Buy Allocate Software (ALL) at 72p

Says The AIM & PLUS Newsletter

Over the last two years Allocate Software has grown at breakneck speed, with earnings per share rising from 2.3p in the 2007 financial year to 6.8p in the year to 31st May 2009. Four acquisitions over the past two years, coupled with a successful expansion into the healthcare market, were the primary reasons for the strong growth. In addition, recent corporate activity has seen the company enter new markets and broaden its base of recurring revenues. For free penny share tip lovers:the shares are a BUY.

THE BUSINESS

Formerly known as Manpower Software, Allocate assists businesses in managing the size, structure, cost, location and capabilities of its workforce. In the short-term its applications help companies (often with a worldwide footprint and using complicated shift patterns) manage temporary changes in market demand by enabling more efficient rescheduling and planning of labour. In the longer-term its programmes help clients improve their human resource management by allowing them to monitor the success of workforce planning systems and to manage recruitment in line costs. At present the group has a presence in the following four sectors:

Defence: The firm's applications help NATO, the British Army and the Royal Air Force plan troop levels and force requirements. The division accounted for 19% of 2009 group revenues.

Maritime: Major companies in the shipping, cruise and ferry sectors such as Maersk and P&O cruises are some of Allocate's clients. Crew administration and manning services to such businesses provided 10% of the firm's turnover in the last financial year

Healthcare: 242 trusts use the firm's day to day rostering (workforce planning), recruitment and training analysis programmes. By far its largest division, the segment represented 70% of group sales during the 2009 financial year.

Local Government and Education: The group's products for the sector aim to streamline administrative processes in order to help control costs and the administrative burden of recruitment. In the previous financial year the division brought in GBP139,000 of group sales of GBP15.8 million.

CURRENT TRADING

Allocate's results for the half-year to 30th November 2009 covered a robust period of trading. Group turnover rose by 38% to GBP9 million on the back of strong growth in healthcare segment sales and recurring service revenues. This, alongside a 4 basis points improvement in trading margins, triggered a 43% increase in underlying operating profits to GBP1.1 million. The application of a 28.3% effective tax rate, considerably higher than last year's effective rate of 3.5%, meant that underlying earnings per share only rose by 0.1p to 1.9p.

The firm's balance sheet continued to be in formidable shape at the half-year end, with net current assets of GBP3.8 million, net cash of GBP4.5 million and net assets of GBP7.8 million. GBP1.28 million was generated from operating activities over the period, which resulted in a 64% increase in cash balances to GBP4.7 million.

Notably, Allocate stated that growth in the volume of recurring support fees and long-term service revenue agreements provided it with "excellent" visibility for future periods. On its outlook the company said all sectors of the business had a "strong pipeline" of opportunities moving into the second half with the board being confident that full-year earnings would be in line with market expectations. A raft of contract wins have also been announced since the period end, including 17 contracts wins in Sweden and the group's first deals in Australia and New Zealand. In addition, 31 NHS Trusts have signed up to upgrade to the company's new data management system, BSMS Trinity.

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OPPORTUNITIES & THREATS

In May Allocate further boosted its base of recurring revenues through the purchase of UK-based healthcare focussed software-as-a-service firm Dynamic Change Limited. The takeover was completed at a maximum consideration of GBP9 million GBP4 million of which is subject to the fulfilment of ambitious earnings targets (25% CAGR in subscription revenues over the three years to March 2013). Dynamic Change posted revenues of GBP3.2 million in the year to 31st March 2010, 70% of which were recurring in nature and the GBP5 million initial consideration represents 10 times historic EBITDA. Furthermore, Allocate will receive GBP1.6 million in cash and receivables under the deal, which is expected to be "significantly earnings enhancing" in the first full year of ownership.

Investors might be wary of the firm's large exposure to the NHS and the effect government cutbacks to address the public sector deficit will have on trading. However, while "efficiency savings" have been targeted in the department the firm's products do not require large capital expenditure. Moreover, the company's e-rostering applications enable temporary staff to be placed efficiently thereby workforce productivity and administrative efficiency. We also note that the firm has begun selling expense control systems to trusts and data management software which are also key operations which management would be loathe to disrupt.

ASSESSMENT

With recent acquisitions set to benefit earnings and Allocate's strong balance sheet giving it the ability to continue to expand into other markets we are positive about its long-term prospects. In line with the upbeat third quarter trading update we would expect the firm to meet Edison Investment Research's forecast for 4.7p of adjusted earnings this year, putting the shares on a current multiple of 15.3. Earnings are expected to rise to 5.9p in the 2011 financial year, which sees the multiple fall to 12.2. Looking forward we would expect earnings to continue to rise as new product launches, entry into new markets and rising recurring from acquisitions boost the bottom line. Even though Allocate Software does not offer dividends we believe the growth prospects on offer make up for the lack of income. BUY.

Key Data
Epic: ALL
Market: AIM
Spread: 70p - 74p (5.4%)

The AIM & PLUS Newsletter, launched in 1995, covers shares listed on the Alternative Investment Market (AIM) and the PLUS Markets trading facility. Twice winner of the prestigious AIM Best Research Award, every month The AIM & PLUS Newsletter brings you two meticulously researched tips as well as investment ideas, analysis and expert comment on a wide range of companies from these vibrant markets, and is edited by current PLUS Journalist of the Year Richard Gill. To gain access click HERE.