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AIM-listed healthcare and business management software and services provider, Advanced Computer Software (LSE:ASW) has today announced a continuation of its buy-and-build strategy with an agreement to acquire Serco Learning, a leading UK education software provider, for £7.25 million in cash. This follows Advanced’s shares closing at an all-time high of 67.5p on Friday – capitalising the company at just over £251 million. The share price compares to 34p when I recommended the shares in September 2010 on t1ps, the website I founded in 2000 but departed in September. The following reviews today’s announcement from Advanced and the investment proposition at current share price levels…
Serco Learning provides business software, training and support to more than 2,000 local authorities, academies, independent schools and higher and further education providers. The deal is expected to complete on 31st December and the business is to be integrated into Advanced’s Business Solutions division, which already has 49 university college customers taking its back-office and student records solutions.
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In calendar 2011 Serco Learning generated approximately £1.2 million of underlying EBITDA on revenue of circa £13.5 million, of which approaching £11 million was contracted recurring. Together with providing Advanced with a greater critical mass, with a broader offering for the education market in the UK, Ireland and Asia Pacific, potential cost-saving synergies and considerable cross-selling opportunities (with both Serco Learning and Advanced supplying public sector customers, particularly local authorities), this looks a well-fitting and attractively priced acquisition for Advanced. Brokerage, Canaccord Genuity, estimates the deal is 4-5% accretive to earnings before synergies and, interestingly, adds that it may also provide a catalyst for the group to expand its international profile.
Today’s announcement follows Advanced’s release, at the end of last month, of results for the six months ended 31st August 2012. These showed a strong performance right across the business – resulting in a 10% increase in underlying group EBITDA to £13.2 million on revenue of £56.8 million (up 10% organically) and a small net cash position at the period end – and noted that “current trading across the group is in line with expectations with the board becoming increasingly confident about the results for the full year”.
To read my detailed analysis of those results click here
Canaccord today noted that Advanced trades on just over 14x its forward earnings forecast and around 9x on an Enterprise Value/EBITDA basis. This is not particularly cheap but the broker continues to believe that, in spite of recent earnings upgrades, forecast risk is on the upside. It should also continue to be borne in mind that Advanced’s management team have a stellar track record and the company’s proven cash generation means it retains significant balance sheet headroom.
With, amidst the prevailing macro economic backdrop, Advanced’s growth prospects (this an opportune time to be offering technology facilitating cost and service quality efficiencies) and defensiveness (in terms particularly of a strong base of contracted recurring revenue) a highly attractive combination for investors, I continue to believe long-term shareholders will be well rewarded from around present share price levels. Long term buy.
Tom Winnifrith will be joining Britain’s Buffett Nigel Wray, secret millionaire Nick Leslau, gold guru Dominic Frisby, legendary bear raiders Evil Knievil and Lucien Miers as keynote speakers at THE investor event of 2013 – The UKInvestor Show held on April 13th in London. For more details of the other speakers and to book your free ticket click HERE.
