Big data analytics software specialists

YouGov 5 February 2010 test1
Download PDF

IS Solutions

Big data analytics software specialists

Resumption of coverage

Software & comp services

09 March 2016

Price

137p

Market cap

£50m

Net cash (£m) at 30 September 2015

0.306

Shares in issue

36.4m

Free float

67.2

Code

ISL

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

11.8

31.1

134.2

Rel (local)

4.0

32.0

159.7

52-week high/low

137.0p

51.0p

Business description

IS Solutions (ISL) is a data solutions provider. Its solutions are primarily used by businesses to analyse their customer’s interactions across multiple channels (both online and offline) for the purpose of increasing customer loyalty and boosting revenues. ISL integrates the applications (which includes its own Celebrus software), looks after the hosting and provides ongoing managed services.

Next events

Preliminary results

Late June 2016

AGM

Late July 2016

Analysts

Richard Jeans

+44 (0)20 3077 5700

Bridie Barrett

+44 (0)20 3077 5757

IS Solutions is a research client of Edison Investment Research Limited

IS Solutions (ISL) has undergone a significant transformation into a data solutions business over the last year, having acquired the enterprise software company Celebrus Technologies for c £8.5m in early 2015. Trading has been buoyant, with a string of upgrades, driven by strong demand for the group’s analytics offerings, which now represent more than 70% of the business. Despite the recent outperformance, we believe the shares continue to look attractive on c 16x FY17e P/E, given the relationships with software vendors and the broadening growth prospects.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/13

9.8

0.9

3.0

1.60

45.7

1.2

03/15**

12.8

1.2

4.0

0.56

34.3

0.4

03/16e

18.0

3.3

7.4

1.60

18.5

1.2

03/17e

19.2

4.0

8.8

1.80

15.6

1.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **03/15 is a 15-month period.

Specialists in data collection and analytics

Celebrus brings to ISL patented software solutions in omni-channel, real-time data collection, which have been endorsed by major technology providers including SAS and Teradata. The software is used by companies (notably in the retail and financial services sectors) to analyse their customers’ interactions across multiple channels (both online and offline) for the purpose of increasing customer loyalty and boosting revenues. The market opportunity is substantial and growing apace, with business analytics software forecast to grow by 8% pa over 2015-19 (IDC), while the web analytics segment (which more closely represents ISL’s market) is forecast to grow by 18.9% pa over 2014-22 to reach a size of $5.12bn (Wise Guy Reports).

Trading update: FY16 and FY17 significantly ahead

In its trading update in early February, ISL said it expects profitability in both FY16 and FY17 to be significantly ahead of market expectations. This is due to a further two major analytics projects with new and existing customers in the retail and financial services sectors. ISL also says it has number of other opportunities in the pipeline, which have the potential to convert in the first half of this calendar year.

Forecasts: FY17 operating margins to top 20%

We forecast revenues to grow 40% in FY16 to £18.0m and for operating margins to double to 19% on the strong growth in high-margin proprietary software sales. For FY17, we forecast more modest 6% revenue growth, on lower third-party software sales, but for the operating margin to rise by 240bp to 21.4%.

Valuation: Patented software in a high-growth market

ISL’s shares trade on 18.6x our FY16e EPS, falling to 15.5x in FY17e. Further, the group generates strong cash flows and has a net cash position. In our view, these ratings look attractive given the group’s strong position in data collection and analytics including key partnerships with SAS, Teradata, Qlik and MicroStrategy.

Investment summary: Big data analytics specialists

Company description: Patented analytics software

IS Solutions’ (ISL) analytics offerings are typically used by businesses to analyse their customers’ interactions across multiple channels for the purpose of increasing customer loyalty and boosting revenues. ISL specialises in bringing together a range of components from various providers to create a sophisticated system for the end-client. It integrates the applications, looks after the hosting and provides ongoing managed services. Celebrus was acquired in 2015, bringing to ISL a proprietary analytics software platform. The group has c 126 employees, including 26 in Chennai, south-eastern India, who provide product development and support. Customers are typically larger enterprises and ISL has a strong blue-chip client base, which includes Toshiba and SAS Institute (its two largest), as well as Urenco, GSK, DWP, JD Williams, M&S and Toyota.

Financials: Software sales, projects and managed services

ISL has three revenue streams: licence sales (third-party software and ISL’s own Celebrus software), projects and recurring revenue (includes managed services, recurring projects and support). Traditionally, Celebrus software has been sold in partnership with independent software vendors (ISVs), although ISL now also sells directly to smaller customers. The software is licensed on a perpetual or recurring rental basis and, since it is priced on the basis of numbers of web sessions, there is significant potential to expand revenues from existing customers as well as winning new customers. ISL offers one-off projects such as building enterprise content management solutions and websites, integrating analytics software and line of business (LOB) applications. As commercial relationships grow, ISL gains regular project work and ultimately ongoing managed services. The group has generated positive free cash flows from FY07 and we forecast free cash flow of more than £3m in both FY16 and FY17.

Exhibit 1: Long-term revenue and margin trends

Source: IS Solutions, Edison Investment Research

Sensitivities: Managing the growth

While we regard internet-related businesses as having a relatively high sensitivity to economic downturns, the industry has matured and has become significantly more sophisticated since the dotcom fallout. ISL’s Celebrus software enjoys the support of a portfolio of patents. Nevertheless, the market continues to evolve apace and there is always a risk that the product could be surpassed by larger competitors. A major challenge for ISL is recruiting/retaining suitably qualified candidates to satisfy demand from a wider customer base and keeping business partners content.

