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UK tech stocks pull back with US tech sell-off

Small cap tech stocks held up well in last week’s sell-off, with the selling focused on liquid larger caps.

Computacenter PLC - UK tech stocks pull back with US tech sell-off

At a glance

Our small-cap software index slipped 1.1% over the week, which compared with a 4.6% slide in the large-cap software index and a 2.8% fall in the FTSE-100.

Computacenter PLC (LON:CCC), the technology services group, was the only large-cap software gainer, surging after upgrading its outlook in a brief trading update ahead of interim results this Wednesday. Also among large caps, Kainos Group PLC (LON:KNOS), the provider of digital technology solutions, dipped 7% after posting an inline trading update, which follows the blow-out trading update in July.

Small-cap tech news roundup

Last week saw final results from NCC Group PLC (LON:NCC), interim results from CentralNic Group PLC (LON:CNIC) and a commercial announcement from Seeing Machines Ltd (LON:SEE). Meanwhile, Redcentric PLC (LON:RCN) has initiated a formal sale process and strategic review.

  • CentralNic, the provider of internet domain names and related services, grew first-half (H1) revenues by 124% to US$111.3mln, which included 18% organic growth supplementing growth provided by acquisitions including Team Internet, which was acquired at the end of 2019. This compares with 15% organic growth for the first quarter (Q1), and hence indicating acceleration in Q2. The organic growth rate was boosted by the Monetisation division - substantially the Team Internet acquisition - which surged by 38%. Revenues from the Indirect sales division grew by 9% organically while Direct fell 1% on this basis. Adjusted underlying earnings (EBITDA) jumped by 64% to US$15.1mln or rose 16% on an organic basis to US$14.9mln. The change in the mix led to a decline in gross margin since Monetisation has lower margins than the other two divisions. Recurring revenues jumped to 96% of the total from 92% in H119 (first half of 2019) and cash conversion was 138% in Q2. The group ended the period with net debt of US$76.4mln, up slightly from US$75.0mln at end-FY19 (full-year 2019), which is after the completion of the earn-out for the Team Internet acquisition with a €2.7mln payment in Q2.
  • Redcentric, the managed service provider, has announced a broad strategic review. This involves a formal sale process that could result in a sale of the company; however, the strategic review includes other potential options regarding organic growth and/or potential acquisitions.
  • Seeing Machines, the computer vision technology company, has announced a three-pillar product strategy targeting the automotive original equipment manufacturers' (OEM) market. This involves the introduction of Seeing Machines' Occula Neural Processing Unit to its FOVIO chip, which will reduce the computational load by 50% while delivering the same level of functionality. Consequently, this provides OEMs with significant capacity to include additional features. The company can also provide its algorithms via its embedded Driver Monitoring Engine (e-DME) software product. Meanwhile, Occula is available for license, in ASIC form, to semiconductor companies for integration with automotive compute platforms.
  • NCC Group, the cybersecurity and resilience adviser, reported a 5.2% increase in FY20 revenues on a like-for-like basis to £263.7mln. Assurance revenue rose by 6.3% while Software Resilience (Escrow) revenue dipped 1.3%. Adjusted EBITDA fell by 5.7% on the same basis to £41.2mln. The group ended the period with net debt of £4.2mln. The final dividend is maintained at 3.15p. The company says that Q1 trading is ahead of the prior year, though noting the soft prior year comparator.

Small-cap software & services market roundup

Small-cap software drifted back last week in sympathy with the US tech-led sell-off in the equity markets. Our small-cap software leaders index slipped by 1.1% over the week, which compared with a 4.6% decline in large-cap software and a 2.8% fall in the FTSE-100.

Redcentric led small-cap gainers, rising 11% after announcing a strategic review that could result in the sale of the company. Redcentric operates in an industry that has significant opportunities for consolidation. Alfa Financial Software Holdings PLC (LON:ALFA) continued higher (up 8%) in the wake of its strong update in the prior week. CentralNic dipped 10% amid concern over the change in revenue mix and consequent fall in margins. Despite the falls in the broader indices, 30% of our constituents posted gains.    

Among large caps, Computacenter was the only gainer, rising 4% over the week. It said in a brief trading update that “the likely outturn for the year as a whole will be materially above the board's previous expectations”. Computacenter reports its interim results on Wednesday. Meanwhile, Kainos dipped 7% amid some disappointment after posting an inline trading update, following the blow-out trading update in July. Other large-cap software decliners included Blue Prism Group PLC (LON:PRSM), down 14% and AVEVA Group PLC (LON:AVV), down 7%.

