash of US$21.9mln, up from US$19.4mln as at December 31. The outlook statement is cautiously optimistic, pointing to the continued sales traction with a doubling of new customer booking value and the company puts revenue visibility for FY20 at US$25.5mln.

Small-cap software & services market roundup

Small-cap software stocks pushed to fresh post-pandemic highs last week, rising 2.5% over the week, despite a languishing FTSE-100 that extended recent losses by 0.6%. Sentiment across the UK tech space remains boosted by the tech-heavy Nasdaq which rose by a further 3.4% last week to fresh highs. The mood was also bolstered by news of the proposed acquisition of SDL by RWS and an upgraded outlook from Alfa Financial Software, with rallied 21%. Despite the gain, Alfa remains 73% below its 2017 flotation (IPO) price of 325p, which valued the equity at close to £1bn. Alfa reached around 550p later that year, for a market capitalisation of roughly £1.6bn. 

Large-cap software stocks recorded an even stronger performance, with our index gaining 4.1% last week as 11 out of the 12 constituents posted gains. Only Avast PLC (LON:AVST) posted a decline, albeit modest at 0.5%. This compared with 20 gainers and 8 decliners among our small-cap constituents. Meanwhile, among UK mega-caps, eight out of 10 were lower. AVEVA led the large-cap winners following news of its bumper US acquisition. Elsewhere, Blue Prism Group PLC (LON:PRSM) jumped 16%, helped by news that Staffordshire University had chosen to implement the Blue Prism Cloud intelligent automation platform.

Besides SDL and Alfa, small-cap winners included Tribal Group plc (LON:TRB), which rose 8% over the week, and Ideagen PLC (LON:IDEA) which lifted 7% to a record high.

Tech indices

Source: Indices are unweighted, with number of constituent’s in brackets

Recent UK tech sector fundraisings

No significant new fundraisings in small-cap tech were announced last week. In the large-cap space, AVEVA is proposing a US$3.5bn rights to finance the acquisition of OSIsoft.

 

  Est'd  gross amount (mln's) Announced Method* Price Discount/ (prem) to prior day (%) Est'd % of new capital Comment
               
AVEVA $3500 25-Aug R N/A N/A N/A Proposed rights issue to part-finance acquisition
Pelatro £2.10 04-Aug P, S 49p 12.1 12.2 Strengthen sales and marketing
TERN £1.50 20-Jul S 8.5p 19.0 5.9 To expand the portfolio
Nanoco £3.40 16-Jul P 17.5p 2.8 6.4 Address opportunities, while maintain b/s during lawsuit 
Ethernity  £0.78 13-Jul P, S 12p 37.0 16.6 To support engagements for its 5G offering 
Deepmatter £2.10 13-Jul P, S 1.5p 18.9 16.2 Invest in sales, marketing, distribution, support
Redcentric £5.76 26-Jun P, S 110p (7.8) 3.3 Part funds settlement with the FCA
Instem £15.75 26-Jun P 435p 4.4 17.7 Accelerate the acquisition strategy 
Boku £20.10 17-Jun P 85p 7.1 8.4 Part finances $41m acquisition of Fortumo
Wandisco $25 11-Jun P 650p 12.2 6.0 Strengthen b/s and working capital
Learning Tech £81.80 29-May P 127p 7.6 8.8 Accelerate growth and gain market share

Source: Data from regulatory news and company websites.

* Key: P- placing, S-subscription, O- open offer, R- rights issue.

Tech calendar

The interim results season in the UK small-cap space moves into full swing in September. There is also a scattering of final results from companies with periods ending March, May and June. Among large caps, Computacenter PLC (LON:CCC) reports interims on 9th September and Learning Technologies Group PLC (LON:LTG) on September 22.

Across the pond, in a quiet week, tech-related companies expected to report earnings include Cloudera, Crowdstrike and Broadcom.

London Tech Week 2020 conference runs from September 1st to 11th, with speakers including Eric Schmidt, former CEO and chairman of Google, and Warren East, CEO of Rolls Royce and previously CEO of ARM.

In the economic calendar, the key US jobs data for August are published on Friday; there is only one further jobs report scheduled (for September) prior to the US election in early November.

