@UK is one of the UK’s largest online company formation agencies offering a range of services and related products as well as a rapidly growing cloud based Software as a Service provider of B2B and B2G eCommerce solutions – SiteGenerator, eMarketplace, SpendInsight and GreenInsight.

The company formation division is the group’s cash cow while its growth engine is the B2B and B2G eCommerce solutions, which are fully PCI/DSS compliant (highest electronic payment standard) where the UK market opportunities exceed £205 million per annum and the company has over 25% market share. It is believed that 0.8 million of the company’s 1.0 million client logons already use the eCommerce market place. It is this together with PCI/DSS compliance that secured a close working relationship with Barclaycard. We anticipate the company securing further overseas financial partnership agreements as multilingual sites are rolled out thereby multiplying its market opportunity.

The interim results, released yesterday, confirmed that the General Election and emergency Budget resulted in paralysing efficient procurement decisions across vast sections of the public sector. This means that there is a backlog in demand, which if cleared would move the group into immediate profitability. However, we have assumed that the company is lagging, probably by no more than a year, its expectation of achieving critical mass for its eCommerce platforms, and the group moving into sustainable profitability and cash generation.

The company is seeking to raise additional general working capital; of we believe £0.1 million that will be used in supporting the release of latent demand public sector demand for eCommerce procurement solutions that the @UK anticipates from this autumn.

We have adopted a very cautious approach to our 2010 and 2011 forecasts, which broadly anticipate increased eCommerce demand from 2011. Nevertheless, we believe the shares are undervalued, for example, the company has invested a further £1.26 million in the IPR associated with its commercially proven eCommerce platforms over the past five years, which compares with a market capitalisation of just £0.61 million. The company has consistently generated annual sales revenues of £2 million per annum over the past four years with a growing proportion coming from the higher margin eCommerce activities.

We have valued the shares using an EV/Sales metric because this provides a reasonable benchmark for a company approaching critical mass with a commercialised product. Even in this austere economic climate, sales revenues are estimated to at least return to the historic high of £2.3 million during 2011. Therefore, we would argue that a 0.16x EV/Sales multiple is unrealistically low, especially as other less pure SaaS plays trade on multiples of 1.0x – 2.0x depending upon their financial visibility and track records. On the assumption that the company does raise an additional £0.1 million of additional working capital, we feel that an EV/Sales multiple of up to 0.75x is not unreasonable given the company’s stage of development and its history. Further ahead and on the basis that the company fully delivers against expectations, we would anticipate continued improvement in valuation metrics. Therefore, with the shares trading at 1.05p we would rate them a speculative buy with an initial target price of 2.0p, however, when the public sector eProcurement market finally unlocks this will increase substantially.

Forecasts Table

Source: Company and Growth Equities & Company Research

Background

@UK plc is one of the UK’s largest online company formation agencies offering a range of company services and related products as well as a Software as a Service (‘SaaS’) provider of eBusiness solutions that operate on a cloud platform.

@UK plc was founded by Lyn and Ronald Duncan in 1999 as an ecommerce directory and marketplace. While in April 2002, the company extended its activities and became an internet based provider of company formation and secretarial services, which was a natural extension for the development of its ecommerce directory and marketplace activities.

The company subsequently developed a secure online open trading market place to connect both buyers and sellers although with a heavy bias toward public sector bodies and their suppliers. The company’s platform has steadily expanded its public sector and non-public sector client base. Whilst further enhancing the versatility and functionality of its solutions, such that the trading platform ensures that it can be readily tweaked to localise the supplier offering to satisfy not only national policy but also local or regionally set requirements.

The company floated on AIM on 14 December 2005 and raised £7.35 million net of expenses to further develop its growing e-procurement operations and by the end of April 2006 made the strategic acquisition of Coding International Limited for a cash consideration of £21,994. Coding International Limited is a leading product coding specialist and its integration into the e-procurement platform enhances usability.