Tech indices

Recent UK tech sector fundraisings

No significant new fundraisings in small-cap tech were announced last week.                                                                                                                                                                                                                                                                                                                                                                                                                              

          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 maintaining b/s during a 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


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 picks up this week. There is also a scatter of final results over the next few weeks from companies with periods ending March, April and June. Additionally, Aquis Exchange, the technology-driven exchange services group, reports interim results on Wednesday.

Among large caps, Computacenter PLC (LON:CCC) reports interims on 9th September and Learning Technologies Group PLC (LON:LTG) on 22nd September.

Across the pond, in a short week with the Labor Day holiday today, tech-related companies expected to report earnings include Coupa Software, Slack Technologies and zscaler.                                        

        Date Company Event Period ending
07-Sep SRT Marine Systems Final results 31-Mar
07-Sep Blackbird Interim results 30-Jun
09-Sep EMIS Interim results 30-Jun
10-Sep DeepMatter 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 Boku 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
21-Sep Craneware Final 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
Late-Sep Attraqt Interim 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 3100 854 49.4 903.4 3.9 3.6 53.7 41.0
SDL 750 683 (35.1) 647.9 1.8 1.7 31.8 25.2
EMIS Group  1050 660 (44.1) 615.9 3.9 3.7 22.2 20.4
NCC Group 186.4 520 4.2 524.2 2.2 1.9 31.5 19.1
Ideagen  213 483 32.4 515.4 9.2 8.3 39.3 33.8
Craneware 1755 471 (38.7) 432.3 8.1 7.8 37.8 37.7
DotDigital          Group  132 393 (25.4) 367.6 7.8 7.3 33.8 35.8
Iomart Group 340 371 37.3 408.3 3.5 3.3 20.6 19.5
IMImobile 405 333 (2.0) 331.0 1.9 1.9 26.8 27.1
WANdisco  572 300 (17.6) 244.4 15.3 10.8 (23.4) (38.1)
Kape          Technologies  185 293 24.2 317.2 3.5 3.1 18.3 16.0
Alfa          Financial Software Holdings  94 282 (68.0) 214.0 3.3 3.3 52.2 57.3
Aptitude          Software Group  449.5 253 (30.9) 222.1 3.9 4.0 35.0 37.8
Redcentric 155 239 13.5 252.5 2.8 2.7 22.5 19.6
Alpha          Financial Markets Consulting 209 211 (14.1) 196.9 2.1 1.9 15.2 13.9
IDOX  46.8 208 14.0 222.0 3.3 3.1 21.5 17.8
Tracsis  635 185 (11.0) 174.0 3.6 N/A 25.9 N/A
Tribal Group 61.5 177 (6.7) 170.3 2.4 2.4 15.0 15.2
Quartix          Holdings 360 173 (10.0) 163.0 6.3 6.5 31.3 34.6
Centralnic          Group  82.25 158 62.1 220.1 1.4 1.3 18.0 15.7
Eckoh 61.5 156 (11.6) 144.4 4.0 N/A 36.4 N/A
Blancco          Technology Group  204 154 (6.7) 147.3 4.4 4.0 50.1 42.5
Loopup Group  212.5 118 5.4 123.4 2.2 2.2 14.5 27.2
Accesso          Technology Group  275 113 (24.5) 88.5 2.8 1.3 (5.0) (53.9)
Oxford          Metrics 88 111 (14.2) 96.8 2.6 2.3 20.4 15.0
Seeing          Machines 3.225 109 (25.0) 84.0 3.8 3.4 (6.6) (9.5)
Bango 145.5 108 (4.2) 103.8 8.8 N/A 85.6 N/A
Instem 515 105 (23.2) 81.8 2.8 2.6 28.6 30.2
Sopheon 890 91 (17.7) 73.3 N/A N/A N/A N/A
Cerillion 295 87 (4.8) 82.2 4.0 3.7 28.4 25.0
D4T4          Solutions  202.5 81 (12.8) 68.2 3.1 2.8 29.7 25.2
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 47.4 31.5


Source: Data from regulatory news and market sources

Quick facts: Computacenter PLC

Price: 2350 GBX

Market: LSE
Market Cap: £2.68 billion


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