November 20, 2012 Iomart Group plc BUY, TARGET PRICE 216p (upside +10.2%) Market data Stock price 196p Shares nb diluted (m) 100.1 Market value 199.1m Net Debt adjusted 4.55m EV (mls) 203.7 ISIN GB0004281639 Market LSE-AIM Analyst P.Schang Iomart Group plc is a UK based company that provides cloud computing and managed hosting services to its customers. The design, delivery and management of hosting services by the company helps clients in reducing costs and risks associated with maintaining their own web and online applications. As the company has its own data centres and network infrastructure, it can provide a whole range of vertical components in the hosting arena without a reliance on third party suppliers. LATEST PRESS RELEASE COMMENTARY (m) 2012 2013e 2014e 2015e Sales 33.5 42.5 49.7 54.7 %growth 32.6% 27.0% 17.0% 10.0% EBITDA 11.2 15.1 18.6 20.6 %margin 33.4% 35.5% 37.5% 37.7% EBIT 6.0 10.1 13.7 15.6 %margin 18.0% 23.7% 27.5% 28.6% Net profit 6.2 7.6 10.3 11.9 %margin 18.5% 17.8% 20.8% 21.7% 2012 2013e 2014e 2015e PE 32.1 26.4 19.3 16.8 EV/Sales 6.1 4.6 3.7 3.1 EV/EBITDA 18.2 12.9 9.8 8.3 EV/EBIT 33.8 19.3 13.4 10.9 On 29 th May 2012 Iomart announced its annual results for FY12 and reported 33% increase in revenues ( 33.5m) compared to FY11. EBITDA increased by 33% to 11.2m and EBIT increased from 2.8m to 6.02m. Net Profit margin improved from 11.3% to 18.5% while Basic EPS was up 113%. Cash flow from operations was 9m, up 29% from 7m in 2011. ANALYSIS Hosting division revenue increased 38% mainly due to 600 new orders, significant additional orders from existing customers and contributions from Titan Internet Limited and EQSN acquired in the middle of FY11. Revenue of Easyspace division increased 21% because of acquisition of Switch Media and Global Gold. After integrating these acquisitions, the company expects to make two to three more acquisitions in the current year. Covered by Nfinance since 20 th Nov 2012 VALUATION Calendar November 27,2012 - H1 FY13 Results Name of shareholder % of share capital Angus MacSween 19.25% Legal & General Investment Management 12.40% Henderson Global Investors 9.86% Majedie Asset Management 8.05% Universities Superannuation Scheme 3.75% British Steel Pension Fund 3.75% Bill Dobbie 3.44% Liontrust Asset Management 3.28% River & Mercantile Asset Management 3.25% Even though EV/EBTDA is at 18.2, the Company is valued higher than its peers, we believe that higher premium is justified in view of growth potential from cloud computing. This will result to an increase in demand for managing, storing and analysing data, hosting services and SaaS. We recommend a buy on the stock with target price of 216p (DCF 349p, WACC 6.8%, terminal growth rate 1%, peers 118p)
SUMMARY... 3 GROUP PRESENTATION... 4 GROUP HISTORY... 7 INVESTMENT TRIGGERS... 8 Growth in managed hosting services and cloud based services... 8 Big data opportunity... 8 Revenue visibility and SaaS opportunity... 8 Benefits from investments in data centre fibre network.... 7 High growth in sales, net income and margins.... 8 INVESTMENT RISKS... 9 Acquisitions related risks... 9 Economic slowdown... 9 VALUATION... 10 FINANCIAL OVERVIEW... 12
SUMMARY The company started its operations in 1998 as an integrated internet and telecommunication enterprise. Over the years the company has evolved as a provider of hosting, collocation, data centres and business services to more than 3,00,000 customers. The company has its own data centres located in London, Glasgow, Manchester, Nottingham, Leicester and Maidenhead. The key services offered by the company are: Managed Services Collocation Domain names Web hosting Web design Cloud hosting Green hosting Shopping cart software Dedicated servers Cloud security
GROUP PRESENTATION Iomart group mainly consists of the following companies: Iomart Hosting Easyspace Virtual Servers Westcoastcloud Rapidswitch Titan Internet Internetters The company offers the following solutions to clients: Infrastructure solutions: (i) (ii) UK Data Centres Iomart operates its data centres in six UK locations. It provides a complete one source managed hosting service from domain to the data centre. UK Network Iomart provides connectivity which is free of collision and packet loss and offers services like IP Transit, Point to Point and content delivery networks. Hosting solutions: The Company offers web-hosting services that help customers to store information and content on servers that are accessible to groups of people via the web. Due to Iomart owning its data centres it has the ability to host the end-to-end process. The hosting solutions offered are as follows: (i) (ii) (iii) (iv) Shared Hosting Dedicated servers, virtual servers, website design and extended services such as ecommerce solutions and email. Dedicated Hosting Clients can customise the entire server for their sole use with no restrictions on operating systems, hardware, etc. Managed Hosting Managed hosting to clients requiring high availability, high performance computing hardware for web applications. Cloud Hosting Cloud solutions provided by the Company enables the clients to scale their own computing, network and storage requirements according to their needs. Data management solutions: Data management solutions services help customers in securing vital information. These include: (i) (ii) Storage Iomart has made significant investments into a new virtualised SAN (Storage Area Network) in order to meet the rising demand for data storage. Data Back and Archiving Provides various data backup and archiving solutions
(iii) Virtualisation Large scale virtualised server environments that enable the clients to run multiple combinations of applications and operating systems on a single computer. Email & Security Solutions: The company provides a range of cloud based email and security apps that help clients in messaging and managing Internet requirements. These email and security solutions include: (i) (ii) (iii) Business Email Two mail hosting options: Microsoft Exchange and Iomart mail. SAAS Internet Management Netintelligence of Iomart uses Software as a Service delivery model and hosts and operates a web based distribution platform. Network Content Filtering Iomart Cloud Clean provides content filtering services to ISPs, MSPs, content providers and corporations to identify potential illegal traffic. Partner Solutions: Westcoastcloud of Iomart group offers a wide range of cloud based email, security and storage services. Business Segments The company divides total revenues generated from various solutions into two segments: Hosting Segment and Easyspace segment. Hosting Segment: This segment includes managed hosting facilities and services to larger SMEs and corporate consumers; hybrid cloud solutions and services through a network of owned data centres. Easyspace Segment: This segment includes shared hosting and domain registration services to the micro and SME companies. The other services provided are email services, domain names, shared, dedicated and virtual servers.
During the past five years the share of Easyspace segment has gone down from 77.9% in 2008 to 27.3% in 2012 while the share of Hosting segment has increased from 22.1% to 72.7 % during the same period as shown in the graph below: The company divides its geographical revenue into two segments UK and rest of world. During 2011, the total share of UK in total revenue was 89% while the rest of the world contributed 11%. The share of non-uk segment in total revenue is continuously increasing from 2009 onwards as shown on the graph below.
GROUP HISTORY The major milestones in the history of Iomart Group plc are given in the following table: December 1998 The company was founded and obtained a UK telecommunication license October 1999 April 2000 Earned it first revenue by launching its service in conjunction with Virginbiz.net Iomart group incorporated and floated on AIM October 2000 June 2001 The company launched consumer ISP and UK s first managed email and messaging platform. Launched first self-install broadband connection into UK. August 2001 German email/messaging company CANBOX acquired. July 2003 Acquired hosting and domain company Web Genie Internet Ltd. February 2004 Acquired.hosting and domain company Internetters. May 2005 Launched UK business directory service Ufindus. January 2006 May 2009 Launched Netintelligence as world s first security Software as a service product. Launches VirtualServers.com July 2012 October 2012 Iomart plc joined with Scotland s Commsworld, to create a complete hosted voice and data offering to the private and public sector. Enters into an agreement with Geo to deliver high capacity fibre connectivity into its six UK data centers.
INVESTMENT TRIGGERS Growth in managed hosting services and cloud based services As a result of the increasing number of critical business applications switching towards the Internet, the necessity of 24-hours management and security will be absolute. The increase in demand for hosted services provides an opportunity for the Company. Iomart also expects to benefit from the growth in cloud computing market. As stated by Wintergreen Research, cloud market is expected to rise from $20.3 billion in 2009 to $100.4 billion by 2016. Big Data Opportunity Transactions and information being transmitted across the Internet is expected to grow at a phenomenal rate as the demand for storing, managing and analyzing data will increase in the years to come. Iomart is currently investing in storage infrastructure and improving network capacity to take advantage of the Big Data Opportunity. Revenue visibility and SaaS Opportunity. The company has multi-year contracts with its clients for the provision of complex managed hosting solutions. This provides revenue visibility to the Company, furthermore, with an increase in number of companies using Software as a Service in the next few years the company can capitalize on this opportunity through SaaS offerings. Benefits from investments in data center fibre network In order to provide fast connectivity between its data centers and main UK internet exchanges, the Company has planned multi-million pound investments into a new optical fibre network. Iomart will no longer have to rely on number of providers for routing customer connectivity. This will enable customers to move huge amounts of data at the highest speeds irrespective of their location. The company expects to increase its capacity and national reach, as it will be able to provide customers with unlimited bandwidth with greater reliability and security. High growth in sales, net income and margins The company has a successful track record for achieving growth via acquisitions. Since 2008 the sales of the company has grown at a CAGR of 42%. EBIT margin and net profit margin have continuously increased along with growth in net income from 2008 to 2012.
