TIPS

Buy Business Control Solutions (BCT) at 3p
Says exclusive small cap specialist website UKMicrocap.com - 08/04/16

The Investment Case:

The credit crunch has left many financial institutions paranoid about the integrity of their balance sheets; none of them want to be the next Northern Rock or Bear Stearns. The stage is set for a huge overhaul of the procedures used by the banking system, of which software will play a major role. With the recent launch of its Balance Sheet Integrity product, which provides instant visibility over the account substantiation process across multiple regions, businesses and currencies, Business Control Solutions (BCT) stands to gain from these developments.

The company was formed out of an amalgamation of two companies, B2B (founded in 2000) and Buttonwood (founded in 2001), which, having pursued different clients in the investment banking world, encountered each other at Abbey in 2003 and realised there was potential for co-operation. A joint venture named Visual Control Management was set up soon after, and in 2005 all three entities were combined and listed on AIM through the reverse takeover of cash shell Honeysuckle. Since then the company has significantly increased its client base, thereby reducing the group's reliance on one client, which accounted for 70-80% of revenues in 2004, and giving a much broader spread of revenues.

Current trading looks positive, with the company pursuing a transition for its clients to an annual licence model that will ensure an increasing level of recurring revenues for the group going forward (they now account for 25% of software revenues). The company also said it has been enjoying strong growth across its client base and its range of services and that levels of interest in its new balance sheet software have been high.

Financials:

During the year to 31 December 2007, the group posted losses before tax of £399,000 on revenues of £9.66 million, representing improvements of 44% and 20% on 2006 respectively, and resulting in a loss per share of 0.15p. However, the main issue was the fact that the company turned a profitable second half, at both the operating and pre-tax level. Revenues at the consultancy business increased by 26%, while the software division managed a less impressive 4% increase due to investment in new products and the ongoing transition to an annuity-based model. This is a strategy that appears to be bearing fruit, with contracted annuity income within the software business up by 88% at £776,000 year-on-year. Gross margins were maintained at 38% despite a shift in the sales mix towards the traditionally lower margin consultancy business. Net cash at the year end stood at a useful £2.8 million.

Year to 31 December	Sales (£m)	Pre-Tax Profit (Loss) (£m)	Earnings (Loss) Per Share (p)	PE Ratio
2006A	8.04	(0.68)	(0.31)	N/A
2007A	9.66	(0.4)	(0.15)	N/A
2008E	10.2	0.3	0.11	27.3

Management:

The board carries a hefty weighting towards the banking world, giving the company an essential contact network it can utilise when pursuing clients. Most notably, Non-Executive Chairman Steve Russell has spent the last 20 years managing some of Britain's largest and best-known companies, and is currently a non-executive director of Barclays Bank; while Chief Executive Nigel Walder was a senior IT manager at Bankers Trust, before moving to take up the position of Head of Technical Infrastructure and then CIO for NatWest Global Financial Markets.

Bull Points:

- Transition towards a recurring revenue oriented approach should ensure a more stable and reliable earnings stream.

- Rise in awareness of control-related issues in the financial services marketplace.

- Broadening client base.

- Very strong net cash position significantly de-risks the investment proposition; provides scope for earnings enhancing acquisitions.

Bear Points:

- Difficult to foresee how investment banks' cost tightening will affect the company, although there has thus far been no sign of a downturn in any of the group's divisions.

- loss of one of the larger customers could adversely affect the business.

- The spread is wide

Valuation and 1-year Target:

The shares have been hit hard over the past few months, having traded at around 7p back in May last year. However, with the company having recently moved into profitability and offering products which play to the concerns attributed to the current financial climate, we believe a re-rating is in order. If we discount the net cash position of £2.8 million, we arrive at an enterprise value of just £5.3 million for the company, and the shares therefore trade on an EV/Revenue multiple of just 0.52 for the current year. This is extremely low, as most peer group companies trade on EV/Revenue multiples of not less than 1. If we attach the same value to BCS shares, this implies a price target of 4.845p, giving us  upside of 62% Assessment: Business Control Solutions is a profitable and growing company, with products that are of increasing interest to their target markets. Throw in a net cash position covering more than a third of the market capitalisation, and the investment case looks compelling. Buy.

Key Data

EPIC: BCT
Market: AIM
Spread: 2.75p – 3.25p (15.38%)

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