Valuation: Celebrus boosts the margin potential

The stock trades on 18.6x our FY16e EPS, falling to 15.5x in FY17e. Based on our forecasts, which incorporate conservative growth assumptions and a 30% long-term margin target, along with a weighted average cost of capital (WACC) of 11%, our DCF model values the shares at 180p, 31% above the current share price. We see significant upside if management can sell its solutions across a broader customer base or provide a core analytics capability to a major global retailer.

Company description: Software and IT services

Historically, ISL established a specialism in web services, developing and managing all areas of customers’ internet activities and hosting. ISL offers solutions around data collection and analytics, online risk management, web and enterprise content management, security and training. To achieve this, ISL partners with leading technology vendors including Adobe, IBM, Kofax, Microsoft, Oracle and SAS. It also utilises its own proprietary Celebrus big data platform. Additionally, ISL provides SAS platform modernisation and enterprise analytics upgrade capabilities including on-premise appliance deployment. Further, ISL offers project work and managed services such as building, testing and managing corporate websites. It resells a range of internet-related software products from leading ISVs such as Adobe, EMC, Oracle and SAS, covering the areas of web portals, content/document management and analytics. Across these three areas the company offers project development services, web-based LOB (eg links into ERP, CRM, manufacturing systems, etc), systems integration and managed services. The group splits its project people into four units: Java Group, .NET Group, Analytics Group and Support Group. The Support Group is funded by managed services contracts, while the other units are funded by projects and software sales.

Exhibit 2: Share price performance since 2004

Source: Bloomberg, company announcements

Strategy: All about the data

Following the acquisition of Celebrus Technologies in early 2015, ISL has strengthened its focus on data collection and analytics. ISL traditionally operated an IT services model around projects and managed services. It also generated software resales as part of its relationship with ISVs. With the acquisition of Celebrus, ISL now owns its own high-margin proprietary software platform, which complements the solutions of its partners. The plan now is to improve on Celebrus’s indirect business model, introducing a direct sales force to target smaller customers and establish a US office to provide services and support for the growing US customer base. Sales of third-party software are being de-emphasised, as is the content/document management area as the group continues to increase focus on data collection and related big data analytics.

Acquisition of Celebrus Technologies

In January 2015, ISL completed the acquisition of the remaining 89% of Speed-Trap Holdings, the parent company of Celebrus Technologies, for c £7.7m. ISL already held an 11% stake in Speed-Trap, having spent £0.7m in 2010 and £0.1m in 2012. The £7.7m consideration included £1.5m in cash with the balance in new ordinary shares. ISL knew Celebrus well, having worked with the company since 2000, and had invested in Speed-Trap since October 2010, with John Lythall holding a non-executive director role since that date. Celebrus’s 20 employees have since rebased from the offices at Newbury, west of Reading, to ISL’s HQ in Sunbury.

In purchasing Celebrus, ISL took the view that it could improve the business model and cross-sell services to Celebrus’s client base, using ISL’s ISO 27001 and PCI security accreditations. Despite having an attractive product offering and high-profile ISV partner/resellers, Celebrus was subscale and only breaking even. ISL also refinanced Speed-Trap’s expensive debt and reduced costs by moving the business to ISL’s Sunbury offices. Celebrus has c £4m of accumulated tax losses.

What does Celebrus software do?

Celebrus’s software manages highly detailed data feeds that provide individual consumer-level data in relation to their interactions with websites, mobile applications and social media. The data are primarily used for the purpose of increasing customer loyalty and boosting revenues or for spotting fraud. The key advantages of Celebrus are that it does not require any tagging and it operates at the individual user level. Competing solutions use tagging, which is less efficient, and many can only provide aggregated data (ie aggregating all the activity on a website). To monitor website experience and target advertising most effectively, customers require individual user-level data.

Celebrus lists the follow six USPs:

Detailed – individual-level data.

Multi-channel – website, mobile and social data.

Complete – all data captured, not just what is tagged.

Easy – tagging-free deployment across all channels.

Flexible – on-premise or SaaS options.

Fast – real-time (milliseconds) or <60-second data feeds.

What are tags and tag-free?

A tag is the standard means by which data are collected on a website to power online marketing and analytics. Tags are not the same as cookies, which are text-only strings of code placed on a device. Tags are set up in HTML or JavaScript code to track specific activity on a website. Each activity being tracked needs to be separately coded and organisations with a large web presence comprising multiple websites and brands can take weeks or months to roll out. Celebrus’s patented solution avoids tagging by using a single line of code at the bottom of the web page, which inspects the browser’s Document Object Model (DOM) to determine what data can be captured. Due to this simplicity, the work involved in a Celebrus environment is drastically reduced to a single change covering entire websites.

Investment case: An exciting investment proposition

ISL has built up strong domain expertise in internet technologies and services, e-commerce and the related analytics space over the last 30 years. Its goal has always been to monitor the evolving marketplace for best-of-breed solutions to offer its customers. In working with a broad range of ISVs, as an independent systems integrator, ISL has been able to develop a strong understanding of the range of solutions available and how they can be applied. We see the acquisition of Celebrus as a bold move, since Celebrus is a core component to a range of solutions offered by major ISVs, and other software vendors are unable to replicate the solution due to its patents.

We note the following points on the investment case:

Attractive valuation characteristics

Our DCF valuation is based on conservative assumptions, including 6.3% CAGR over the next five years. If we assume 20% CAGR, which in our view is quite possible given the industry dynamics and strength of the group’s offerings, the valuation would rise to 319p. Reducing the WACC by 1% to 9% would lift the valuation to 373p. The attraction is supported by the traditional P/E valuation of just c 16x FY17 in spite of 19% earnings growth in FY17 and a net cash balance sheet position.

