Paul Hill, one of Britain’s most successful private investors, suggests a share for the brave. This week: a company that is forecasting strong growth on the back of the outsourcing trend in the public sector.
Gladstone (Aim, GLD: 21p)
If you are a member of a fitness club, then the chances are
that you may already be an indirect customer of Gladstone. Although the firm has a market capitalisation of only £11m, generating sales of £8.4m in 2005, it is the UK market leader – with a 20%-25% share – in supplying membership software to gyms and sports facilities.
Its proprietary technology allows clubs to manage user access, subscriptions, bookings, attendance, events management and loyalty points. Importantly, it also provides valuable marketing information to improve customer retention and maximise cross-selling. Gladstone’s software is used by some 2m members at clubs including Holmes Place, JJB Sports, Bannatyne Fitness, Total Fitness and MacDonald Hotels and it has contracts in the public sector with UK councils and universities.
In mid-2005, both a new chief executive and finance director were appointed in order to return the company to profitable and dynamic growth. Clearly, this injection of new blood has started to bear fruit. At the interims announced in March, turnover was up 10% to £4.3m, and (before goodwill) ongoing earnings per share (EPS) of 1.2p jumped by an impressive 47%. The order book was also said to be strong.
This turnaround improvement has been achieved by creating much greater efficiency within the company and by adopting a sharper focus on sales.
Additionally, 40% of the firm’s revenues are generated from recurring contracts, which provides a solid base for future top-line growth.
Future growth in the UK is expected to come from the public sector, as councils seek to outsource the running of their membership schemes. However, the far bigger opportunity is to leverage Gladstone’s industry-leading technology in the international arena. The company has already set up an office in Australia, which is presently breaking even. It is also targeting new overseas customers via partnerships.
Revenue growth is obviously important in any industry; here, where gross margins are more than 80%, then any incremental turnover will largely drop down to the bottom line.KBC Peel Hunt, the house broker, has a 2006 EPS target (pre-goodwill) of 2p, which looks very achievable, given
the company’s performance in the first six months. Consequently, at 21p, the shares trade on a forward p/e of only 10.5, decreasing to 7.8 in 2007.
This seems excellent value for a profitable software business with a leading position. Furthermore, as at the end of February, Gladstone had net cash of £4m, owns a freehold property worth £1.7m and also possesses carried-forward tax losses.
In my opinion, Gladstone is a solid investment. The company not only offers significant upside, but it is also defensive, owing to the fact that half of Gladstone’s market cap is backed by tangible assets.
Recommendation: BUY at 21p.
Paul Hill’s personal portfolio has gone up by 483% over the last five years. To find out more about his own specialist share-tipping service, click on the link below: