Interactive Investor

Upgrade cycle underway at eg Solutions

17th September 2014 12:58

Lee Wild from interactive investor

A year of boardroom turmoil behind it, back office software company eg Solutions is profitable again and looks to be back on track for rapid growth. A hefty order book underpins forecasts and there's a huge amount of business in the pipeline.

Many of the big name banks and insurers, among them Nationwide, Lloyds, Barclays, Aviva and Santander, use eg's complex software. It captures phone calls, documents and emails, and is able to allocate and distribute work to staff, and check how they're performing. Eg even guarantees productivity improvements of 20-40%.

After winning nine new contracts, revenue leapt by over three-quarters in the six months to July to £4 million, and a £735,000 loss last year turned into a pre-tax profit of £621,000. Since then, eg has won a huge £1.2 million contract with a big outsourcing company and existing client, half of which is deliverable in the second half. It will generate additional annually renewable licence revenues, too.

Unsurprisingly, this keeps the company on track to hit full-year forecasts. A month after raising forecasts, finnCap analyst Lorne Daniel does so again. He now expects adjusted pre-tax profit of £300,000, giving adjusted earnings per share (EPS) of 2.4p, rising to £500,000 and 3p in 2016.

That's a long way from where eg was in 2013 when industry heavyweight John O'Connell was brought in to help run the company. He proceeded to oust founder and brains behind the business Elizabeth Gooch, and eg lost £1.4 million in the 12 months to January.

But he's gone now and Gooch is back. There's a £13 million order book to work through over the next three to four years, and a pipeline where companies have actually confirmed they want to do business with eg conservatively estimated at £24 million.

Of course, getting contracts with big financial institutions up and running takes time - there's a sales cycle of up to two years and extra investment, too. Deals can, therefore, be lumpy which can make forecasting more difficult. Still, the opportunity is huge - industry analyst Donna Fluss expects annual growth of 20% and a $500 million (£306.54 million) market by 2018.

eg has the "most complete purpose built back office optimisation product available," she says. And its products certainly set industry standards. Yet, the shares trade on a modest enterprise value-to-cash profits ratio of 10.5, a big discount to peers on 12-13 times.

Despite rallying 6% to 78p on these results, finnCap reckons the shares could be worth 100p. Keep up this rate of growth and that's not unrealistic.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.