Buy Iomart (IOM) at 65p

Says James Faulkner of specialist small cap website WatsHot.com

Small cap wizard James Faulkner published two brand new tips on WatsHot.com this week. If you are looking to make money from hot tips and rumours from outside the FTSE 350 this is the site for you. To sign up now click here.

The Market

Chinese researchers believe the internet will double in size every 5.32 years! All this information needs to be stored somewhere, and many businesses are now turning to data centres as a way to save costs and improve operational efficiency. The cloud hosting market is expected to grow at a CAGR (compound annual growth rate) of 27% to reach $42 billion by 2012 and over $100 billion by 2016. Iomart has established itself as one of the leading UK players in this exciting market and it has just moved into profitability on the back of some tremendous growth figures.

Cloud computing is all the rage with the IT crowd at the moment, but what does it actually mean? It is all about pooling resources to realise the true potential of the internet. Only in recent times has technology advanced to the stage where companies can experience a complete end-to-end IT service over the internet, with applications and infrastructure specialists coming together to make information technology more akin to a utility. The potential benefits for businesses in terms of quality of service and cost savings are huge as there is no requirement for infrastructure spend on the part of the user. Industry analysts Gartner expects the market to grow at an even greater rate than the figures cited above (Iomart's own estimates), reaching £46 billion this year and rising to £101 billion by 2014. It also said the UK is expected to account for one third of all cloud using businesses by 2014, which puts UK leader Iomart in a fantastic position.

Markets Move Fast. Keep up with GFT's Free Guide.

Learn to Harness Market Volatility.

Determine if a market is in trend or range (and what that means)
Identify potential trades using common trading patterns

Click here to download your Guide.

The Business

Iomart provides hosted data centre services at four UK locations; London, Glasgow, Nottingham and Leicester. Iomart emphasises the security element of its offering; 24 x 7 x 365 manned security, monitoring and technical support; smart card access; internal and eternal CCTV systems; on-site technical support. The company also offers a unique 100% uptime guarantee. Brands include RapidSwitch (ranked by Deloittes as one of the UK's fastest growing technology companies) and Iomart Hosting. Iomart provides hosted data centre services at four UK locations; London, Glasgow, Nottingham and Leicester. Iomart emphasises the security element of its offering; 24 x 7 x 365 manned security, monitoring and technical support; smart card access; internal and eternal CCTV systems; on-site technical support. The company also offers a unique 100% uptime guarantee. Brands include RapidSwitch (ranked by Deloittes as one of the UK's fastest growing technology companies) and Iomart Hosting.

Recent Trading

Results for the year to 31 March 2010 showed revenue growth of 55% to £18.3 million, or 16% excluding the impact of the RapidSwitch hosted services acquisition. Core hosted services revenue grew by 37%, Rapidswitch grew by 18% whilst Easyspace grew by 2%. EBITDA turned a corner from the second half of 2009, increasing from a full year 2009 £0.32 million loss to a £3.1 million profit (1H £0.84m; 2H £2.7m). This trend supports the company's observation of an "inflection point reached such that future sales will contribute to high levels of profitability". The firm ended the period with net cash of £4.4 million.

Valuation

From 1.6p in 2010, earnings per share are forecast to reach 2.5p in 2011 (the current year) and 4.1p in 2012, on pre-tax profits of £2.5 million rising to £4 million. A forward rating of just under 16 may not seem cheap, but if we consider earnings growth of 56% rising to 64% we are looking at growth at a very reasonable price. Putting the shares on a rating similar to larger peer Telecity would imply a price target of c.70p, but given that Iomart is forecast to grow much faster and the fact that it has a net cash position, we ought to be looking at 100p pretty soon. Buy.

Key Data

EPIC: IOM
Market: AIM
Spread: 64p - 66p

WatsHot.com is THE site for those wishing to make money out of fast-moving small caps. If you are looking to make money from hot tips and rumours from outside the FTSE 350 this is the site for you. For more on the site click here.