Strong industry dynamics

According to industry analyst IDC, the worldwide business analytics market was $40bn in 2014 and is forecast to grow 8% annually over 2015-19. The web analytics segment (which more closely represents ISL’s market) is forecast to grow by 18.9% pa over 2014-22 to reach a size of $5.12bn (Wise Guy Reports). Separately, IDC sees the big data technology and services market growing at a CAGR of 23.1% over 2014-19, with annual spending reaching $48.6bn in 2019. In big data, IDC forecasts the software segment, which consists of information management, discovery and analytics and applications software, to grow at a CAGR of 26.2%.

String of upgrades over the last year

In its trading update in early February, ISL said profitability in FY16 will be significantly ahead of market expectations. This is due to a further two major projects with new and existing customers in the retail and financial services sectors. The two contracts will add contracted revenue of up to £2m in FY16 and more than £250k of recurring revenue. ISL also says it has a number of other opportunities in the pipeline, which have the potential to convert in the first half of this calendar year. Consequently, FY17 trading is also expected to be significantly ahead of market expectations. The latest guidance upgrade follows the upgrades since the group completed the integration of Celebrus, with significant upgrades in September and November.

Highly attractive business model

Celebrus software is licensed on a perpetual basis (with 20% support and maintenance) or a rental basis (typically for a three-year term). Pricing is based on numbers of web sessions, and hence the solution is aligned to the success of the customers and there is significant potential to expand revenues from these existing customers. Since 2008, Celebrus has been operating a partner model and no longer sells directly to customers. ISL seeks partners where Celebrus can add a whole new dimension to the partner’s product offering and hence enhance its attractiveness to its partner’s customers. Winning new business often involves a proof of value to prove the software will work for the customer. There are two classes of partner licences: OEM and reseller. With an OEM licence, the Celebrus solution is embedded into the ISV partner’s own software, and the ISV looks after tier one support. Current partners include SAS, Teradata, MicroStrategy, Qlik and Pegasystems. Since ISL works closely with its ISV partners and has intricate knowledge of their solutions as well as its own Celebrus software, it is in a strong position to offer the systems integration work that comes with product sales, along with any related hosting and managed services.

Patented software

Celebrus, which was founded in 1999, has established a portfolio of patents that revolve around online data collection techniques, dating from 2000. Of particular importance are two patents that underpin Celebrus's tag-free, client-side data collection, detailing how the data collection process dynamically configures itself on a page-by-page basis, coupled with auto-discovery of page content by traversing the web page structure. Recent applications have been granted in the US, covering techniques to provide effective tracking, as the technology and privacy legislation, as well as restrictions around cookies, evolve.

Attainment of PCI certification for managed services

ISL has extended its data security capabilities with certification in the Payment Card Industry Data Security Standard (PCI DSS). This follows on from the achievement of ISO 27001 Information Security Management accreditation in 2011 and means that ISL can now take payments on behalf of its managed services customers. Having been to ISL’s Sunbury offices, we have seen the emphasis ISL puts on security. It currently has one customer utilising the PCI DSS certification – The Ice Organisation. Nevertheless, ISL believes this will be an important driver for the business given the scale of customers operating in the retail and financial services spaces.

Proof of the proposition

JD Williams case study (JDW is a long-term client of Celebrus)

JD Williams (JDW, part of N Brown Group) is a leading UK omni-channel retailer, operating over 20 successful brands. It generates over half of its sales online while also offering customers the chance to carry shopping bags across its websites and complete the checkout on any site. JDW’s ranges of products include clothing, footwear, household and electrical goods. These products need to be carefully targeted at the right customers and provided through whichever channels the customer demands.

Celebrus has been working with JDW since 2009, with JDW a rare direct customer of the software vendor. We note that JDW uses Teradata data warehouse and digital marketing tools as part of the solution. This relationship has been a very important testing ground for Celebrus, as determining what can be done, both with the Celebrus software and its partners’ tools, has developed significantly. Revenues from this customer continue to grow, as the revenue model is tied to the number of web sessions, and is therefore directly linked to the success of the product.

JDW’s customers are increasingly using multiple devices, with mobile traffic now accounting for over 50% of all sessions. While this creates new challenges in the quality of the customer experience, the company’s analysis of customer behaviour has revealed that those using multiple devices are significantly more valuable to the business through greater overall sales. The challenge, therefore, was to ensure that the quality and relevance of each customer’s experience was maximised, regardless of changing behaviour and devices.

JDW has created a single repository for all trading and customer data in a Teradata data warehouse. Since 2010 the company has captured and retained every single website click, search, basket add, purchase and more within Celebrus, generating c 65GB of customer data each month.

Using Celebrus, JDW is able to:

quickly compare conversion rates between individuals that do and do not use the image zooming;

assess the way that customers are responding to the overall experience; and

allocate a customer account number to around 50% of traffic, which means it can build up a picture of what each individual is doing on the website in one session and then stitch that together over multiple sessions to get a highly detailed single customer view.

JDW combines offline and online data within Teradata, which provides the company with deep customer insight, including contact, payment and order history, as well as exposure to marketing campaigns, building an accurate picture of lifetime value and the creation of a profit score for every individual. The retailer is becoming increasingly sophisticated in its use of customer data, for instance by using predictive modelling to understand the likelihood of a customer making a purchase. The retailer has also created a number of behavioural personas – such as value hunters, frequent abandoners and on-trend customers – to create a more relevant and personal experience as customers arrive onsite. If there is downtime on the site, JDW can track the people who hit a holding page and follow up with an email and the company is now using this customer experience data to inform ongoing website development.