Overview of Operations

@UK plc reports its revenues and gross profit across three revenue streams:
•             Company Formation Services;
•             Web & eCommerce Services; and
•             Coding International Limited.

Web & eCommerce Services is the company’s strategic growth engine and as can be seen from the following pie charts is beginning to exert its influence; 2009 revenues increased 25.1% while gross profit margin expanded by 4.4% points to 89.4%.

Charts: Revenues & Gross Profit

Source: Growth Equities & Company Research

The company’s SaaS solutions are delivered via a single software platform so that no matter how customers were acquired they are using the same technology and have access to all solution offerings, which also provides an opportunity to up-sell any or all services.

The company has continuously enhanced its service offerings to ensure consistently high satisfaction and has seen the company establish its own secure cloud with some 200,000 logons, and is partially used for the hosting of the company’s established secure email services. @UK’s email system has always been PCI/DSS (Payment Card Industry/Data Security Standard) secure because it is regularly scanned and assessed for vulnerabilities as a PCI certification compliance requirement.

More recently, the company has further enhanced its cloud based secure email with improved scalability, monitoring and quality of service features developed for its eCommerce solutions, along with CRM and other automated email handling capabilities.

Company Formation Services
Company Formation Services was established in 1999 and over the past ten years has formed over 200,000 companies. When the operation was established it was one of the earliest providers of an online company formation system, which is now the norm. The core company formation product offering has been steadily improved and expanded to include a wide range of business services to include nine registered office locations, service office addresses, nominee services, apostile and legislation services, assistance with bank account opening as well as links to partners providing ancillary services. Supplementary products and services offered to assist start-ups include domain name websites, eCommerce sites, secure email and more latterly secure cloud-based webmail, CRM, etc.

Web and eCommerce Services
The company’s core eCommerce engine is ‘SiteGenerator’ that was created in 1998 and has been continuously enhanced, such that it provides a complete range of solutions from easy to use self build eCommerce sites through to major B2B ‘punch out’ solutions for very large suppliers and G2C eCommerce.

Through the company’s commitment to continual improvement and service enhancement the platform is arguably the UK’s leading cloud eCommerce system with over 1 million logons held within the @UK plc market place. It is believed that 600,000 logons use the platform for secure card purchases.

The key features of SiteGenerator are:
•             Built in search engine optimisation;
•             Built in integration to all major buying systems;
•             Built in integration to all major UK credit card systems;
•             Over 1 million people pre-connected to the site; and
•             Easy to use with many suppliers setting up their website without assistance.

SiteGenerator has been a market leading B2B eCommerce system for the past 8 years and its ease of use and flexibility continues to improve. SiteGenerator supports all the leading forms of ‘punchout’ applications, e.g., sbxp punchout, cXml punchout, OCI punchout and OAGXML standard and transparent punchout. The platform also supports all the major finance systems (e.g., Oracle, Sage, SAP, Agresso, Cedar and Integra) as well as a range of smaller niche systems and other marketplaces.

Critically, this site is fully PCI/DSS compliant, which attracted the interest of Barclaycard, who is becoming a more vocal partner and promoter of the platform to its commercial customers. We understand that the average annual public sector expenditure that eMarketplace addresses is £35,000 and with some 5,000 prospects implies a potential market of £175 million per annum. This market opportunity has been steadily growing because of persistent central Government pressure to improve procurement, however, the Chancellor’s swingeing cuts to all Government departments and related public agencies budgets should lift the market opportunity significantly over the next 2 – 3 years at least.

eMarketplace

Source: Company

An integral application within SiteGenerator is ‘SpendInsight’, an application that extracts and analyses an organisation’s procurement spend very rapidly and down to an individual item level; we believe that a single run analysis could cost around £6,000, which indicates a market opportunity for @UK of £30 million. Through a ‘SpendInsight’ analysis an organisation can identify average savings of 2.5% on its controlled spending as a result of incorrect and modest price improvements and an average of 10% on its uncontrolled spending. This aspect of the integrated platform was developed by Coding International through its acquisition; this business continues to record separate revenue streams through its contracted product coding analysis while the outcomes further strengthen the SpendInsight database.

