Fast-growing LoopUp still trades at a discount

LoopUp Group has had a great first year since IPO. The AIM-listed conference calling software firm has more than doubled in value and revenue growth is accelerating. It did again in the first six months of 2017, and there's so much market to go for the future looks very bright indeed.

Management gave us a hint of progress in a brief update late July. That triggered a 25% surge in the share price, and Wednesday's confirmation of rapid growth, both at the top and bottom line, has fired them to a record high at 230p.

Revenue jumped 44% in the six months to June – 37% was business growth and 7% is attributed to the translation of strong dollar earnings back into weak pounds. LoopUp, which has contracts with Travelex, Planet Hollywood and National Geographic, now makes 52% of its money in the US, 36% in the UK and 10% elsewhere in Europe.

In 2015, group sales grew 36% and by 39% in 2016, and house broker Panmure Gordon pencils in 34-35% for 2018-19.

"Since the end of the reported period, we've had some major new customer wins set to roll out in the second half, including a major multinational consulting organisation, a premier investment banking advisory firm, and a leading UK building society," said co-chief executive Steve Flavell.

"Pipelines are healthy and we remain confident in our ability to deliver further growth."

Crucially, LoopUp delivers top line growth profitably and efficiently. Gross profit margin has risen by 310 basis points to near-77%, and Panmure's Michael Donnelly has more than doubled earnings per share (EPS) estimates for 2017 to 3.7p and lifted forecasts for 2019 to 14.7p.

This success comes as little surprise. I met Mr Flavell three months ago at LoopUp's funky offices in Shoreditch, London, when the shares were worth about 150p.

Flavell set up the business with Michael Hughes more than a decade ago. The pair met in the mid-1990s at the prestigious Stanford University where both earned their MBA. Help from a handful of smart coders in San Francisco explains offices near Silicon Valley.

And LoopUp is certainly inventive. Rather than running separate business development, sales and account management teams, the firm is split into pods, effectively mini companies each run by half-a-dozen staff.

Pods, split regionally, averaged 7.7 during the period, each costing £493,000, but returning new annual recurring revenue growth of £508,000. Expect an average of 8 pods in 2017 and 11 next year.

But LoopUp is generating lots of cash and paid off the last of its debts in January. It ended June with net cash of £1.6 million.

"We can do more pods and can accelerate growth rates of pods if we have the cash," Flavell told me Wednesday. Money will be needed for product development, too, and hiring a new marketing chief implies ad spend.

Donnelly is confident, however. He thinks the path is clear "to potentially material free cash generation in FY'18". He adds: "We see no reason for this strong performance not to continue into FY'18 and beyond; especially given the robust Pod metrics and the material beat on [negative net churn]".

"LOOP's shares have outperformed by c.63% since IPO as a result of consistent delivery, forecast upgrades, improving metrics and accelerating organic growth, each of which we expect to continue, but with the incremental benefit of potentially strong [free cashflow] generation.

"We strongly urge investors to buy the shares as they continue steadily to re-rate up to the level at which longer-established peers trade."

Currently, LoopUp trades on under 16 times enterprise value/cash profit versus US peers on an average of over 18 times.

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.