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Why Iomart’s enhanced growth strategy makes it an attractive stock

Publication Date: 26 Oct 2018 - By Samuel Smith By Samuel Smith
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Equity Fundamental Equity UK EU ex-UK Technology

High growth Scottish information technology and cloud computing company Iomart Group is beginning to look attractive after shares have sold off 23% from 52-week highs. 

Revenue and adjusted EBITDA both grew 9% during the past fiscal year, a strong balance sheet and improved liquidity enabled them to grow their dividend by 20%, and a strong competitive positioning enabled them to maintain their pre-tax margins at 25% year-over-year.

As the most accredited company in the UK data security space and a global data infrastructure network complementing the business, Iomart is well positioned to maintain its niche positioning and more focused, personalised image in an industry that is becoming increasingly dominated by faceless giants such as Microsoft, IBM, and Amazon.

Management enhanced the company's strong organic growth with three acquisitions during the year (Dediserve, Simple Servers, and Sonassi). The Simple Servers and Sonassi acquisitions were especially strategic as they give Iomart a high level of expertise in a segment of application support, their first move into that field. Impressively, the company acquired and began integrating these firms without denting margins or earnings results and also maintained a solid balance sheet.

The company also took steps to enhance the balance sheet by extending the revolving credit facility three years, making it not due to mature until June 2022. This enhanced liquidity gave management the boost it needed to continue aggressively growing the dividend on a year-over-year basis.

Moving forward, the company’s main focus is on maintaining a healthy balance between organic and acquisition revenue and earnings growth while protecting and growing its niche positioning within the cloud based solutions business.

Management believes that by posturing the company as a personalised “IT as a service” business, they can appeal to companies which lack internal IT skills and experience which are simultaneously desiring more individualised, flexible services than their larger competitors can provide.

The main initiatives that Iomart is counting on to achieve these objectives are its sales and marketing team restructuring and reinvigorating programme as well as its significant investments in improving customer service skills and support levels.

The main challenges confronting the company are the long-term impacts of Brexit (which should be minimal given that the vast majority of its revenues are in Sterling, it thus far has seen minimal impacts, and it is not heavily reliant on foreign nationals for labour) and its ability to continue effectively navigating the increasingly complex and competitive cloud computing business against deep pocketed rivals.

The stock is looking fairly attractive though, given that a year ago today it was trading for roughly the same price (despite three acquisitions, liquidity enhancement, and significant earnings and dividend growth being achieved during that time). 

Furthermore, thus far Iomart has shown that it has been adept at navigating its business sector and competing effectively against bigger competitors. While the business is certainly risky given the aforementioned factors, the facts seem to indicate upside for shares is ahead.

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.

Samuel Smith

 

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