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There could be significant upside on the cards if new economy consultancy gets it right
Thursday 06 Aug 2020 Author: Steven Frazer

One of the clear dynamics to emerge from Covid-19 is the need for businesses to embrace digital transition and cloud-based flexibility. The Panoply Holdings (TPX:AIM) has substantial promise to become an investment star right at the heart of this trend.

Panoply is a digital enabler consultancy, designing tools, products and services that can fast track clients’ e-commerce and internet delivery ambitions. Founded in 2016 by chief executive Neal Gandhi and chief finance officer Oliver Rigby, it is very small.

The shares may not be always easy to trade, either, with several long-term shareholders on the register and about 26.5% of the stock in the hands of the founders.

But the future looks exciting, and the potential share price upside large.

The company’s buy-and-build roots mean it has made six acquisitions at a total cost of £22 million upfront, plus another £19 million based on future earn-outs. This has created a pan-European business making most of its revenue from large organisations, about two-thirds of which sit in the public sector realm where the need for digital change is arguably greatest.

We are talking about the BBC, DVLA, UNICEF, and from the corporate world, Funding Circle (FCH), for example.

Accounts to 31 March 2020 highlight robust revenue growth of 43% to £31.5 million, with both organic expansion and a contribution from acquired businesses. Significantly, there is a lot of repeat business in those numbers, with about 70% of customers billed in fiscal 2020 also billed the year before. That’s very encouraging.

This translated into normalised adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £3.4 million, versus £2.1 million in 2019.

This was accompanied by operating cash flows of £2.7 million, and while acquisitions saw the company nudge £0.4 million into net debt at the year end, by the end of June it had turned that deficit into a £1.8 million net cash balance thanks to strong cash generation.

With £10.1 million of sales recorded in the first quarter to 30 June and a record £13 million worth of contracts signed, the company believes it can generate 10-15% annual organic growth going forward and is targeting a revenue run rate of £100 million by March 2023.

To get there will mean further acquisitions, so investors should be willing to back future fund raisings to avoid dilution. Back of notebook calculations imply maybe 12p per share of earnings on that sort of revenue. Purely hypothetically, if you were to place that on a typical digital economy earnings multiple of, say 25, investors would be looking at a 300p share price on a two-year horizon.

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