Taking Secure Payment Solutions To The US
Eckoh (LONDON:ECK) had a strong FY14, winning material new contracts through partners, renewing 100% of expiring contracts and integrating the Veritape acquisition. The UK partner channel has scope to generate new high value contracts, and investment in the US secure payments opportunity could result in significant revenue upside. While the valuation looks full, successful execution of the growth strategy could drive upside from here.
FY14: Strong Growth; Veritape Integration On Track
The company reported 28% revenue growth (16% organic), EBIT growth of 48% (EBIT margin 15.7%) and normalised EPS growth of 22%. In FY14, Eckoh won new contracts worth £17m and had a 100% contract renewal rate. Veritape has been successfully integrated and the first combined Eckoh/Veritape contract sold.
Capitalizing On The US Secure Payments Opportunity
Through the Veritape acquisition, Eckoh gained an on-premise secure payment solution and US-based customers. Due to the lack of comparable solutions in the US market, management has decided to increase investment in the US opportunity and will market its secure payment solutions (both hosted and on-premise) under the CallGuard brand. The recent US partnership agreement provides an excellent opportunity to sell into a large number of Fortune 500 companies.
Estimates Reflect Investment Focus
We have revised our estimates to reflect higher revenue expectations for both Eckoh and Veritape. We have also increased our operating cost forecasts to take into account increased partnership support, higher US headcount and investment in the UK and US hosting platforms. Our FY15 EPS forecast is substantially unchanged (+51% y-o-y) and we introduce FY16e EPS of 1.59p (+18% y-o-y).
Valuation: US Opportunity Could Drive Upside
The stock trades above its peers on a P/E basis, although on an ex-cash basis (27.6x FY15e and 22.9x FY16e) it trades more in line, despite strong growth prospects and cash generation. We expect the recent contract wins and future potential wins from Eckoh’s sales partnerships (in both the UK and US) to drive strong growth, providing scope for earnings upgrades. Eckoh has a progressive dividend policy, with a dividend yield of nearly 1% in FY15 and FY16. We forecast net cash to increase to £7.2m by end FY16, providing ample funds for future investment and bolt-on acquisitions.
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