Portfolio Updates

The Idox transformation


Idox has undergone a transformation under new management appointed in 2018. The strength of this transformation was confirmed by the FY20 results announced in February 2021, with further progress since then. We believe FY21 will cement this positive trend and Idox’s value will continue to build – either as an independent company or as an attractive strategic asset. There’s a lot to like about Idox including management style, growth strategy, investment in its people, as well as fundamentals and we look forward to further progress. We explain below the current investment opportunity.

 

“There’s a lot to like about Idox…”

 

In mid-February 2021, Idox received an initial approach from Dye & Durham Ltd (D&D), a Canadian listed company growing by acquisition, with a public sector technology platform. We weren’t surprised a buyer expressed interest in acquiring the re-invigorated Idox, but we didn’t expect an approach so soon. The potential 75p offer price valued Idox on current year ratings of 16.6x EV/EBITDA and 3.8% FCF/EV yield, and the shares held above 70p while D&D considered a formal bid. While 75p was not an overly exciting price, we agreed with the Idox Board’s conclusion that it was worth exploring. In March 2021, D&D decided not to bid and IDOX shares initially fell back to below 60p but have since strengthened and are now priced at 62.5p. We believe this relatively modest fall following a failed potential offer reflects investor optimism in Idox’s future.

New leadership – sharper focus

Entering 2017, Idox was a collection of assets across the UK and Europe, delivering solutions from six business lines. Its core was the reliable Public Sector Software (PSS) business, servicing UK local government and delivering consistent returns, added to which was a collection of businesses focussed on public and private sector, notably EIM (software for global engineering / manufacturing) and health (hospital asset management technology). But IDOX began missing forecasts through FY17 and by mid-2018, it was without a CEO, profits were under pressure, debt was increasing and the shares were unloved, languishing at c. 30p.

 

“The new team began breathing life into the business…”

 

From June 2018, Kestrel supported a newly configured Board, including the appointments of Dave Meaden as CEO, Rob Grubb as CFO and Chris Stone as Chairman, alongside Kestrel’s Oliver Scott as NED. The new team began breathing life into the business through clear strategy and restructuring Idox around its core competencies. Today, Idox has just two business lines, PSS and EIM, allowing management to focus and build on competencies for growth.

“Don’t let history fool you”

 

The non-financial playbook

We like the bolt-on acquisition of Tascomi in FY19 (to enhance the digital story), the disposal of digital and content divisions (to remove poor fits and KPI-diluting assets), the ‘bid to win’ strategy (designed to only bid for business that Idox wants to win) and many other aspects of management’s confident style, including the investments in 18-month leadership courses for 15 managers. This employee comment sums up the investment case for Idox: “Always improving after a long period of stagnation. Real company progression is taking place. Don’t let history fool you.”

Careful M&A to augment growth

New management has built a well-controlled platform from which to augment organic growth and margin expansion. The growth strategy is to add scale through selected bolt-on acquisitions and bring more PSS businesses into the Idox fold. Acquired products can be distributed through the Idox sales team, which drives operating leverage. In our opinion, this could deliver significant value on the back of the hard work undertaken so far.


Impressive fundamentals

  • Targeting 30% AEBITDA margins. Through a focus on margins and cost control, Idox is moving into the top quartile of software companies, delivering 29% in FY20. Following the disposal of the content business in March 2021, which had low levels of software revenue, IDOX should exceed 30% AEBITDA margins by FY21 and potentially head towards 35% by FY22.
  • Improved visibility of revenues Management has adopted SaaS commercial models and removed low margin/low visibility services and one-off technology revenues. We expect 55% recurring revenues to move ahead in FY21 from exiting the content business and other improvements. Idox has visibility over c. 90% of FY21 revenues from recurring revenues and customer contracts.
  • Turnaround in cash flow generation Cash is king and Idox is moving from c.15% of revenues converted to OCF in FY16 to nearer the 30% we are forecasting for FY21. These cash generation metrics allow new investment and repayment of historic debt. Cash compounding continues to drive Idox’ valuation metrics.
  • Net debt reduction. A standout metric shifting from £32m net debt FY17 to our forecast of £5m net cash by the end of FY21; a great turnaround that’s rarely seen.

 

FY16AFY17A FY18AFY19A FY20AFY21F
AEBITDA / Revenue 28.0%20.8%21.4%22.0%28.8%31.4%
Repeat revenues %42.9%45.0%46.6%55.7%55.0%61.8%
FCF / Revenues8.2%6.7%7.7%8.7%19.0%19.3%
OCF / Revenues14.5%15.1%14.4%18.9%29.1%27.7%
Net (debt) / Cash £m (25.0)(32.1)(31.8)(26.4)(16.1)5.6

Source: Kestrel methodology and (A) Idox reported results (F) Kestrel forecasts 

 


Valuation metrics are lagging

  • While financial KPIs have improved strongly, valuation metrics suggest that Idox is not materially more valuable than it was in FY16, perhaps less so in real terms.
  • The FCF / EV yield has nearly doubled suggesting improved cash flows are now less valuable than they were in FY16.
  • The EV/EBITDA multiple has increased slightly to 8x, which is somewhat distant from the 15x-20x multiples for established enterprise software businesses of this quality and scale.

 

FY16AFY17A FY18AFY19A FY20AFY21F
FCF / EV yield2.6%2.4%3.1%3.2%5.5%4.4%
EV / EBITDA multiple11.413.311.712.312.013.8
EV £m245247169177236281

Source: Kestrel methodology and (A) Idox reported results (F) Kestrel forecasts

 


Back to News