itim Group – a cheap, cash generating SaaS specialist firm

This information technology group floated on AIM at the end of June last year.

After a Placing of 5.2m new shares at 154p each, the company’s market capitalisation was valued at £48m.

Since hitting 158p in the first week of July the group’s shares, in very light dealing activity, have been on a steady downward trajectory, closing at only 104p last Friday night.

And at this level I consider that they are now looking very good value over the next couple of years.

So much so that they could easily double from this current price level.

The business

Established in 1993 by its founder, and current Chief Executive Officer, Ali Athar, the company was initially formed as a consulting business, helping retailer’s effect operational improvement.

From 1999 it expanded into the provision of proprietary software solutions and by 2004 it was focused exclusively on digital technology.

The itim Group (LON:ITIM) has grown through a series of acquisitions of small, legacy retail software systems and associated applications which were redeveloped to create the holistic end-to-end solution for retailers that supports omni-channel retailing through the internet.

So, what exactly is ‘Omni-Channel’ retailing?

The group’s own description is that Omni-Channel retailing is a concept built on the growing Uberisation of Retailing.

Essentially, on the back of the restaurant industry, a whole series of local courier networks have developed in cities and regions, which is disrupting the ‘Online’ business model of national distribution from central warehouses.

Retailers are realising that, rather than thinking of their stores as points of sale, thinking of them as points of service means they can fulfil customer orders from the stock in their stores, providing 30-minute click-and-collect (curb-side collections) and same day or 1 hour delivery from their stores to customers in the local community.

Thereby providing extreme convenience and extreme services that their online competitors cannot match. Those that have done this well have seen 50% of online orders being fulfilled from stores.

In addition, they are finding that 10% of customers account for 40-50% of revenues, and over 60% of their profits. By linking these customers digitally to their stores and increasing engagement means, that if they shop one more time a year, it doubles the retailer’s profits.

The company offers retailing platform that allows retailers to compete with online competitors. It also provides stock management, supply chain management, and finance system integrated with automatic invoice matching.

The company platform allows both home delivery and in-store collections, and also supports in-store returns for online purchases.

Customers

The group provides software as a service (SaaS) and related implementation and consultancy services in the UK, Europe, and internationally.

The group works with over 65 retail groups spread across ten countries.

The list includes: JC Penney, Sainsburys, Whitbread, Costa Coffee, Makro, JD Sports, The Southern Co-operative, Waitrose, Blackwell’s, The Entertainers Toy Shops, one|stop, Seasalt, Travis Perkins, Holland & Barrett, Pizza Express, Coles, Simply Market, Musgrave Group, East of England Co-op, mateus, Adnams, Jollyes, Radio Popular, WH Smith, Planet Organic, The Works, The Fragrance Shop, Majestic Wine, Notcutts, McDonalds, Office, Royal Collection Trust and The Henderson Group amongst several others.

The equity

There are some 31.21m shares in issue.

Larger shareholders include Ali Athar, CEO, and his family interests (38.4%), Rowan Lewis and family interests (18.1%), Robert Frosell, NED (7.6%), the Curtis family interests (5.2%), Herald Investment Management (4.2%), and Ian Hayes, FD (2.7%).

Apart from Athar, Frosell and Hayes, who have been directors of the company for decades, it is worth noting that the Chairman is Michael Jackson, boss of Elderstreet Capital Partners and ex-Sage Group (1.76%), who has been with the company since 2015.

Also on the board is Justin King, ex-Sainsburys CEO and now Marks & Spencer NED (0.74%).

Latest Trading Update

Two weeks ago, the company issued its Trading Update for the year to end December 2021.

It gave guidance to the market that its year-on-year revenue growth came in some 14% higher at circa £13.4m (£11.8m). Its EBITDA for the year could be 40% better at £2.1m (£1.5m), after excluding the June IPO expenses.

At the year end the group’s net cash balance was a healthy £6.2m (£0.2m).

An important point to note is that the group’s annual recurring revenue was 16% better at a record £11.1m (£9.6m) – which was an impressive 83% ARR. And readers know by now just how much I love to see high ARR’s.

Broker’s View

Analyst John Cummins at brokers WH Ireland considers that with an already established customer base and a highly experienced board, the group is well positioned to benefit from highly visible structural trends now being seen across the retail sector.

He notes that the group is looking to double its ARR by 2024.

Well-funded now, he sees the group continuing its investment in building out its technology.

His estimates for the next three years see revenues rising to £14.6m in 2022, £19.6m next year and up to £28.3m in 2024.

In that same time, he goes for pre-tax profits to rise from £0.5m, then £3.1m and up to £8.3m in 2024.

That would generate earnings of 2.0p, 9.5p and up to 19.9p per share respectively.

His estimates for end of year net cash balances is very impressive – £6.1m end 2022, £9.6m end 2023, then up to a massive £17.7m by the end of 2024.

It is those figures that, no doubt, back up his ‘fair value’ estimate for the shares at 200p each.

My View

Oh, my goodness – doubling of the ARR by 2024 – I just love it.

And just look at the generation of those cash balances – and then compare todays £32.5m market capitalisation.

This group is a ‘disruptive’ SaaS-based platform. Its business model for its customers is to increase sales and reduce costs. It can’t be better than that can it?

It is just the type of ‘builder’ that I really enjoy following.

Its potential is massive and global.

Within a few weeks we will see the full results for last year, together with a statement on current year trading and group prospects.

The shares, in my view, are totally undervalued at only 104p.

I now set a Target Price of 130p, which is an easy near-term objective.