INVESTMENT RISKS Acquisitions related risks Iomart has made various acquisitions in past few years and is planning to continue this stategy in the years to come. If the Company is not able to successfully integrate the operations of the acquired businesses, the desired results may not be achieved. Furthermore, the debt level may further increase if acquisitions are funded through borrowings. The company made three acquisitions in 2011. In August 2012 Iomart acquired Melbourne and Skymarket for 8.2m and expects to complete 4 acquisitions in the current year. Economic slowdown The global economic slowdown may reduce companies willingness to invest in technology, therefore having a direct impact on the financial performance and growth of Iomart.
VALUATION In order to compute the target price of Iomart Group plc share price, we have used a combination of DCF-based absolute valuation technique, relative valuation (peer multiples) and historical multiples. Value obtained through each of the methods has been given an equal weight, thus arriving at valuation of 2.16. per share. Method Weighting Stock price Peer comparison 33% 1.18 DCF 33% 3.49 Historical Ratios 33% 1.80 Weighted average 2.16 PEERS COMPARISON We have compared Iomart Group Plc with 4 peers companies by using 5 multiple ratios. By taking the average of the following prices we have computed a stock price of 1.18. Name of Company EV/Sales EV/EBITDA EV/EBIT PE P2B Computacenter plc 0.2 5.0 6.5 9.4 1.4 Blinkx plc 3.2 28.6 57.1 103.1 3.2 Microgen plc 2.6 9.6 10.5 15.3 1.9 NCC Group plc 3.9 13.9 18.5 41.1 5.2 Median 2.9 11.7 14.5 28.2 2.5 Corresponding Stock Price 0.92 1.27 0.83 1.75 1.15 Source: www.bloomberg.com, www.4traders.com, http://investing.businessweek.com 1. At median EV/Sales ratio of 2.9 of peer group we get stock price of 0.92 for the company. 2. The median EV/EBITDA of 11.7 of results into corresponding stock price of 1.27 for share of the company. 3. The median EV/EBIT of 14.5 for the peer group results into corresponding stock price of 0.83 for Iomart Group plc. 4. The median PE ratio 28.2 provides corresponding stock price 1.75 for each share of the company. 5. At median P2B of peers at 2.5, each share of Iomart Group plc is valued at 1.15.per share.
The average of above 5 prices provides a stock price of 1.18 for each share of the company. DISCOUNTED CASH FLOWS Based on this DCF model, we get a stock price at 3.03 per share (WACC 6.8%, terminal growth rate +1.0%): 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Revenues 25.3 33.5 42.5 49.7 54.7 60.2 66.2 72.8 76.5 80.3 84.3 Revenue growth % 32.6% 27.0% 17.0% 10.0% 10.0% 10.0% 10.0% 5.0% 5.0% 5.0% EBIT 2.8 6.0 10.1 13.7 15.6 17.9 21.4 25.2 26.9 28.8 31.0 EBIT margin % 11.0% 18.0% 23.7% 27.5% 28.6% 29.7% 32.3% 34.6% 35.2% 35.9% 36.8% Dep. & Amortisation -3.4-4.8-4.6-4.5-4.5-4.5-4.5-4.6-4.7-4.8-5.0 CapEx -4.0-3.0-3.8-4.4-4.9-5.3-5.9-6.5-6.8-7.1-7.5 WCR 1.4-0.9 1.3 1.4 1.0 1.1 1.2 1.3 0.7 0.7 0.8 Free Cash Flow 3.1 6.0 10.3 12.5 13.2 14.6 16.9 19.5 20.0 21.3 22.9 Terminal value 418.6 Discounted cash flow 10.3 11.7 11.6 12.0 13.0 14.0 13.5 13.4 13.5 Discounted terminal value 210.9 WACC assumptions Beta 0.64 Market premium 6.0% Risk Free Rate 3.0% Cost of Equity 6.8% Long-term Equity Weight 100.0% Cost of Debt 3.9% Long-term Tax rate 23.0% Tax Effected Cost of Debt 3.0% Long-term Debt Weight 0.0% WACC 6.8% Terminal growth 1.0% Forward diluted shares(m) 104.8
FINANCIAL OVERVIEW Profit and Loss account: P&L ( m) 2008 2009 2010 2011 2012 Revenue 8.12 11.80 18.33 25.25 33.48 % growth 45.4% 55.4% 37.8% 32.6% Easyspace 6.32 7.22 7.36 7.56 9.13 % growth 14.3% 1.9% 2.6% 20.8% Hosting 1.80 4.57 10.96 17.69 24.35 % growth 154.6% 139.8% 61.4% 37.6% EBIT -2.27-1.65 0.38 2.77 6.02 % margin -27.9% -14.0% 2.1% 11.0% 18.0% Net Profit -1.79-1.93 2.07 2.86 6.20 Net Profit Margin % -22.0% -16.4% 11.3% 11.3% 18.5% The Company s revenue has continuously increased from 8.12m in 2008 to 33.48m in 2012. Hosting division is the major contribution to the growth where revenue has increased from 1.80m in 2008 to 24.35m in 2012. During the same period revenue of Easyspace division increased from 6.32m to 9.13m. EBIT margin and net profit margin have also improved continuously over the past five years.
