5th Mar: Trader Tim’s Penny Stock Portfolio – #D4T4

@TraderTim5D4T40 Comments

Trader Tim’s Penny Stock Portfolio identifies penny stocks that have real long-term potential. Penny stocks will be published on the blog to show how the portfolio is performing. To receive Trader Tim’s updates direct to your inbox at 10am each morning, click here.

Penny Stock Portfolio

We’re back with another addition to the Penny Stock Portfolio! A series in which I identify penny stocks that I think have real long-term potential.

This is now week 3. In week 1, we added Horizonte Minerals, which has had a mixed couple of weeks performing very well in its initial week and then falling back in the second week. In week 2, we added CyanConnode – the smart metering company. Cyan’s share price has been muted. That said, these picks are long-term holds in my opinion, not quick trades.

This week, I have chosen a proper company with profits and revenues and everything. Given that we have Horizonte, a AIM resource stock, and Cyan, an unprofitable AIM company, I thought it is time to add a company that has some substance and is less speculative.


D4T4 Solutions

Market Cap: £57.9
Price: 148p
Spread: 3%

I hold a long position in this stock.

This may be a slightly shorter Penny Stock Portfolio post as my time has been squeezed this week. Given that this company has a full and robust balance sheet, it should be straight forward enough for you to do further research if you need to. Unlike the anecdotal evidence I may cobble together for some of the more speculative, risky penny stock picks in the portfolio.

Background

This company was formerly known as IS Solutions with the ticker ISL. Naturally, given geopolitical events the Board took the sensible to decision to rebrand to D4T4 Solutions. The AIM stock has been around for a long time. However, the acquisition of Celebrus in 2015 has accelerated D4T4 Solutions’ bottom line. Having been listed since 1997, the rebrand probably dovetailed nicely with the the AIM company’s new focus to capture investor attention.

Celebrus is a ‘big data’ management platform, which allows companies to use their terabytes of data to deliver business value. Similar to Cyan last week, this new Software-as-a-Service (SaaS) product allows D4T4 to unlock new revenue at a much higher gross margin. Also, it is very conducive to recurring revenues.

Data, Data, Everywhere…

Data is now becoming a necessity of life as society spends more time on mobile phones, tablets and browsing the internet. Here’s a fact for you: more data has been created in the past two years than in the entire previous history of the human race. This is mind boggling. While we wrap our heads around that reality, companies are rapidly working out how to leverage this data to gain a competitive advantage. This is crux of D4T4’s business. They have software analytics, management and tracking tools to interpret this data. D4T4 also receives substantial revenue from consultancy projects.

An example of the work D4T4 do – they work with large UK bank to offer new loan or mortgage products based on browsing habits. They do similar things with retail clients. However, D4T4 services are also being using by financial companies to detect fraudulent transactions and tackle cyber-security issues. There is real breath in the appeal of D4T4’s offering.

Management Strategy

The management are very agile. This is an attribute that I look for in a lot of my penny stocks: the ability of management to be agile and react to change.

Last week, I covered Cyan. This is another management that I think is very agile. Firstly, the Board seized to acquire Connode and accelerate their business plan. Also, the AIM company were the first to move when Iranian sanctions were removed and secured a lucrative £10 million contract. The recent $5.4 million Bangladesh contract saw Cyan deliver a prototype offering to the customer in a matter of weeks, the competing Chinese bid took over 3 months to deliver anything. This speed and perception helps companies win business and allows small caps to punch above their weight.

D4T4 Solutions have similarly seen an opportunity to vastly improve their business through the acquisition of Celebrus, so props to the management here. More impressively, the Board have integrated this technology into their business extremely quickly. The AIM stock went from a net loss in H1 2014 to a net profit in H1 2015, which out-stripped the whole of 2014.

Peter Simmons is also involved in the business, who is well known on the investment circuit. His involvement has probably contributed to the D4T4 improvement in liquidity, which was a problem with the shares a few years ago. Simmons, serving as a Non-Executive Director at D4T4, has had experience dotDigital and more recently has played role in CloudCall’s successful resurgence.

Business Metrics

The D4T4 Solutions business has changed quite significantly since the acquisition of Celebrus. The focus now is higher margins and repeat revenue.

Our main focus in selling Celebrus software into more verticals via an increasing number of channel partners continues, in parallel we are continually extending the Celebrus data collection capabilities and product functionality which enables us to extend into new product areas

In February 2016, the AIM company released a very bullish update confirming it “for the year ending 31 March 2016 with both revenue ahead and profitability significantly ahead of current market expectations”. This came off of the back of two major contract win for the Celebrus platform, which D4T4 stated would add £2 million in added revenue and £250,000 in recurring revenue.

In November 2016, D4T4 confirmed trading “remains strong” and reported that the AIM company had “secured a number of additional contracts including one with a leading US retailer and one with a UK based insurance company”. Also, the Board was “confident of being able to deliver further strong growth”.

The software certainly is gaining traction on the market. The AIM stock have secured several contracts with major clients in different sectors across the US and UK. I like this business as there are minimal overheads and the product isn’t too niche. Celebrus is being used by financial service, insurance, retail and telecommunications sectors – it has wide ranging appeal.

£5.1 million in contracted revenue to the company and approximately £490,000 per annum of recurring revenue in subsequent years

There seems to a hefty initial lump sum for D4T4 services. The company may want to consider trying to convert some of the this one-off revenue into a recurring revenue where possible. However, it’s reassuring that clients are willing to pay a chunky upfront payment for D4T4 Solutions’ services and software.

Outlook

The AIM company continues to streamline its business model into one that is fuelled more by recurring revenue and higher margins. However, the conventional financial metrics are looking very good for growth.

D4T4 Solutions have a forecasted PE Ratio of 15.4, which for a tech stock with growth potential is pretty reasonable. Also, the company has seen a decent growth in sales of 18.3% which can be attributed to the Celebrus acquisition. This has contributed to 3 year compound growth in Earnings Per Share of 33.1%. The AIM stocks has an increasing profit margin, which has jumped from ~9% in years before Celebrus and currently sits at 18.2%.

The company at this early stage have some dependancy on a couple of large contracts, so there is an element of risk here. However, the business metrics are beginning to look very promising for D4T4. If they can continue to onboard new contracts, this will accelerate and take the share price to new levels.

Timing

I picked up some shares in D4T4 Solutions on Thursday. The price has dropped to 147p, which I figured was a good level. You can track this over on the Penny Stock Portfolio page. I noticed in my research that Peter Simmons, Non-Executive Director, has bought £100,000 of D4T4 stock at a price of 142p recently, which prompted me to think that the min-140s was a good entry level.


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If there are companies that you want me to cover in the coming days or have significant news due imminently then let me know. My aim is to deliver value to readers, so I want to ensure I’m doing this as much as I can.

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