Eckoh Interim Results

Eckoh reported a strong H114 and has seen continued contract momentum since period end, with particular success from its channel partner strategy. The integration of the newly acquired Veritape is progressing as expected, with a strong level of new/follow-on business and promising signs of cross-selling potential. As we recently upgraded our estimates to reflect the 10-year contract win, we leave our revenue and earnings forecasts substantially unchanged.

H114 results: Strong for Eckoh and Veritape
Eckoh reported 24% H114 revenue growth y-o-y, with strong underlying revenue growth of 12% augmented by the inclusion of Veritape since June. EBITDA margins grew 73bp y-o-y, helped by the higher-margin Veritape business. The underlying Eckoh business saw a 100% contract renewal rate and benefited from the ramp-up of contracts signed in earlier periods. The Veritape business continued to trade well and sold its first contract into Eckoh’s customer base; there is also potential to sell Veritape products via Eckoh’s channel partners. Even after paying for Veritape and paying a dividend, the company ended H114 with net cash of £4.3m.

Outlook and changes to forecasts
Eckoh is typically an H2-weighted business, and this trend will be more pronounced with a full six months of Veritape business to be reported in H214. With a strong sales pipeline, the company expects growth experienced in recent periods to continue and highlights that it could even accelerate. The company also continues to look for strategic options to accelerate growth further. As we recently upgraded our estimates to reflect the 10-year contract with a telecoms operator, we leave our revenue and earnings forecasts substantially unchanged.

Valuation: Upgrades to drive upside
The stock trades above its peers on a P/E basis, although on an ex-cash basis (24.5x FY14e and 16.6x FY15e) it trades in line despite strong growth prospects and cash generation. We expect the recent contract wins and future potential wins from Eckoh’s sales partnerships to drive strong growth, providing scope for further earnings upgrades. Eckoh has a progressive dividend policy, with a dividend yield of c 1% in FY14/FY15. We forecast net cash to increase to £6.3m by end FY14 and £8.4m by end FY15, providing ample funds for future acquisitions.

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