Driving value via specialist products: Why investors ought to look at Microgen

London-listed software company Microgen’s (LON:MCGN) two businesses – Aptitude Software and Microgen Financial Systems – combine high quality revenue streams with excellent forward visibility and a mission-criticial positioning within client operations.

Aptitude Software seeks to drive growth by focusing on specialised financial management software and building on their successful partner network in new markets across the globe. Microgen Financial Systems is continuing its transition towards focusing on the Trust & Fund Administration (T&FA) market in order to capitalise on the rising software needs driven by increasing regulations.

Thus far, this two-pronged approach has achieved strong growth: in the first half of 2018 revenue grew by 23% (11% organic growth) and adjusted earnings per share increased 15%. 

Aptitude Software – which contributes over 75% of revenue – grew operating profit by an impressive 31% in the first half, while Microgen Financial grew at a healthy 7%. Managment also reduced debt and total liabilities while increasing net assets.

This year Aptitude Software has begun transitioning its strategic focus towards developing opportunities through its Aptitude Insurance Calculation Engine and has seen initial success in the venture. By building on new business contracts in the first half of the year, the application won business from a major global reinsurer headquartered in Europe and has several promising further prospects in North America, Europe, and Asia. 

With a suite of highly specialised finance management software applications focusing on banking, insurance, telecommunications, technology, media, and publishing offering clients the capability to rapidly process high volumes of complex, business event-driven transactions and calculations, this business should continue its very robust growth in the years to come.

Meanwhile, Microgen Financial Systems has strengthened its strategic focus on the T&FA sector by selling its Payments business (and recycling the capital into its main growth initiatives), attracting several new clients so far this year with a number of promising growth opportunities in the works. Thus far, the business has over 350 customers in over 30 countries.

With 69% of continuing revenues in the Financial Systems business now coming from T&FA (growing at a 13% pace with investments being made to accelerate that pace), management projects the overall business growth to pick up considerably from the current 7% pace.

While both businesses remain well on track to meet or even exceed management growth expectations for the year, future success depends on management’s ability to close on the majority of a promising pipeline of potential contracts while mitigating risks.

These inclue: cyber security threats (as a software company), maintaining an edge in intellectual property (in a field exploding with competition), and navigating Brexit (as a UK-based firm). However, given their global diversification (over 80% of revenues come from outside the UK), Brexit impact should be minimal. Furthermore, by consistently pruning their focus and strengthening their balance sheet, maintaining their niche IP edge should remain feasible.

Conclusion: The stock has declined over the past year even as growth has surged, bringing the valuation to a highly attractive level. Now may be a good time to buy in.