Balance Sheet Balance Sheet ( m) 2008 2009 2010 2011 2012 Non-current assets: 29.27 27.49 35.83 43.35 49.61 Goodwill 18.53 16.55 20.72 23.95 27.54 Other Intangible Assets 0.72 0.36 1.01 1.98 3.03 Property, plant and equipment 8.31 8.67 12.28 14.79 15.63 Deferred Tax Assets 0.83 0.02 0.60 0.62 0.99 Lease deposit and deferred consideration 0.88 1.88 1.22 2.02 2.42 Current assets: 3.86 16.09 9.57 9.96 13.01 Trade & other receivables 3.12 2.18 2.94 3.10 4.07 Inventories 0.00 0.00 0.00 0.00 0.00 Deferred consideration receivable on disposal 0.00 0.00 0.91 0.00 0.00 Cash and cash equivalents 0.74 13.91 5.72 6.86 8.94 Total Assets 33.13 43.58 45.39 53.32 62.62 Current liabilities: 5.46 10.14 8.97 13.49 16.34 Trade & other payables 4.79 5.19 7.49 9.74 10.59 Current Borrowings 0.67 0.15 0.48 2.85 5.25 Contingent consideration due on acquisitions 0.00 4.80 1.00 0.60 0.25 Current income tax liabilities 0.00 0.00 0.00 0.30 0.26 Non-current liabilities: 27.67 33.45 36.42 39.82 46.27 Borrowings 0.19 0.05 0.83 0.92 1.21 Deferred consideration due on acquisition 4.80 0.00 0.00 0.00 0.00 Equity 22.68 33.39 35.59 38.90 45.06 Total Liabilities 33.13 43.58 45.39 53.32 62.62 Net Debt 0.12-13.71-4.40-3.10-2.47 The majority of non-current assets are contributed by goodwill and property, plant & equipment, which account for 55% and 32% of total non-current assets respectively. Goodwill has continuously increased over the years as a result of various acquisitions made by the group. Other intangible assets mainly include development costs, customer relationships and software. Development costs are research and development costs that are capitalized. Currents assets include trade & other receivables and cash and cash equivalents. The borrowings of the group have continuously increased because of amount raised for acquisitions.
Cash-Flow statement Cash Flows ( m) 2008 2009 2010 2011 2012 Profit before taxation -2.32-1.20 1.25 2.79 5.84 Depreciation, Amortisation & Impairment 0.68 1.10 2.36 3.39 4.75 WCR 0.20 0.63 1.11 1.41-0.89 Share based payments 0.09 0.23 0.38 0.29 0.10 Net Finance Income/Costs 0.05-0.45-0.01-0.02 0.18 Income tax paid 0.00 0.00-0.16-0.01-0.59 Others 1.82 0.46-1.20-0.80-0.41 Operational cash flows 0.52 0.78 3.72 7.04 9.00 Purchase of property, plant & equipment -0.39-1.52-2.34-3.42-2.40 Purchase of intangibles -0.02-0.04-0.07-0.20-0.09 Capitalisation of development costs -0.25-0.24-0.28-0.35-0.47 Free cash flows -0.14-1.02 1.03 3.08 6.04 CFF 9.26-1.34-0.93 1.19 0.48 Operational cash flows of Iomart Group plc have continuously improved and have increased from 0.52m in 2008 to 9m in 2012. Capital expenditure includes purchase of property, plant and equipment; intangibles and development costs. Free cash flows of the company have also increased continuously every year from -1.02m in 2009 to 6.04m in 2012.
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