When Gresham House Strategic plc (LN:GHS) took on its strategic investment in IMI Mobile (LON:IMO) in August 2015, the share price was 145p and the software and services company was very much a small cap stock. At first glance, it was a complicated story for investors; it had a seemingly complex range products and commercial models, it was heavily reliant on its businesses in India and Africa with large single-client exposures, was misunderstood, it lacked investor awareness, it had a non-independent board and a complex capital structure entailing exchangeable B-shares with uncertain future dilution, and of course it was ‘small’. In many ways, it still resembled a private company, just with a public quote.
However, at the core, IMI Mobile was building a world-class, international business catering for a revolutionary approach in the way companies communicate and engage with their customers, clients and patients. CEO, Jay Patel, had a clear strategy to create a market leader in their chosen field. In the two and a half years since Gresham House has been involved, Jay and his team have taken a number of small steps to address shareholder concerns, simplify and clarify the product offering, and advance the technology to become the market leader in the UK and other international markets. The business now stands to benefit hugely from the shift in the way in which companies are communicating and engaging with their customers, using Artificial Intelligence, automation, no-code programming and a focus on client needs. A report published by MarketsAndMarkets estimates that the digital transformation global market size is set to grow from $148bn in 2015 to $392bn by 2021 (+164%) This is a great example of how small steps can turn into giant leaps.
Much of GHS’s investment thesis was centred around IMI’s potential to grow from its original footing into a mid-cap enterprise software stock; something which required a continuation of the company’s track record of double-digit growth, strong cashflow and building on its recurring revenue base, but also some less noticeable changes that were deemed just as important for life in the public markets and would help the shares get a stronger following.
Summary of GHS’s 5-year investment thesis (August 2015):
- Re-rating of the shares
- At the time of investment, IMI traded on an EV/EBITDA of c.6.0x vs peer group trading in the mid-teens
- Scope for improved perception through better governance and simplification of the capital structure
- Improved public and investor relations and market coverage to simplify the story and engage new investors
- The clear difference between multiples paid by private equity and trade buyers compared. The IMI Mobile rating offered an element of insurance that if the market does not fully rate IMI Mobile in time, there is a high likelihood that a trade or private equity buyer would do so.
- Earnings growth
- Revenue growth – Strong track record of organic and acquisitive growth that was forecast to continue
- Margin expansion – As the company achieved scale and demand for ‘digitisation’ grew there was scope for improved margins
- Favourable return on capital metrics – the company has a strong record of successfully deploying capital, both organically and in acquisitions providing the mechanism to generate shareholder value
- Cash generation
- Consistent history of strong cash generation which offers potential for either returns to shareholders, or investing for growth whilst maintaining a strong balance sheet
As the infographic below demonstrates; IMI has achieved some of these important milestones as a part of its growth strategy – and the share price and market cap have followed. The company has:
- Focused investment into developed markets to shift the geographical balance and client concentration risk
- Maintained double digit organic growth (+12% rev, +10% GP FY18 Interims.)
- Established a strong M&A track record (Textlocal, Archer Digital, Infracast, Sumotext, Healthcare Communications) with acquisitions generating synergistic benefits and enhancing growth
- Continued the strong cash characteristics (100% Op. cashflow to EBITDA conversion FY18 Interims)
Jay has cleverly, diligently and successfully gone about addressing four areas that shareholders should be focused on:
Operational strategy – continued organic growth; strong cash generation; developing strategic partnerships with global and national organisations who can help drive the business forward – such as BT, KCom, Telenor and others; by focusing on verticals such as mobile telecoms, banking, utilities, logistics and healthcare, IMI Mobile has become a market leader in sectors with large consumer bases and a rapidly growing need for its products; business mix has shifted from emerging markets to developed markets whilst maintaining exposure to high growth regions; client concentration risk has been significantly diminished through growth.
Product Strategy – investment into R&D has been increased to develop the IMIconnect solution as well as creating a common, enterprise-wide platform for all the other applications. By focusing on client needs, the business has a market leading product which is enjoying increasing success.
M&A strategy – has proved highly effective; Textlocal has been successfully rolled out in the SEA region; Archers is now cross selling IMI Mobile enterprise solutions into Africa; Infracast delivered a leadership position in UK banking and is generating cross sell opportunities; Healthcare Communications provides a leading position in the UK healthcare market.
Governance and shareholder issues – the company now has an independent chairman; the balance sheet has been simplified and B-share structure removed; shareholder communications and messaging has improved and there is broader research coverage. Last year the company undertook a capital re-organisation to enable dividends to be paid in future.
The journey is by no means complete for IMI. Following the successes above the IMI share price has re-rated from c.6x to c.11x EBITDA but remains at a significant discount to its international peer group which averages 15x. Furthermore, the prospect for accelerating growth is promising, with strategic partnerships and recent acquisitions all providing potential for meaningful earnings enhancements. Recent investment into the US market opens another possibility.
IMI’s exposure to many of the key trends in digital; automation, digitisation, Artificial Intelligence and cloud based software offer a growing list of potential growth opportunities. We believe the business could use its cash on the balance sheet and ongoing cash generation to make further opportunistic, value adding acquisitions as well as demonstrating its financial discipline and shareholder focused approach to provide shareholders a modest, but growing dividend. We expect the company to continue investing into organic growth opportunities, including targeting the US market through partnerships.
Both Gresham House and IMI believe this leaves the company well placed to continue its share price growth and to reach a midcap size over the next 2.5 years as per our 5-year investment thesis. IMI Mobile remains the largest holding in the Gresham House Strategic plc portfolio and is a statement of our conviction in the growth story going forward.
 Source: Bloomberg Data as at 07/03/2018
By Graham Bird, Head of Investments, Gresham House Strategic
Website Link: ghsplc.com
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