SSP: a solid systems bet

As the economy slows, software businesses with lumpy revenues and discretionary offerings have understandably been savaged by the stock market. But investors have everything to gain by backing attractively priced concerns with high-quality earnings, strong track records and exposure to attractive market dynamics. SSP Holdings is one such company.

Floated on AIM in 2006 at 98p, SSP is the largest provider of software and services to the UK general insurance market.

It provides ‘business-critical’ systems to insurers and insurance intermediaries with clients including Fortis Insurance, Norwich Union and Swinton.

The group’s resilience springs from the provision of core insurer administration systems, as well as providing brokers with the very technology that enables them to write new business.

Moreover, its revenue model is a further source of strength, combining subscription licence fees, transaction fees and long-term managed service contracts, giving SSP a high proportion of recurring revenues and great earnings visibility. Moreover, the model is high margin and cash generative. Transaction and software rental fees, combined

with low customer churn, result in sector-beating operating margins of 25 per cent, while strong cash flows ensure the company can comfortably service debt, which stood at £38.4 million at the September half-year.

Further defensive attributes arise from exposure to the cash-rich general insurance market, which has favourable dynamics. Industry consolidation is also playing into the group’s hands. As clients get bigger, come together or decide to review multiple systems, the sizeable SSP typically wins out, while as times get tough, smaller competitors could be taken out for keen sums.

Recent news flow has been bullish. In December, interim figures showed strong profits growth to £2.7 million (2006: £1.8 million) from turnover up 47 per cent to £26.4 million. More recently, SSP reassured investors that it would meet forecast annual numbers to March following yet another year of double-digit sales growth, driven by pleasing performances from its insurer systems and international divisions and good transaction-related growth in the UK broker market.

There was a positive update on July’s strategically compelling Sirius acquisition, which expanded the product portfolio, most notably adding S4I or ‘Sirius for Insurance’, a Microsoft-based administration system for mid-market insurers. SSP has been particularly successful with S4I, for which the value of contracts won in the nine months since the acquisition was almost double that achieved ‘in any previous full year’.

Consolidating the group’s position in the UK intermediary market, Sirius has also expanded the international footprint to new and emerging markets including Australia, New Zealand, the US/Caribbean and India, where SSP recently struck a lucrative and groundbreaking deal with United India Insurance Company.

‘Sirius was a very good fit for us with very little overlap,’ enthuses SSP executive chairman and respected industry figure David Rasche. ‘They were into the mid-range commercial brokers, while we were big at the large and small commercial end. We have taken out cost duplication and there is upside from cross-selling opportunities and managing their customers better,’ he adds.

When SSP unveils results in July, house broker KBC Peel Hunt will be looking for profits of £11.6 million and 10.9p of earnings, from sales of £63.2 million. For March 2009, profits should reach £15.6 million, from a top line approaching £74 million, giving earnings of 13.6p.

Those estimates leave the shares changing hands for ten times forecast earnings for 2009. The rating reflects falls among small-caps, and software stocks in particular, many of which have unpredictable revenues, a drawback that SSP does not share.

Overall, SSP represents a robust investment for the long term, led by a management team with a strong track record of delivering growth organically and by acquisition. As Rasche recounts, ‘We have either hit or exceeded our numbers over the past six years and our bankers are very happy with us.’