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Edison says Allocate Software in ‘good health’, values stock at 100p

Last updated: 22:16 15 Feb 2010 AEDT, First published: 23:16 15 Feb 2010 AEDT

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Edison Investment Research issued a note on Allocate Software (AIM: ALL) today, saying the healthcare workforce optimisation software provider is in “good health” and valuing it at 100 pence per share, compared to the current stock price of 72 pence.


The company is focused on five sectors: healthcare, defence, maritime, education and government and construction and engineering with healthcare accounting for the bulk of its revenues. The business was initially built for organic growth, though its acquisition programme has accelerated recently to increase the company’s international presence. Internal targets to drive annualised organic growth at 15-20% or better have been exceeded in recent periods and the ambition is to build EBITA (earnings before interest, taxes and amortization) margins year-on-year towards 20%, while allowing for investment in infrastructure that will support a much more substantial business.


The group’s half yearly results showed organic growth of 27%, while trading margins improved from 12.1% to 12.5%. The interim report also referred to a strong pipeline of business for H2, which, as Edison noted, was by far the stronger half.


Edison said that the success of Allocate’s core product suite within the NHS provided an ideal reference for winning new business with significant opportunities being present in the healthcare sector through new product development along with contiguous development in defence, maritime and offshore.


Back in November, the company entered a strategic partnership with special strategic health authority NHS professionals (NHSP) to deliver long-term integrated services to NHS Trusts, which Edison said will allow sales to Allocate’s workforce optimisation suites to continue on a subscription bases if there is a post-election moratorium on NHS capital and software projects.


The valuation of 100 pence was based on a DCF (discounted cash flow), which is equivalent to 10.9x current year AV (enterprise value/EBITDA. Edison said that while the share price has performed “respectably” and the P/E of 15.6x current year earnings seemed to be up with events, the current valuation did not reflect the inherent value of the installed base or the increased visibility of earnings as the services and support elements of the revenue stream grew as a proportion of the whole. The research house added that the cash flows were attractive and would support both the organic and acquisitions to help move the business forward.

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