Teradata (an ISV reseller partner of ISL/Celebrus)

Teradata has a resellers licence, selling Celebrus as part of a package to its customers that also includes Teradata’s own IP along with open source components. Despite being a reseller, Celebrus also handles tier one support. Exhibit 2 shows a chart from Teradata’s own marketing information that demonstrates Celebrus in action, as part of a unified and fully functioning system for the end-client. Celebrus (positioned at the bottom left of the diagram) acquires the detailed individual-level data via a range of channels. The data are stored in Hadoop and subsequently fed into Teradata Aster Database and Teradata Customer Data Warehouse when needed for analysis, utilising Teradata’s Unified Data Architecture components. This feeds back through to the original channels, creating a perpetual loop.

Exhibit 3: How Celebrus fits into a Teradata installation

Source: Teradata

Expanded agreement with SAS Institute (an OEM partner)

SAS has an OEM agreement with Celebrus, whereby Celebrus software is embedded in SAS’s software. SAS is a leader in business analytics software and services, and the largest independent vendor in the business intelligence market. The contract win with SAS in 2010 was a strong endorsement, both of ISL’s systems integration work and Celebrus’s intellectual property. ISL works closely with SAS on the sale, implementation and ongoing management of products in SAS’s customer intelligence suite. Specifically, ISL is expert in the delivery of the SAS Adaptive Customer Experience solutions – Customer Experience Analytics, Customer Experience Targeting and Customer Experience Solutions – as well as SAS Marketing Automation. In 2010, ISL announced a global partnership with SAS, whereby ISL carries out the implementation for SAS CXA products globally, along with hosting. Implementation is mostly done remotely, but some installations are onsite. The contract has been extended to include more SAS products as a global reseller. SAS analytics contracts are very high level, with values typically exceeding £1m. SAS software is often regarded as difficult to implement and use, but once up and running, customers have the benefits of its highly sophisticated analytical capabilities including strong visual analytics. The SAS/ISL partnerships’ biggest CXA customers are in the retail and finance industries.

The competitive environment in analytics

In recent years ISL’s focus has increasingly shifted towards analytics – initially web analytics, but more recently this has moved to include all channels (or omni-channel). While the e-commerce segments (web and increasingly mobile) clearly lead this industry, the move to omni-channel is a natural progression, since it involves combining the separate data sets (eg web, in store, call centre, email, mobile) to create a broader and more rigorous analysis.

It is important to understand the structure and dynamics of the analytics market. The overall software market in the advertising and marketing vertical is complex, growing quickly and fast moving, with many vendors claiming to have offerings in areas such as Customer Experience Analytics, Customer Interactions Solutions and similar-sounding categories. ISL’s Celebrus operates in the high-end enterprise software market, which includes companies such as Adobe, EMC, IBM and SAS, offering highly sophisticated solutions. It also competes to a lesser degree with Google Analytics (which provides aggregated data) and there are also some smaller players including SDL (Tridion), AT Internet (XiTi, SmartTag) and Webtrekk. The companies ISL is most often up against are the major ISVs Adobe and IBM. Adobe implements its Adobe Analytics Premium solution itself over the web, while IBM Digital Analytics implementations are handled by IBM Global Services. ISL sees very little competition via the major systems integrators in the web analytics space as this is primarily a technology battle, with ISL and its ISV partners (of which SAS CXA is the largest) competing against Adobe and IBM.

The output from an enterprise analytics solution can help internet businesses to tailor their websites, refine their marketing strategies, improve customer experience, increase cross-selling rates and reduce fraud. Most demand has been from B2C companies (primarily retailers, banks and consumer finance companies) seeking greater understanding of the relationships with their customers and with the goal of improving their revenues while reducing costs and risks. ISL estimates that a typical e-commerce company is now spending more than a third of its online marketing budget on analytics, from less than 10% in 2009, with the increase partly driven by the requirement to link the new sophisticated solutions into companies’ back offices systems.

In our view, the ability to offer a unified and fully functioning system using the best components from a range of vendors puts ISL/Celebrus in a strong position to compete with larger players. We also note that the competing solutions can be less efficient, taking significantly longer to download data for analysis than a typical Celebrus system. Further, Celebrus’s system avoids tagging by collecting data directly from the DOM.

The Digital Analytics Association defines web analytics as the measurement, collection, analysis and reporting of internet data for the purposes of understanding and optimising web usage. It is essentially about the analysis of internet data for optimising e-commerce performance. ISL has established a strong niche in this market, having operated in the sector from the early years when the software involved little more than counting hits on websites. Consequently, the group has developed strong relationships with major software vendors including Webtrends and most recently with SAS and Celebrus, which it subsequently acquired in 2015.

ISL’s web analytics domain knowledge is built around the following:

Technological know-how: dealing with the web and clients’ internet infrastructures requires understanding of many disparate systems and a multitude of different technologies.

A customer may have a range of websites, running across different group companies and using different technologies. The solution may involve linking up with the customer’s ERP system, or with information from call centres, so the customer can identify the past activities of individuals on its website, such as their purchase history and what they have been requesting information on. The degree of complexity will affect the time it takes to put a solution together.

Understanding the business rules: understanding precisely what can be done, relating that to the client’s goals and translating it into a system that can deliver.

Empirical evidence of the strength of the group’s domain knowledge includes the following:

1.

ISL is used in all SAS’s English-speaking (and some non-English speaking) web analytics sales and SAS will even pull ISL’s Web Analytics Support Group to the US for pre-sales. We note the company has a pre-sales person in the US to promote sales in North America.

2.