@UK has continued to extend SpendInsight’s capabilities to which end it is launching ‘GreenInsight’, which is the first comprehensive ‘green’ analysis system to examine and calculate the carbon footprint of an organisation’s product purchases. The company believes that GreenInsight establishes a higher standard in green/sustainability analysis and is actively engaged in driving a new BASDA Green XML standard.

Green Insight

Source: Company

GreenInsight relies on e2class, a new coding and classification system created by Coding International that integrates all previous coding systems, NSV and derived systems such as NPC, NHS eClass, and proClass in addition to global systems, such as UNSPC and CPV.
For some six years, @UK has provided a G2C (Government to Citizen) eCommerce solution, which has seen both the range of goods and services provided widen in addition to the numbers of government agencies. Government agencies are notoriously security conscious, inefficient and innately cautious; and it is the latter, which has restrained a more active adoption of the platform or technology despite the many central government reports and demands to for all agencies to drive out inefficiency and needless cost in procurement and service delivery. Maybe a more fiscally determined (financially desperate?) UK Government may force greater use of the platform, which, if the case, augurs well for @UK.

For example, ‘... In 2007 the US Public Sector purchased US$ 18.6 billion of goods or services using purchasing cards compared to £795 million in the UK. Financial experts suggest that there are potentially £10 billion of public sector transactions that could be effectively managed using the UK’s Visa Government Procurement Card (GPC) programme and the lack of take up is resulting in significant missed saving opportunities.
So why isn’t GPC being used to its full potential? A fundamental difference in the two programmes is that the American version is mandated, with all public sector agencies required to use purchasing cards. ... in the UK where the Government prefers to encourage usage ... evidence suggests that this approach is not driving the desired effect and this is especially evident within the NHS ...

The NHS, unlike some other Government departments, has not recognised the role purchasing can play in significantly reducing costs ... With a budget of £92 billion per annum, ... The 2007 GPC Visa annual report shows that the health sector only contributed £5.2 million of the £795 million or the public sector – this is less than 1% and yet they have by far the largest potential card user base.’ (Source: Ian Clarke, Excalibur Procurement Services Ltd).

Coding International
In April 2006 @UK acquired Coding International, which was, and remains, one of the leading companies that have been for over 20 years standardising descriptions of products and services for application in and with eCommerce systems. Coding International has direct experience of all the main coding and classification structures used in procurement and the company is the sole holder of the UK licence to maintain the National Supplies Vocabulary (NSV) codes and as a result holds the key to lower cost procurement.

Strategy for Growth

The company’s strategy is to focus upon and continually enhance its powerful suite of cloud-based eCommerce and eProcurement solutions while co-operating with channel partners, including banking transaction partners such as Barclaycard with whom the company has a strong existing relationship, to further penetrate the commercial and corporate market. @UK will further develop its UK market penetration through the launch of its environmental and sustainability orientated GreenInsight and e2class platforms as well as its enterprise level, secure cloud based secure email hosting service.

The company will extend its geographic reach beyond the UK through the release of multilingual eCommerce and eProcurement sites; again tying up with a strong and well recognised local partners, including a major financial payment specialist.

However, one of the biggest and most immediate strategic growth opportunities for @UK lies in the increased adoption and usage of its proven integrated eMarketplace platform using the secure embedded Government Procurement Card. Following the ending of the longest and deepest co-ordinated global recession in living memory, Governments, not just the UK coalition, are imposing austerity measures to quickly rebalance budget deficits. In the case of the UK, the Government could drive the savings more rapidly through the enforcement of GPC. While the company could further enhance its overseas opportunities in this area by tying up with other national GPC providers by making available national GPC embedded eMarketplace platforms.

