A Cash-Positive business and operating on 87% ARR
I know that I haven’t featured my favourite ARR investment criteria for any stocks recently, but as regular readers will know I just love Annual Recurring Revenues.
It is any finance director’s key number and this group operates on a very high figure.
To know that your company’s revenue intake has certain fixed levels for the year ahead, surely makes the assessment of future capital expenditure that much easier.
So, when I alight upon companies where their business has high levels of guarantee going forward, it makes me almost salivate upon the assumption that ‘risk’ is being severely reduced.
Now looking at REACT Group (LON:REAT) many investors may not get zizzed-up because of its basic business – which is cleaning services.
The £13.5m capitalised group, which is based in Birmingham, is the UK’s leading specialist and contract cleaning business.
It operates with three divisions: LaddersFree, one of the largest commercial window cleaning businesses in the UK; Fidelis Contract Services, a contract cleaning and facilities maintenance business; and the REACT business, which primarily provides a solution to emergency and specialist cleaning situations, both through long-term framework agreements and on an ad-hoc basis.
You Want It Cleaned?
Well REACT can do that.
The group describes itself as the extreme cleaning company that goes beyond the everyday to tackle cleaning problems that non-specialists just can’t cope with.
From hotels to prisons, crime scenes to cruise ships, public spaces to private hospitals, it does what others can’t do – going beyond everyday cleaning to deliver a specialist service whatever the challenge.
The sectors into which it provides its various services includes rail, justice, industrial, housing, healthcare, education, highways, emergency, and also facilities management.
The company offers air duct cleaning, animal and human fatality management, hazardous and biohazard cleaning waste removal, carpets and floor cleaning, clinical waste removal, crime scene and forensic cleaning, decontamination, deep cleaning, detention centre cleaning, end of tenancy cleans, fire and smoke damage, fire damper testing, flood and sewage clean up, and fly-tipping clearance services.
It also provides graffiti removal, depot and warehouse cleaning, high-level cleaning, ATEX explosive environment cleaning, grease extractor cleaning, highways and lay-bys, house and hoarder clearances, kitchen grease extract cleaning, nightly hospital cleans, office and commercial property cleaning, pigeon guano clearance and anti-bird control.
Other services include trackside decontamination, emergency vehicle cleaning, sharps and drugs paraphernalia removal, detention centre cleaning, commercial window cleaning, norovirus and covid decontamination, infection control cleaning, data room cleaning, school contract cleaning, train carriage and graffiti cleaning, and rail deposit and station, and rail rapid response cleaning services.
Some Leading-Name Clients
As a group, through its three main divisions, it offers its services to over 1,200 customers mostly in the private sector, while better-known clients include Costa Coffee, DPD, Hitachi, Lidl, Sodexo, Mannheim, UCLH, Frimley Health, Nespresso, Wendys, Marriott, Mitie Group, Ringway, Serco, Pret A Manger, Tapi, Fortem, the gym, Govia, Britannia Services Group, Holiday Inn Express, the Extra Care Charitable Trust, IAC, GeoAmey, and the University College Birmingham.
The group’s growth has been underpinned by its strong customer retention, while securing contract expansion and retention, as well as offering massive cross-selling possibilities.
The Latest Results
Last Tuesday the group declared its final results, showing a record performance for the year to end September 2023.
It reported that its revenues had increased by 43% to £19.6m (2022: £13.7m), boosted by the numerous multi-year contracts that had been won via cross-selling across the group.
Impressively the group’s gross profit was up 61% to £5.2m (£3.3m), its profit margin was 27% (24%), while its adjusted pre-tax profits were almost trebled from £0.7m to £1.8m, with earnings per share doubling from 0.1p to 0.2p for the year.
Some 87% of the group’s sales were classed as recurring revenue, against 83% in 2022.
On a like-for-like basis the group’s organic revenue growth showed through at around 21%.
The ‘capital light’ business was highly cash-generative and ended the year with a cash balance of £2.1m (£1.5m).
CEO Shaun Doak stated that:
“I am delighted to announce a strong performance from the REACT Group, marked by impressive organic growth and improved profitability and cash conversion. This success underscores the strength of our value proposition and customer acquisition strategy.
Following the acquisitions of Fidelis in March 2021 and LaddersFree in May 2022, we have consistently achieved substantial organic growth. This achievement showcases our proficiency in integrating these offerings into our core services, unlocking potential across an expanded customer base. Our success is evident through effective cross-selling and upselling strategies, as well as our ability to attract new customers.
Momentum from FY23 has continued into the new financial year, and despite the usual slow down across the festive period, the first few months of FY24 have delivered a record trading performance for the Group.”
Current Trading And Outlook
Looking at the group’s current year’s trading and its outlook, the company stated thatit has already had good momentum into the current year, following a strong first quarter, reflecting significant growth opportunities as it goes forward.
The company is now underway with a near £300,000 investment in infrastructure to leverage its efficiency-enhancing technology across the group by way of mapping out digitisation of its services, which could offer greater operational efficiencies and optimisation of its resources when completed.
There are 1,067,648,507 shares in issue.
Larger holders include Octopus Investments (15.22%), Dowgate Capital (12.09%), Canaccord Genuity Wealth (9.32%), Harwood Capital (8.38%), ISPartners Investment Solutions (7.95%), and Premier Fund Managers (6.36%).
Three private investment holdings are of note: Jonathan Whitmore (2.81%), Jason Korinek (2.61%) and Justin Korinek (2.61%), the latter two were involved in the LaddersFree business.
Greg Poulton at Singer Capital markets rates the group’s shares as a Buy.
For the current year to end September he is estimating £21.2m of revenues and £2.1m of adjusted pre-tax profits.
He has a Price Objective out on the shares at 1.9p.
In the middle of January, the group appointed Dowgate Capital as a Joint Broker to the company, I now understand that it will be issuing a note on the group shortly.
My View – 1.60p Target Price Holds Firm
This little group has achieved excellent organic growth over the last three years, running at an average 24% per annum rate in that time.
And that long-term growth in its 87% annual recurring revenue will also help to boost still further its operating margins.
I consider that this little group has sensible ambitions in its future expansion.
It has a declared aim to grow to a £50m value within the next few years.
Against its £13.5m market capitalisation, a positive point is that it ended its 2023 year with £2.1m cash in the bank.
The recent bolt-on acquisitions that it has completed have all been accretive and I am sure that other smaller to medium sized targets are being lined up, certainly as the group steps up its M&A expansion phase.
The group has a good pipeline of potential business and as it gets its digitisation completed, I can envisage even more cross-selling opportunities being presented and being worked upon.
It would be sensible if moves were made to lose the current ‘penny share’ status, that could give it more investor credibility – which it certainly deserves.
The group’s shares, which closed at just 1.25p on Friday night, are a Strong Hold for existing shareholders and should prove to be a bargain for new investors.
(Profile 29.01.21 @ 1.5p set a Target Price of 2.5p*)
(Profile 31.10.22 @ 0.80p set a Target Price of 1.60p)
(Asterisks * denote that Target Prices have been achieved since Profile publication)