 

Date Company Event Period ending
       
01-Sep Centralnic Interim results 30-Jun
03-Sep NCC Final results 31-May
07-Sep SRT Marine Systems Final results 31-Mar
07-Sep Blackbird Interim results 30-Jun
09-Sep EMIS Interim results 30-Jun
15-Sep Bango Interim results 30-Jun
15-Sep Kape Technologies Interim results 30-Jun
15-Sep Corero Network Security Interim results 30-Jun
16-Sep Eagle Eye Solutions Final results 30-Jun
16-Sep Accesso Technology Interim results 30-Jun
Mid-Sep Beeks Financial Cloud Final results 30-Jun
Sep Crossword Cybersecurity Interim results 30-Jun
Late Sep Craneware Final results 30-Jun
Late-Sep Attraqt Interim results 30-Jun
21-Sep Tern Interim results 30-Jun
22-Sep Ideagen Final results 30-Apr
29-Sep Alfa Financial Software Interim results 30-Jun
29-Sep Blancco Technology Final results 30-Jun
Oct essensys Final results 31-Jul
Oct PCI-PAL Final results 30-Jun
30-Oct Seeing Machines Final results 30-Jun

Source: Data from regulatory news and company websites

Small-cap software & services valuations

The sector ratings look fair in comparison with the UK 350 large caps, given the significantly stronger growth potential, combined with the relatively strong balance sheets.

  Shr Price Pence Market Cap £m Net debt/ (cash) £m Enterprise Value £m EV/sales Year 1 EV/sales Year 1 P/E Year 1 P/E Year 2
First Derivatives 3200 879 49.4 928.4 4.0 3.6 52.8 40.3
SDL 732 667 (35.1) 631.9 1.7 1.6 30.7 24.3
EMIS Group  1030 648 (44.1) 603.9 3.8 3.7 21.8 20.1
Ideagen  226 512 32.4 544.4 9.7 8.8 41.7 35.8
NCC Group 180 502 5.0 507.0 2.0 2.1 26.4 30.5
Craneware 1725 463 (38.7) 424.3 7.8 7.5 36.6 36.4
DotDigital Group  141.5 422 (25.4) 396.6 8.4 7.9 36.2 38.3
Iomart Group 360 393 37.3 430.3 3.7 3.5 21.8 20.7
IMImobile 410 337 (2.0) 335.0 2.0 1.9 27.2 27.5
Kape Technologies  196 311 24.2 335.2 3.6 3.2 19.1 16.7
WANdisco  576 302 (17.6) 244.4 15.1 10.6 (23.1) (37.7)
Alfa Fin'l Software Holdings  87 261 (68.0) 193.0 3.3 3.2 120.8 66.9
Aptitude Software Group  444 250 (30.9) 219.1 3.8 4.0 34.6 37.4
Redcentric 140 216 13.5 229.5 2.5 2.4 20.3 17.7
IDOX  46.85 208 14.0 222.0 3.3 3.1 21.5 17.8
Alpha Fin'l Markets Consulting 205 207 (14.1) 192.9 2.1 1.9 14.9 13.6
Tracsis  635 185 (11.0) 174.0 N/A N/A N/A N/A
Centralnic Group  91.5 176 62.1 238.1 1.5 1.4 20.1 17.4
Quartix Holdings 352 169 (10.0) 159.0 6.2 6.4 30.6 33.8
Eckoh 63 160 (11.6) 148.4 4.1 N/A 37.3 N/A
Blancco Technology Group  202 152 (6.7) 145.3 4.4 3.9 49.6 42.1
Tribal Group 65 134 (6.7) 127.3 1.8 1.8 15.9 16.0
Loopup Group  237 131 5.4 136.4 2.4 2.5 16.1 30.3
Oxford Metrics 93 117 (14.2) 102.8 2.7 2.5 21.5 15.9
Bango 145.5 108 (4.2) 103.8 8.8 N/A 85.6 N/A
Accesso Technology Group  262.5 108 (24.5) 83.5 2.6 1.2 (4.7) (50.6)
Instem 520 107 (23.2) 83.8 2.9 2.7 28.8 30.5
Seeing Machines 3.075 103 (25.0) 78.0 3.6 3.2 (6.3) (9.0)
Cerillion 313 92 (4.8) 87.2 4.3 3.9 30.1 26.5
Sopheon 895 91 (17.7) 73.3 N/A N/A N/A N/A
D4t4 Solutions  219 88 (12.8) 75.2 3.5 3.1 32.2 27.2
Essensys  148 78 (8.4) 69.6 N/A N/A N/A N/A
Gresham Technologies 107 73 (5.1) 67.9 2.7 2.7 46.7 53.5
                 
Averages         3.2 2.8 52.9 33.3

Source: Data from regulatory news and market sources

 

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