finnCap Tech Sector Chat: The Bieber Principle

Research reports and comments in the past 2 weeks:

• Pelatro*: CORP – IPO forecasts delivered with a bright outlook
• Nasstar*: CORP – Demonstrating the underlying strength
• Telit*: CORP – Looking to the future
• Minds + Machines*: CORP – Boom and bust
• Ideagen*: CORP – Positive trading update and board changes

* Indicates a corporate client

finnCap Tech Sector Indices

The Bieber Principle - Andrew Darley

As a 24-year-old, I did stupid fun things. There are no photos or evidence, apart from the odd stain or two, and I didn’t own a mobile phone. I see the 24-year-olds in the office today do stupid fun things, but despite being surgically attached to their phones they have been brought up with Facebook/ Insta/ Snapchat and so they are cannier than to foolishly post the evidence on social media for their digital time eternal, thus it also remains private. On the face of it they are the same respectable and employable individuals.

Yet today when a particular 24-year-old splits up with his girlfriend, it makes headlines.  The same poor fellow, when 19, was accused of “drag racing under the influence” in Miami even though it transpires he was doing 55 in a 30 zone after having one beer. The poor fellow in this case is Justin Bieber. Infringements which would be skipped over for the average Joe become news suitable for scandalising commentary when you have to grow up in public, in order that tabloid gossips can thrive on the judging.

This is the Bieber principle: a listed company has to grow up in public, and suffer the slings and arrows of outrageous fortune that being listed entails, in order to gain the benefits a listing can convey.  We are all watching and waiting to applaud or criticise yet much of it can be short-term bumps which don’t affect long-term prospects. With the burden of regulation on AIM now arguably higher than on the full list, it is not the Wild West – however, growing up in public is not something private companies have to do – hence 11% organic growth would be celebrated as a note of success for a private company, where a public company aiming for 15% might be pilloried for it.

There is an armada of companies we could point to which have slipped up in the near-term and thrived in the long-term; in fact, it’s much harder to find one that hasn’t (Ideagen* perhaps?). 

In our corporate stable, ZOO Digital* is up +789% in the year; Sopheon* is up +183% in six months; CityFibre* +94% in a month. Each have had issues of credibility and performance at some stage which has done nothing other than present buying opportunities thanks to short termism. In each case, they are now leaders in their fields, with significant prospects and global industry standing in what they have done.

Having acquired Perfect Commerce in summer last year, Proactis* continues to successfully integrate the two businesses – integration being the obvious identified risk at the time of acquisition.  Unfortunately we didn’t expect the loss of two single-product large clients at Perfect Commerce (albeit there are no more of equivalent impact customers remaining), therefore the last results did disappoint in that respect – however the prospects for the 5th largest spend control software provider in the world are not dimmed, and the “known unknowns” are being handled well.  A -7% review to FY19 revenue has led to a 42% share price movement, with the stock trading at 9.2x P/E, 5.7x EV/EBITDA, and an almighty 13% free cash flow yield.  With peers trading at 3.5 to 14x sales, the reduction in market cap of £66m equates to a multiple of 14.8x of the FY19 £4.5m sales downgrade  – a multiple which the company didn’t have the benefit of in the first place.  Overreaction to a Bieber event – yes certainly.

While poor old Justin and Selena have long split and the gossips are gloating, something tells me the dating prospects for the 24-year-old millionaire remain unaffected in the longer run.  Proactis*, too, is growing up in public Bieber-style, but in our opinion it has grabbed exaggerated attention and things will be back on track.  Growing up in the public eye doesn’t mean an unfortunate slip can’t be overcome, even providing a little extra experience for the future, as challenges are inevitable. 

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