Management

Source: Company

Significant Shareholders

@UK plc has 57,779,822 Ordinary shares of 1.0p each in issue that are quoted on AIM. The main shareholders as at 4 January 2010 are

Source: Company

Notes:
1The interests shown for Lyn Duncan and Ronald Duncan each include a joint interest in 12,824,952 shares.
2Adjusted to eliminate double counting of joint interest in 12,824,952 shares held by Lyn Duncan and Ronald Duncan.

Interim Results

The company reported a 17.9% decline in group turnover for the six months ended 30 June 2010 due to an election induced slowdown in demand for its Web & eCommerce and Coding International services as well as the loss of a key eCommerce customer that has since been replaced. Gross profit for all divisions fell – overall 28.7% - because it was not possible to fully recover cost of sales, which resulted in the gross margin contracting 10 percentage points to 65.2%.

Table: Profit & Loss Account £000

Source: Company

Nevertheless, action taken in the previous year resulted in administrative expenses coming back a healthy 24.9% to £1.007 million. While a lower finance charge £1,000 compared with £3,000 and no exceptional charges (2009: charge of £0.053 million) resulted in the reported pre-tax loss declining from £0.463 million to £0.350 million. The loss per share improved from 1.0p to 0.6p.

Trading appears to have stabilised at the subdued second quarter levels and, although the General Election and the coalition’s emergency Budget are behind the group, public sector bodies appear to be waiting until the Autumn Spending Review before engaging more actively with eCommerce platforms that can meaningfully reduce expense. The company is optimistic that there is considerable pent up demand for its eCommerce and Coding International services remains, which will be released following completion of the Autumn Spending Review.

We do not dispute that the demand exists; however, we believe that it will come too late for this year. Consequently, we anticipate that full year gross profit for the company will fall from £1.672 million to £1.285 million and squeeze the margin from 72.8% to 65.6%. Nevertheless, the company continues to operate with a relatively low cost base and is actively controlling costs, such that the monthly cash burn was held to less than £20,000 in 4 of the 6 months during the first half and for June was £18,847. The company is raising an additional £0.1 million for general working capital purposes, particularly to support the additional public sector eCommerce demands that the company anticipates from this autumn.

We believe that demand for both eCommerce and Coding International, particularly from the public sector, will pick up during the following year but for now the timing is uncertain and until the dust settles we are only factoring in relatively modest overall growth in sales revenues together with a consolidation of gross margins, which implies a gross profit of £1.361 million.

Valuation and Conclusion

We believe that @UK is approaching critical mass and had it not been for the uncertainties created by the election and subsequent emergency Budget the company would have reported a profit this year.

Table: Financial Record

Source: Company

Once critical mass is achieved, the business should become sustainably profitable and cash generative, especially if it maintains rigorous control on costs and continuous investment in the product and service offering.

Table: Forecasts £000

Source: Company and Growth Equities & Company Research.

Notes:
1 Administrative expenses includes amortisations costs, R&D expenses and share base payments

Nevertheless, the UK economy remains fragile and the coalition Government, to date, appears firmly committed to dramatically scaling back the public sector to eliminate the budget deficit within one Parliamentary term. This more austere environment ought to be very favourable for the company because its entire offering is orientated toward helping all clients save money and maximise revenues. Nonetheless, we believe that it is appropriate to adopt a very conservative approach to our FY2010 and FY2011 expectations, which nonetheless indicate that the company will further reduce the reported or headline pre-tax loss.

As stated earlier, we believe that the more austere economic climate ought to be favourable for the company but this is not reflected in its valuation (i.e., a market capitalisation a fraction of its investment into IPR and last year’s turnover), which in part is due to its past performance and the necessity to bolster general working capital.

Forecasts Table

Source: Company and Growth Equities & Company Research

This research note cannot be regarded as impartial as GE&CR has been commissioned to produce it by @UK, it should be regarded as a marketing communication.

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