Nasstar – looking for a 35% lift-up over the next year
I just love businesses with recurring revenues and contracts – they make me feel so much safer when there is a strong element of earnings visibility.
And that is just what Nasstar (LON:NASA) is all about.
The company is a provider of hosted managed and cloud computing services, in fact it is one of the UK’s leaders in that specialised sector.
It is a key player in the provision of its services into what is becoming a quite established sustained and growing demand for managed IT and cloud hosted services.
What I like to see is that some 90% of its revenues are on recurring contracts. Generally, they are on long-term 3-5 year contracts, with their customers being invoiced in advance of use. It is on the back of such predictable income streams that a company can build up its offer and make itself more employable.
From its five regional and international offices the company’s 190 employees provide its services to over 12,000 users.
I don’t know about you, but my desktop always needs managing. That is Nasstar’s job – not tidying up the papers but instead giving its business customers a robust, secure and stable hosted IT service.
The company owns its own primary data centre and is headquartered in Telford, Shropshire, with other offices in Northampton, Bournemouth, London and New York.
The seven days a week, twenty-four hours a day support service that the group provides is based in Auckland in New Zealand.
There are a massive 575,012,743 shares in issue. Nigel Redwood (CEO) and Niki Redwood (CFO) each own 1.95% of the equity, while the former Chairman Lord Daresbury holds 0.23% and Nick Bate the new Chairman owns 0.13%.
Significant shareholders include: Kestrel Partners (21.05%), Liontrust Asset Management (16.06%), Canaccord Genuity Group (12.17%), Close Asset Management (10.25%), Gresham House Asset Management (5.69%), Harwood Capital/Oryx International Growth Fund Management (5.22%), Octopus Investments (2.78%), River and Mercantile Asset Management (2.75%), NVM Private Equity (2.06%) and former Board member David Redwood (2.03%).
The group’s recurring revenues give a very clear indication of visibility, consistency and quality of earnings. For that I would be prepared to pay a premium rating for its shares.
With such balance sheet cash generation it is easy for the company to commit to significant internal investment for its organic growth, while also giving it an ability to target certain strategic acquisitions when the opportunities arise.
In the year to end December 2018 the company reported revenue of £25.7m, upon which it made an adjusted pre-tax profit of £3.1m.
For the current year finnCap, the company’s brokers, are going for £27m of revenue and £3.6m pre-tax.
Next year £28.9m of turnover could generate at least £4m profits, worth 0.5p per share in earnings and giving it the ability to pay out 0.1p per share in dividend.
Capitalised at just £64m, with a net debt of just £2.3m and an enterprise value of £62m I really do like the feel of this little company.
By now you will have realised that my emphasis is strongly upon the recurring contract revenues – I just love to see this in companies, it gives a certain safety to valuations and forecasts.
I see these shares nudging higher than the current 11.1p up to and beyond next April’s finals announcement. In the meantime, a late January/early February Trading Statement could give that nudging a bit of a boost.
My end 2020 Target Price is 15p.