HL SELECT UK GROWTH SHARES

Why we bought Ideagen

Fund changes

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Charlie Huggins (CFA) - Fund Manager

25 January 2018

We have added a new name to the portfolio, Ideagen plc. It’s a smaller company, but one that we think has lots of scope to grow.

In today’s world, the role of Governance, Risk Management and Compliance only ever seems to become more prominent. Not just in financial services, but right across business and commerce the world over.

Ideagen have a suite of software products that help companies operate efficiently, within all the rules that surround them. Safety management, quality control, compliance to ISO standards are covered, along with products to improve the internal audit process and track the production, management and access to documentation within businesses.

When a customer chooses Ideagen, the software becomes embedded into their daily processes and changing providers can be a complex undertaking once everyone has been trained up to use the Ideagen systems. So clients tend to be sticky and revenues usually repeat.

Quality characteristics

We love good quality software businesses, because once made, the cost of supplying software to an additional customer can be very small. This makes for robust cash generation as well as repeating revenues. The surplus cash flow can be reinvested into developing the software further, or acquiring complementary businesses. So far, it seems to be going well, with the group having grown revenues more than tenfold since 2011.

As Ideagen has grown, margins have widened and analysts are predicting the group to achieve EBITDA margins (a common measure of cash profits) of over 30% in the next two financial years. Organic revenue growth of 10% was achieved last year and adjusted earnings per share grew by 19%. Analysts forecast growth to continue at a strong pace.

Small with plenty of potential

Ideagen is still a smaller company but it has net cash in the bank and we expect it to report robust trading when it reports interim results in January. Since the period end, the company has announced a major contract win and talked of strong demand across all their key markets. Our position in the stock is a little smaller than usual, reflecting the company’s £200m market value, which is the lowest of all the stocks in the portfolio. We have high hopes for the stock but given its size, we are mindful it carries an element of increased risk.

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