Tax Systems (AIM: TAX) reversed onto the market in July last year in a £73 million deal. The company has 25 years experience of supplying software to large corporates and accounting firms, allowing them to automate the preparation of tax reporting and computation. With ever-changing tax rules and a regime that never gets any simpler, customer retention rates tend to be high. Additionally the move by HMRC towards quarterly reporting and digitising the tax system should provide a natural tailwind for growth.
The business was acquired from owner-managers who in recent years had been more interested in stability and cash, rather than driving growth. The new team under CEO Gavin Lyons has upgraded processes,systems and personnel to provide a platform more suited for a publicly-listed company. It is also nudging up investment in product development and refocusing the sales team on cross-selling all the products in the portfolio. There will also be the benefit of recently acquired Osmo, which offers a complementary data extraction product. The automation of technical back-office functions is a hot area and Tax Systems looks well-placed within its specialist niche.
At first glance though the valuation of the company looks high, with the market cap plus debt trading at 5.5 times current year sales. However the company is very profitable in the context of a £14.7 million revenue line projected for 2017. Gross margins are over 90 per cent and the ebitda margin approaches 50 per cent. The company plans to bed down the post-float changes this year and is looking to achieve revenue growth in the 7 per cent region. Forecasts for similar growth the following appear conservative in the context of management’s ambitions for the business.
As revenue growth comes through profits and cash should build nicely, though an accounting change to monthly revenue recognition will slow the reported growth profile in the near term. Tax Systems does have a relatively high debt load of £24.4 million, but this is forecast to decline given growing free cash generation and it’s also backed by a stream of recurring revenues. Even so it’s surprising that the company didn’t list with less debt in order to retain more flexibility, especially over international expansion opportunities.
On a p/e of 14.9 times for 2018 the shares look about right, though there could well be scope for upgrades to that forecast if the company starts realising the potential CEO Gary Lyons believes it has.