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Blue Prism Group: Enter with caution

Publication Date: 05 Oct 2018 - By Manika Premsingh By Manika Premsingh
Actionable
Differentiated

Equity Fundamental Equity EU ex-UK UK Technology

Following announcements of rapid business growth in August 2018, work automation software provider – Blue Prism (LON:PRSM) – saw a rally in its stock prices. The company, which listed on the London Stock Exchange as recently as March 2016, saw its share price breach the 2,000p mark during the month and has consistently lurked either side of that level.

Despite investor bullishness on the stock, however, there are a number of red flags to consider before buying it at the present levels. But first, an assessment of what makes the stock tick.

Blue Prism functions in the promising Robotic Process Automation (RPA) segment, which is projected to be a $5bn industry by 2024. Rapid adoption of the company’s services indicates that it is poised to become a bigger player as the size of the sector expands. Evidence of this is seen from the fact that Blue Prism recently extended its footprint to Asia Pacific, with the opening of its regional headquarters in Singapore, and also announced that over 1,000 organisations now use its software.

This is also visible in the outfit's recent financials. In the first half of 2018, the company’s revenues grew by a strong 145% to £22.9m. The cash inflow is also worth noting, which turned positive £38.3m from an outflow of £1.1m during the corresponding period of the previous year. 

While these are definite positives; the fact that Blue Prism is loss making cannot be overlooked either. For H1 2018 (six months to 30 April 2018), the company reported an EBITDA loss of £5.4m, a bigger loss than that already made during the corresponding period previous year (£3m). In glaring comparison to Blue Prism’s losses are the profits made by all its peers in the business automation segment.

Despite this, however, Blue Prism’s trading multiples are uncomfortably high compared to the peer set. Given that the company is loss making, the most commonly used P/E multiple is inapplicable.

In lieu, the Price-to-book (P/B) and the Price-to-Sales (P/S) ratios are considered. The P/B is currently trading at 47.1, which is over 2x the same ratio for the nearest peers in the business automation service providers, namely, Craneware and Softcat. A similar story is visible for the P/S, which stands at 38.7 for Blue Prism, and is almost twice that for the nearest peer - Learning Technologies. 

The combination of being loss making and trading at high multiples indicates that Blue Prism’s stock market fortune could turn if the company’s growth rate slows down.

This could happen for a variety of reasons like rise of competitors, delays in adoption of RPA on account of resistance by existing workforce and softening of economic growth from current levels. Investors may thus want to enter the stock at current levels assuming a non-trivial probability for at least some softening in prices in the near future. 
 

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Manika Premsingh

 

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