Digital workforce designer raises £100m to capitalise on significant growth opportunities
Thursday 07 Feb 2019 Author: Steven Frazer

This is one of the most ‘marmite’ equity stories on the UK stock market right now. Sceptics argue that Blue Prism (PRSM:AIM) has unproven technology, a business model that is yet to make a profit, and the shares trade on an eye-watering valuation.

Fans believe the Warrington-based business is embracing a new, digital way of automating labour-intensive and mundane administrative tasks. They consider it to be a rare made-in-Britain growth opportunity that can match anything Nasdaq-listed companies have to offer.

WHAT’S ALL THE FUSS ABOUT?

Blue Prism is a virtual workforce disruptor which uses robotic process automation (RPA) technology to automate manual back-office administration. This cuts costs for clients, frees the human workforce to do more value-adding stuff, improves customer service and speed, and reduces the need to invest in new IT systems, all via a compliance-friendly platform.

It is an area that is attracting serious money from investors around the globe, with more than $1bn of growth funding raised in the last two years by two of the industry’s three poster kids – UiPath and Automation Anywhere.

Blue Prism, the third of that trio, has tapped investors for more than £120m since its IPO in March 2016, including a £100m fundraise announced two weeks ago.

This is a nascent, fast moving digital industry whose scope to benefit businesses is capturing the imagination of top management teams everywhere. Blue Prism alone is helping more than 1,100 clients tap into the operational improvement scope of its RPA digital workforce tools, and many are industry heavy-hitters such as Coca-Cola, Walgreens, Xchanging and 02.

Shop Direct (which owns the Littlewoods brand) is one of Blue Prism’s longest standing customers of more than 10 years, and it recently doubled its licence with the company. Importantly, nearly all of the company’s revenues are on a multi-year recurring basis with very limited churn to date.

UNWRITTEN FUTURE

Chief executive Alastair Bathgate admits that the future potential of RPA is impossible to predict, outside of stating that the ‘market is growing very fast’.

There is a clear land grab going on right now but Bathgate believes that RPA is a ‘genuine utility product’ and its applications have the scope to support multiple specialist players, and it’s his job to ensure that Blue Prism is one of them.

That’s why the company has just raised fresh funding. The opportunity is there for bigger sales teams, more marketing expertise, and product development to widen and deepen Blue Prism’s RPA toolkit applications.

For example, there is inherently a level of self-learning in the technology but Bathgate thinks that as artificial intelligence gets better, faster and more user-friendly, his company will be able to embed more capabilities into the Blue Prism product set and do clever things for clients.

In the meantime, Blue Prism isn’t doing too badly at winning new business; it secured 538 new licences in the year to 31 October 2018. The company is also winning more work with existing clients. An extra 723 licences were upsold into 300-odd existing customers, demonstrating the common sense of integrating itself far deeper into its large client base.

Such achievements have helped Blue Prism post astonishing growth since floating on AIM in March 2016. Analysts forecast £93.8m revenue this year, roughly 10 times the £9.64m reported for 2016, and approximately £140m for 2020. ‘A year from now we could be really profitable,’ Bathgate tells Shares, although it is worth noting that analyst forecasts out to 2020 imply no change to Blue Prism’s loss-making status.

HOW BIG IS THE OPPORTUNITY?

At this stage it remains tricky for retail investors to gauge the real scope of opportunity for a business like Blue Prism.

With the company still firmly investing for future growth, there are no profit metrics to lean on for valuation assistance, while near-term plans will likely mean negative cash flow for the foreseeable future.

One way analysts get round this situation is to look at revenue multiples or enterprise value-to-sales, which is basically market cap less net cash. Blue Prism currently trades on 9.9 times this year’s expected £93.8m revenue.

That is bound to look punchy compared to more mature businesses, yet balancing against its main peers UiPath and Automation Anywhere provides useful perspective.

Detailed data is hard to obtain for these privately-owned, venture capital-backed rivals. Yet based on revenue estimates from market intelligence website Owler, we estimate peer sales multiples of 25 to 30-times, a massive premium to Blue Prism.

Analysts at Shore Capital have done similar calculations and have come to an even bolder conclusion: ‘Taking the average of the recent private equity valuations for UiPath and Automation Anywhere implies a short-term fair value for Blue Prism of $2.4bn (or £27 per share).’ That is nearly double its current share price of £13.98.

GROWTH ASSUMPTIONS

If we assume revenue grows at 50% a year on average for the five years beyond the current forecast range (which stretches to 2020) then 2025 revenue could be in the region of £1bn.

Let’s assume sales and marketing costs come down as a percentage of revenue from the 80%-odd expected in 2020, and other operating expenses expand at a slower rate than sales, given the recurring revenue nature of most of Blue Prism’s income.

You could then see how the company might become very profitable on a reasonable, mid-range time frame.

We believe that is by and large what will happen, and believe Blue Prism’s shares are still attractive for investors willing to play a longer game.

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