There have been a number of cases when enterprises have requested large IT services companies to implement a solution. However, the IT services company did not have the specialist skills and so the request was sent back to the software vendor and the work eventually came back to ISL.

3.

ISL is seeing strong demand from customers wanting to interpret data and offers a specialist data analysis service.

A typical analytics managed services project

We note that analytics typically involves long sales cycles and often a proof-of-value phase. Around 50% of contracts are for replacing existing solutions, while the balance is for entirely new solutions. A typical ISL managed services project will operate as follows:

1.

Building the infrastructure: the support group will set up the hardware, operating system, software and databases.

2.

Implementation: the analytics group examines the project from the client’s side. This involves assessing the client’s website technology along with the client’s different back office systems. The analytics group then determines what is required and translates this into a system that delivers the solution.

3.

Going forward: the support group will then run the system.

Financials

The acquisition of Celebrus was transformational, as it brought a proprietary software platform to the group. The acquisition has clearly been very successful, having been subscale, but it is now benefiting from being part of a larger organisation by an increasing pipeline of opportunities and securing new business. Following the acquisition, the group changed its balance sheet date from 31 December to 31 March. Hence the FY15 reporting period was 15 months.

H1 results and February trading update

Group revenue rose 118% in H116 to £7.04m, including 81% growth from the continuing IS Solutions business (to £7.04m) and a strong performance (£1.43m) from the acquired Celebrus Technologies. 72% of group revenue came from analytics and management expects analytics to represent at least 70% of group revenue in the foreseeable future. The company declared an interim dividend of 0.50p, compared with zero in the comparative period.

Contract wins: during H1 the group secured two additional major contracts with existing and new customers from within the financial services and airlines industries. The two contracts vary in duration and size; in total over the current financial year they are expected to contribute around £4m in contracted revenue and in excess of £350k of annual recurring revenue.

Investment in people: ISL is expanding its European direct sales team, which will focus on selling the analytics solutions to smaller customers. The group is in the process of opening a US office to support its marketing and sales drive, and has already employed several personnel. The US office will provide real-time customer service and pre-sales support to the group’s substantial and growing US business.

Costs and margins: cost of sales represents direct bought-in costs, bought-in contract costs, eg datacentres, developers and most of the support group. Group gross margins rose by 1480bp to 46.8%, reflecting the impact of a full period contribution from the high-margin Celebrus software business. Operating costs jumped by 51% to £2.4m due to the inclusion of Celebrus’s costs along with growth.

Balance sheet: the group ended the period with net cash of £0.3m, including cash of £2.1m, and borrowings of £1.8m. Borrowings include c £0.5m secured on the mortgage over the group’s head office in Sunbury-on-Thames.

Exhibit 4: Half-by-half analysis

FY14/15 (15 months)

FY15/16e

FY17e

 

H1 (six months)

H2

FY

H1a

H2e

FY

FY

Product

813

1,114

1,927

1,448

1,302

2,750

3,575

Project work

1,060

5,086

6,146

4,768

5,552

10,320

9,546

Recurring revenues

2,006

2,760

4,766

2,254

2,696

4,950

6,039

Total Revenue

3,879

8,960

12,839

8,470

9,550

18,020

19,160

Product

127

410

537

709

721

1,430

2,467

Project work

(252)

1,818

1,566

2,137

2,197

4,334

3,723

Recurring revenues

1,364

1,202

2,566

1,116

1,359

2,475

3,020

Gross profit

1,239

3,430

4,669

3,962

4,277

8,239

9,209

Gross Margin

31.9%

38.3%

36.4%

46.8%

44.8%

45.7%

48.1%

Other operating costs & income

(1,584)

(1,856)

(3,440)

(2,392)

(2,450)

(4,842)

(5,094)

Adjusted operating profit

(345)

1,574

1,229

1,570

1,827

3,397

4,115

Operating Margin

(8.9%)

17.6%

9.6%

18.5%

19.1%

18.9%

21.5%

Net interest

(9)

(25)

(34)

(32)

(48)

(80)

(70)

Edison Profit Before Tax (norm)

(354)

1,549

1,195

1,538

1,779

3,317

4,045

Share-based payments

4

(8)

(4)

(1)

(19)

(20)

(30)

Exceptional items

0

(539)

(539)

0

0

0

0

Profit before tax (FRS 3)

(350)

1,002

652

1,537

1,760

3,297

4,015

Source: IS Solutions, Edison Investment Research

Outlook: at the time of the interims, management reported that trading for both the continuing IS Solutions business and Celebrus remained strong. It said that the company had already added two new customer projects in H2, one with a new retail customer and the other with an existing financial services customer where it was entering the second phase. These two projects will add £150k of recurring revenue in H2. In addition, ISL says it has a number of other exciting opportunities in the pipeline with the potential to convert before the end of the financial period.

In its February trading update, ISL said that it was continuing to witness stronger demand, resulting in sales for both the IS Solutions business and Celebrus now well ahead of management budget. ISL said it had secured a further two major projects with new and existing customers operating in the retail and financial services sectors. It is anticipated that these will add contracted revenue of up to £2m in FY16 and in excess of £250k in annual recurring revenue. Further, the group says it has “a number of other exciting opportunities in the pipeline with the potential to convert these in the first half of this calendar year”.

Additionally, we believe ISL will be benefiting from the weakening of the £/US$ as it will boost day rates, which are quoted in US dollars, when converted to pound sterling.

Management changes: in November, ISL announced a number of changes to its senior management. From 1 April 2016, John Lythall, ISL co-founder and MD, will step down after 30 years of service. John will remain with the business as a consultant and non-executive director. He will hand over the mantle to Peter Kear, who will take up the role of CEO at the start of the new financial year. Peter, currently sales director, was also a co-founder of ISL. He has worked with John since 1977 and was appointed an executive director on its formation in 1985.

