Big investors own almost 70% of the shares of software company Idox (LSE: IDOX). The list of big holders includes Soros Fund Management and others. And last year Idox was the focus of a takeover approach from an outfit called Dye & Durham Limited.
However, the deal didn’t go through. And that was because the Idox directors thought better value would flow to shareholders if the company remained independent.
Steady trading and growth
I think all the interest shown underlines the value the business has as a growth proposition. The sector is steady — the company supplies specialist information management software and solutions to the public and “asset-intensive” sectors.
For example, Idox builds software for government and industry to help its customers comply with regulations. Areas include the management of planning, building control, environmental health, licensing procedures and elections. And Idox software aims to encourage collaboration in social services departments and it also “brings health service information together”.
On top of that, Idox makes software for facilities (property) management and engineering information management for large-scale, complex capital projects.
Meanwhile, the share price rose by about 27% over the past year and trading has been going well. Today’s full-year report covers the 12 months to 31 October 2021. And the banner headline is ‘Another year of strong financial performance and strategic and operational progress’.
Revenue from continuing operations increased by 9% compared to the figure a year ago. And of that, 5% came from organic growth with recurring revenue increasing by 2% to just over £36m.
That means recurring revenue is now around 58% of the total. And it’s what I’d describe as ‘sleep-at-night’ revenue. If customers keep coming back year after year to continue or renew contracts, profits and cash flows can become steady and predictable. And I reckon that’s one of the main reasons institutional interest in the stock is so high.
Rising profits and an optimistic outlook
Meanwhile, the company’s been doing a good job converting revenue into profits. Operating profit shot up by 90%, adjusted EBITDA rose by 13% and adjusted diluted earnings per share increased by 54%.
During the year, Idox disposed of its Content business, gaining net proceeds of almost £11m. And that was offset by three bolt-on acquisitions with an initial cost of £10.5m. I reckon it’s good to see such nipping and tucking because it suggests managers are focused on optimising the operations of the business. Meanwhile, in another positive indicator, net debt reduced by 50% to just over £8m.
The directors raised the final dividend for the year by just over 33%. And, looking ahead, chief executive David Meaden said the outlook for the business “remains strong”.
City analysts have pencilled in an increase in earnings of about 28% for the current trading year to October 2022. But there’s no guarantee the business will achieve assumptions. Operational challenges could arise to derail progress. However, set against that estimate and with the share price near 67p, the forward-looking earnings multiple is around 24.
That’s not cheap. And valuation could add another risk for investors here. Nevertheless, I’d buy the stock now to hold for the long term as the ongoing growth story continues to unfold.