A seller of software and services for headhunters, Dillistone is developing a reputation for under-promising and over-delivering.

Having already established a global presence, the cash-generative company is growing
fast and making inroads into developing markets.

Tracing its origins back to the early 1980s, Dillistone, which floated on AIM in 2006, has evolved into a market-leading executive search software group with offices in London, the US, Germany and Australia.

Customers in more than 50 countries use its proprietary Filefinder package, which is designed to work alongside Microsoft applications. Filefinder supports everything that an executive recruiter does, acting as a CRM system, a searchable database, a research tool and a report producer, as well as a project management package

Little wonder then that a broad sweep of executive recruiters such as Norman Broadbent, Hays, Harvey Nash and EWK International are users, or that Filefinder is proving increasingly attractive to interim management firms and internal recruiting teams within the corporate space. Here, where headhunting techniques are becoming increasingly popular, clients include Fidelity, KPMG
and even Time Warner.

While acknowledging that the group has ‘a handful of private competitors’, chairman/finance director Jim McLaughlin says the company has an edge, because ‘we are the only globally focused executive recruitment software firm’. This differentiator is serving the company well, as evidenced by recent contract wins in emerging markets such as Singapore
and Vietnam.

Despite global economic worries, Dillistone delighted investors with record first-half results to June.

Pre-tax profits powered ahead by 44 per cent to £949,000 on turnover increased almost a third to more than £2.5 million, boosted by orders taken towards the end of 2007.

Highly cash generative, the company reported 33 per cent growth in its cash pile to more than £2 million – a figure that has since increased to around £2.6 million.

Describing the figures as ‘our best performance to date’, McLaughlin outlined growth across all geographic regions, with Asia providing the highlight. Here, sales surged 47 per cent higher, with 36 per cent growth achieved in Europe, 29 per cent in the UK and 21 per cent in the US.

McLaughlin was especially keen to flag up improving earnings quality, with high-margin,
high-visibility recurring revenues increasing to 43 per cent of the top line. This reflected not only the greater volume of technical support contracts in place, but also increasing take-up of its software-as-a-service (SaaS) product. Under SaaS agreements, clients pay monthly fees for licences, while still having their data on their own servers.

Meanwhile, Dillistone is delivering a rising proportion of ASP (application service provider) sales, under which it hosts both software and data for clients. Encouragingly, non-recurring sales still grew by 30 per cent, despite the rise in repeat business within the mix.

Looking ahead, the organic growth strategy entails the ongoing development of Filefinder, to ensure the product remains market leading, as well as the targeting of in-house recruiters and the further exploitation of opportunities in the developing markets of Eastern Europe, Asia and South America. Given the group’s balance sheet strength, acquisitions are being sought, although a suitable, complementary earnings-enhancing deal has yet to
be announced.

For 2008, a rise in pre-tax profits from £1.2 million to £1.3 million looks likely, with earnings growing by 15 per cent to 17.1p. Next year, profits of £1.4 million and 18.9p of earnings are envisaged.

On those estimates, Dillistone trades on prospective multiples of just 10.2 and 9.3 – strip out cash and the true multiples are lower – while the shares offer a yield approaching six per cent, based on a forecast dividend of 10p.

Considering that investors were prepared to pay north of £3 a share for Dillistone less than a year ago, the current valuation looks decidedly undercooked; particularly in the light of McLaughlin’s summation that ‘we are a highly cash-generative business, we have no debt at all and we have an awful lot of cash in the bank’.

Dillistone	AIM	£9.45m	175.00p	0.00p
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