In November 2015, Mrs Carmel Warren, FCA, was appointed CFO. Carmel joined the group following the acquisition of Speed-Trap Holdings where she held the position of CFO and played a key role in managing the sale process to ISL. She is an experienced financial director with over 20 years' experience across multiple industries. Her operational and board-level experience ranges from start-ups to blue-chip companies. Also in November, Mark Boxall rejoined the business as operations director of the trading subsidiaries. Mark has in excess of 20 years’ experience gained in the IT industry. He has considerable operational, sales and financial experience, having been both board director and senior manager at technology consultancies and product-based technology companies such as rbase, Morse, PTC and Siemens. His most recent role has been senior manager at EMC, where he was responsible for managing sales engagements, to transform IT, for the largest global investment banks. Mark was a founding director of Chapter26, which was acquired by ISL in 2008.

Forecasts

We forecast group revenues to grow by 40% (or 75% over an annualised FY15, which covers 15 months) in FY16 to £18.0m, and by 6% in FY17 to £19.2m. We forecast operating profit to jump c 250% (over annualised FY15) to £3.4m in FY16, rising 21% to £4.1m in FY17.

Our key forecast assumptions are as follows:

Licence sales: these represent a mix of high-margin proprietary software licence sales and low-margin resales, which are now being de-emphasised, but are still potentially very lumpy and difficult to forecast. We assume revenues rise by 78% (over an annualised FY15) to £2.8m in FY16, reflecting the full period contribution from Celebrus in FY16, and then rise by 30% in FY17. We assume a 52% contribution margin in FY16, rising to 69% in FY17 as software resales are de-emphasised.

Project work: ISL offers one-off projects such as building content management solutions (ie to handle content, documents, details and records related to the organisational processes of an enterprise), designing and building company websites, integrating web analytics software (measurement, collection, analysis and reporting of internet data) and LOB applications (computer applications that are vital to running an enterprise). Contracts are based on time and materials, and margins are typically 38-40%. We assume revenues rise by 110% in FY16 (over annualised FY15) to £10.3m, easing by 7.5% in FY17 to £9.5m. We assume 42% gross margins in FY16, easing to 39% in FY17.

Recurring revenues: this division has four components: some regular fixed-term project work (ie developers commissioned on an ongoing basis); software licence renewals and maintenance, both of which relate to resales that are now being de-emphasised; managed services (which is growing the fastest); and proprietary software (software rentals and support & maintenance from traditional licence sales). Managed services incorporate remote management, hosting, business intelligence, business continuity (eg ensuring websites etc are always available to customers) and application support. Managed services contracts are fixed price, plus labour, with margins typically 45-50%. We assume revenues rise by 30% in FY16 (over annualised FY15) to £5.0m and by 22% in FY17 to £6.0m, with the growing managed services business representing a larger share following the recent declines in software renewals. We assume contribution margins of 50% going forward.

Group gross margins: cost of sales represents software, some hardware and staff costs (engineers). We forecast a group gross margin of c 46% in FY16 and c 48% in FY17.

Operating costs/margins: operating costs are mainly selling and administration expenses (largely staff costs), as well as software development expenditure (substantially all R&D is written off as incurred). We assume underlying operating costs rise by c 77% in FY16, over the annualised FY15 and after including Celebrus, and 5.5% in FY17. We forecast operating margins to rise to 18.9% in FY16 and to 21.5% in FY17.

Exhibit 5: Forecasts

Year end

Dec

Dec

Dec

March

March

March

 

2011

2012

2013

2015*

2016e

2017e

Revenues (£'000s)

 

 

 

 

 

 

Product

2,027

1,482

1,567

1,927

2,750

3,575

Project work

2,475

3,052

4,003

6,146

10,320

9,546

Recurring revenues

4,559

4,674

4,199

4,766

4,950

6,039

Group revenue

9,061

9,208

9,769

12,839

18,020

19,160

Growth (%)

(17.5)

1.6

6.1

31.4

40.4

6.3

Product

446

296

270

537

1430

2467

Project work

792

915

1231

1566

4334

3723

Recurring revenues

2479

2676

2665

2566

2475

3020

Gross profit

3,717

3,887

4,166

4,669

8,239

9,209

Gross profit margin (%)

41.0

42.2

42.6

36.4

45.7

48.1

Operating expenses

(2,815)

(3,050)

(3,186)

(3,416)

(4,828)

(5,094)

Capitalisation of dev costs (net)

0

56

(18)

(24)

(14)

0

Adjusted operating profit

902

893

962

1,229

3,397

4,115

Operating margin (%)

10.0

9.7

9.8

9.6

18.9

21.5

Growth (%)

19.9

(1.0)

7.7

27.8

176.4

21.1

Net interest

(34)

(33)

(23)

(34)

(80)

(70)

Profit before tax norm

868

860

939

1,195

3,317

4,045

Share based payments

(5)

(3)

(3)

(4)

(20)

(30)

Exceptional items (net of tax)

(33)

(65)

30

(539)

0

0

Profit before tax

830

792

966

652

3,297

4,015

Taxation

(67)

(62)

(173)

(120)

(663)

(809)

Net income

763

730

793

532

2,634

3,206

Adjusted EPS (p)

3.2

3.2

3.0

4.0

7.4

8.8

P/E - Adjusted EPS

42.4

42.7

45.2

33.9

18.6

15.5

Source: IS Solutions, Edison Investment Research. Note: *15-month period.

