Small Cap Value Report (Wed 3 Jan 2024) - IGP

Good morning from Paul & Graham!

Today's report is now finished. 

Graham and I agreed that the other micro caps on the news list today weren't worth covering, and we've both got loads of other things to write about (I'm part-way through a mammoth article on my 2024 shares ideas, so would rather focus on that). Also Graham's agreed to put his top 10 onto that same spreadsheet, on a different tab, so we can monitor both lists with real time prices.

Graham's eagerly anticipated Top 10 list of share ideas for 2024 is up! I'm sure we'll all be carefully scrutinising these, given Graham's stellar +25% result in 2023. It's also interesting to see how Graham whittles down a large shortlist to a top 10. 

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Explanatory notes -

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Green (thumbs up) - means in our opinion, a company is well-financed (so low risk of dilution/insolvency), is trading well, and has a reasonably good outlook, with the shares reasonably priced. OR it's such deep value that we see a good chance of a turnaround, and think that the share price might have overshot on the downside.

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Red (thumbs down) - means we see significant, or serious problems, so anyone looking at the share needs to be aware of the high risk. Sometimes risky shares can produce high returns, if they survive/recover. So again, we're not saying the share price will necessarily under-perform, we're just flagging the high risk.

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Agenda - nothing much today, just Intercede (LON:IGP)

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Paul’s Section:

Intercede (LON:IGP)

93p (pre-market) £54m - Major New Contract Win - Paul - GREEN

Intercede, the leading specialist in digital identity, credential management and secure mobility, is pleased to announce that the Group has been awarded a major licence order with associated support and maintenance totalling approximately $1.0 million for a new client in the US Intelligence Community. In addition to the perpetual licence order, the client is also contracted for a separate annual subscription of $0.2 million.

Better still, this means IGP is ahead of expectations again (after a monster contract win in Dec 2023) -

This order, combined with expected additional conversion of our existing pipeline in Q4, means that the Company now expects financial performance to be ahead of market expectations for FY24* and further underpins FY25.  

* The current market forecast for the year ending 31 March 2024 is revenue of £18 million and adjusted EBITDA of £5.2 million. 

"We are particularly pleased to secure this order because it has potential to grow further and the fact that there is a subscription element associated with it.

Annoyingly, they quote adj EBITDA, which is not the figure most private investors (and many fund managers too) actually want. Especially not in the software sector, where EBITDA is often totally meaningless, as half the payroll ends up on the balance sheet.

I’ve lodged a complaint with both the company and broker!

EDIT:  This focus on EBITDA doesn't make sense to me, as IGP actually has very conservative accounting, expensing its development spend. So forecast adj EBITDA of £5.6m (FY 3/2024) almost all flows through to adj PBT of £5.3m. End of edit.

Broker update - Cavendish helpfully updates us, with another increase in forecasts -

FY 3/2024 - revenue upped by 7% to £19.2m. Adj PBT upped from £5.0m to £5.3m - that seems only a modest increase in profits, I would have expected more operational gearing from a big new contract win. Maybe they’re keeping something back to have a final out-perform flourish at the year end?

Importantly, remember that FY 3/2024 has a one-off element to the profits, due to the large perpetual licence won in Dec 2023. So FY 3/2025 forecast is for adj PBT to fall back to £3.0m (unchanged today). This is a more normal year for valuation purposes, and the FY 3/2025 adj EPS is 3.7p. So the current PER at 93p per share is a punchy 25x. Actually that’s not really punchy for a company growing so strongly, so I think that’s a perfectly reasonable valuation.

Paul’s view - the major contract win in Dec 2023 so impressed me, that IGP ended up in my Top 20 share ideas for 2024. We’ve followed Intercede closely in these reports for over 5 years, and liked the turnaround under Klaas van der Leest, a particularly strong CEO for a small cap in my judgement. It’s great to see the long-awaited growth now coming through, in a big recent surge. Nearly all IGP’s business is in the US, and mostly with Govt agencies - astonishing for a little UK company. Could this make IGP a bid target I wonder? There’s a 28% major shareholder who would probably need to agree any bid, plus of course key approval from the US Govt, who wouldn’t let anyone from a hostile state buy IGP.

I imagine today’s good news could propel IGP shares to 100p, maybe more. Some shareholders might be tempted to bank profits, but that might prove shortsighted. In my experience when contract wins start flowing through channel partners, it can often become a process, where more follow (providing execution is good, and clients happy with the outcome). IGP already has many very longstanding customers, which suggests to me high levels of client satisfaction.

It’s lovely to see this share developing so well. Pity I sold out a while back, and I wasn’t quick enough to catch this latest move, but it’s top of my informal “buy the dips” list! Well done to shareholders, I hope to join you at some stage.

There have been false dawns with IGP in the past, but I think this current bull run is much more solidly backed -