Investment, interest and tax: we forecast an £80k net interest charge in FY16, noting the group still has a mortgage to pay while cash generates negligible interest. The group benefits from UK R&D tax credits and we are forecasting an effective tax rate of 20% going forward.

Cash flow and balance sheet: the group had £0.3m net cash as at 30 September 2015. We forecast free cash flow (after capex) of c £3.1m in FY16 and £3.3m in FY17. We forecast £0.9m net cash at the end of FY16, rising to £3.6m net cash a year later.

Sensitivities: Managing the growth

While we regard internet-related businesses as having a relatively high level of sensitivity to economic downturns, we note that ISL was resilient during the 2008/09 global economic crisis. In our view the industry has matured and has gained significantly in sophistication since the dotcom fallout. This has resulted in somewhat stronger barriers to potential new entrants, and we believe it should temper the sector-specific volatility we have seen in the past. Sensitivities include:

Economic downturn: ISL’s businesses are sensitive to IT spending patterns. However, the group’s recurring revenues (c 30% of FY16e) and regular project work provide some protection. Further, the more international profile of incremental revenues generated from SAS-related work is likely to reduce the group’s exposure to the UK economy.

Competition: the group faces competition from well capitalised systems integrators, ISVs selling directly and through other resellers and in-house IT departments. However, ISL gains an edge from its domain knowledge, independence, partnerships and infrastructure.

Technological change: the group’s analytics software solutions are at risk of being surpassed by competitors. ISL benefits from several patents, although two of the group’s key patents are relatively mature and could expire over the next few years (when do they expire?). Nevertheless, we expect ISL to continue to file patents to protect its IP. The group has some sensitivity to the technological successes of its ISV partners. The ongoing battle over privacy (around the various technology ecosystems) and ad-blocking software could put limitations on the potential benefits of analytics solutions.(make sense?)

Customers: the loss of a key customer could potentially reduce revenues by more than 10%. However, ISL has been reducing its dependency on its largest customers, with which its relationships are long-running and appear to be strong in our view.

Suppliers: a value-added reseller’s (VAR) success depends on the quality of products from its suppliers as well as its ability to negotiate favourable terms and maintain good relationships with them. ISVs do have the option to sell directly to customers. However, most ISVs benefit significantly from having partners to distribute/implement their solutions as well as to provide ongoing training and support.

Staff issues: the gain or loss of key staff could have a significant impact on this business. The ability of the group to recruit suitably qualified employees to satisfy customer demand may have an impact on the group’s propensity to maintain its relationships with its customers and partners and hence to manage the long-term growth of the business.

Public sector exposure: while ISL has some moderate exposure to public sector bodies, this is largely related to lower-margin software sales (eg Adobe enterprise software at 3.5%), which the group is now de-emphasising.

Potential regulation: US and EU rules may compromise the ability to hold consumer data. We note that ISL is not involved in third-party cookies, where the main controversy lies.

Valuation: Strong software offering in growth space

Having been involved in the internet sector since 1994, ISL has built strong domain expertise in lucrative niche areas, which would be challenging for other companies to emulate. The acquisition of Celebrus has fortified the group's position in data collection and analytics. The group is building a sizeable managed services business and consequently growing a strong recurring revenue base which, combined with Celebrus, is lifting group margins. Further, we also note the high-quality blue-chip names in the client base, which provide strong references for new business. We believe there is a blue-sky opportunity if ISL was able to displace an in-house analytics system at one of the large global retailers.

We highlight the following points on the group’s valuation:

Traditional valuation measures: in traditional valuation terms, the stock trades on 18.6x our EPS forecasts in FY16, falling to 15.5x in FY17. In our view, these numbers look attractive given the strong growth potential combined with a net cash position on the balance sheet.

Peer comparison: the stock trades on 2.5x FY17e revenues (above its peers’ average of 1.3x) and 11.0x FY17e EBITDA (above its UK peers’ average of 8.0x). The premium reflects the strong growth potential and the recent upgrades to guidance, along with rising margins.

Exhibit 6: Peer valuations

Share price

Market cap

EV/sales

EV/EBITDA

PE

local curr m's

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

IS Solutions

137.00

50

2.6

2.5

12.9

11.0

18.6

15.5

1) IT services/ managed services companies quoted on LSE and AIM

Computacenter

840.00

1030

0.3

0.3

8.2

7.9

16.5

15.6

FDM

483.50

520

3.3

3.0

16.5

14.7

23.2

20.8

K3 Business Tech

352.00

112

1.4

1.3

9.3

8.0

14.3

11.9

Redcentric

187.25

273

2.7

2.4

11.5

10.3

18.9

16.6

SCISYS

69.50

20

0.6

0.6

18.5

6.6

N/A

11.2

Medians

1.4

1.3

11.5

8.0

17.7

15.6

2) Other small IT services companies with a significant software strategy

Cenit (€)

18.48

155

1.0

0.9

9.6

8.7

21.2

19.1

First Derivatives (£)

1500.00

360

3.4

3.0

17.2

14.8

31.1

27.2

Prodware (€)

7.56

62

0.5

0.5

3.0

2.7

5.4

4.7

SNP Schneider (€)

30.99

116

2.1

1.6

20.6

12.7

45.0

23.9

Medians

1.5

1.3

13.4

10.7

26.1

21.5

2) Web analytics and related marketing software providers

Adobe Systems ($)

84.83

42518

7.0

5.8

19.1

14.8

30.7

23.0

ComScore ($)

27.28

1546

2.8

2.3

11.5

9.0

18.4

14.0

Google ($)

698.48

485581

5.8

5.0

11.8

10.1

20.3

17.5

IBM Corp ($)

138.83

133399

2.1

2.1

8.4

8.2

10.3

9.8

Nice-Systems ADR ($)

59.92

3636

N/A

N/A

N/A

N/A

17.3

15.9

SDL (£)

434.50

353

1.3

1.2

13.4

11.1

23.1

18.6

Medians

2.8

2.3

11.8

10.1

19.4

16.7

4) Large-cap IT services companies (local currency m)

Accenture ($)

18.60

156

1.0

0.9

9.6

8.7

21.4

19.2

Atos (€)

1490.00

361

3.4

3.0

17.2

14.8

30.8

27.0

Cap Gemini (€)

352.00

112

1.4

1.3

9.3

8.0

14.3

11.9

CGI group (C$)

7.50

62

0.5

0.5

3.0

2.7

5.4

4.7

CSC ($)

31.45

118

2.1

1.6

20.9

12.8

45.6

24.2

Medians

1.4

1.3

9.6

8.7

21.4

19.2

Source: Bloomberg, Edison Investment Research. Note: Priced on 8 March 2016.

FCF yield: ISL generated free cash flow of £0.1m in the 15-month period to March 2015, after a £0.5m working capital increase and £0.5m of exceptional items. We forecast FCF (after capex) to rise to c £3.2m in FY16 and steady at £3.3m in FY17. These numbers translate to FCF yields of c 6% in FY16 and c 7% in FY17.

Discounted cash flow valuation: based on our forecasts and a (c 30% long-term margin target) WACC of 10%, our DCF model values the shares at 180p, or 31% above the current price. Discounting back from our forecasts implies that the market is attributing a break-even WACC of 12.1% to the stock. Our DCF period implies a conservative 6.3% CAGR revenue growth over the next five years. Assuming a 20% CAGR revenue growth over five years and the same 30% long-term margin target would lift the valuation to 319p, 133% above the current share price.

Exhibit 7: DCF calculation

DCF valuation

% owned

£m

Per share

 

Assumptions

 

 

 

 

 

IS Solutions operations

100%

65.1

178.9p

 

WACC: 10%

 

Number of shares

36.4m

Group enterprise value

 

65.1

178.9p

 

 

 

Share price

137p

Less: adjusted net (debt)/add cash

 

0.3

0.8p

 

 

 

Market capitalisation

£49.8m

Group equity value (£m)

 

65.4

179.8p

 

Up/(down)side from current price

31%

Source: Edison Investment Research

Exhibit 8: Financial summary

£'000s

2011

2012

2013

2015

2016e

2017e

Year end 31 March (Dec up to 2013)

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

9,061

9,208

9,769

12,839

18,020

19,160

Cost of Sales

(5,344)

(5,321)

(5,603)

(8,170)

(9,781)

(9,951)

Gross Profit

3,717

3,887

4,166

4,669

8,239

9,209

EBITDA

 

1,041

1,054

1,130

1,457

3,649

4,377

Adjusted Operating Profit

 

902

893

962

1,229

3,397

4,115

Amortisation of acquired intangibles

0

0

0

0

0

0

Exceptionals

(33)

(65)

30

(539)

0

0

Share based payments

(5)

(3)

(3)

(4)

(20)

(30)

Operating Profit

864

825

989

686

3,377

4,085

Net Interest

(34)

(33)

(23)

(34)

(80)

(70)

Profit Before Tax (norm)

 

868

860

939

1,195

3,317

4,045

Profit Before Tax (FRS 3)

 

830

792

966

652

3,297

4,015

Tax

(67)

(62)

(173)

(120)

(663)

(809)

Profit After Tax (norm)

801

798

766

1,075

2,654

3,236

Profit After Tax (FRS 3)

763

730

793

532

2,634

3,206

Average Number of Shares Outstanding (m)

24.8

24.9

25.3

26.6

35.9

36.7

EPS - normalised (p)

 

3.2

3.2

3.0

4.0

7.4

8.8

EPS - normalised and fully diluted (p)

 

3.2

3.1

3.0

3.9

6.6

7.9

EPS - FRS 3 (p)

 

3.1

2.9

3.1

2.0

7.3

8.7

Dividend per share (p)

1.30

1.44

1.60

0.56

1.60

1.80

Gross Margin (%)

41.0

42.2

42.6

36.4

45.7

48.1

EBITDA Margin (%)

11.5

11.4

11.6

11.3

20.3

22.8

Op Margin (before GW and except.) (%)

10.0

9.7

9.8

9.6

18.9

21.5

BALANCE SHEET

Fixed Assets

 

4,219

4,252

4,277

13,822

13,808

13,815

Intangible assets and deferred tax

1,137

1,091

1,063

11,408

11,394

11,394

Tangible Assets

2,382

2,361

2,414

2,414

2,414

2,421

Investments

700

800

800

0

0

0

Current Assets

 

3,439

3,303

3,446

4,918

9,472

12,488

Stocks

0

0

0

0

0

0

Debtors

2,382

2,672

2,907

4,823

6,769

7,197

Cash

531

70

539

95

2,703

5,290

Current Liabilities

 

(2,128)

(1,753)

(1,755)

(4,940)

(6,961)

(7,330)

Creditors

(1,977)

(1,598)

(1,593)

(4,486)

(6,507)

(6,876)

Short term borrowings

(151)

(155)

(162)

(454)

(454)

(454)

Long Term Liabilities

 

(1,112)

(957)

(541)

(1,937)

(1,787)

(1,637)

Long term borrowings

(1,112)

(957)

(541)

(1,537)

(1,387)

(1,237)

Other long term liabilities

0

0

0

(400)

(400)

(400)

Net Assets

 

4,418

4,845

5,427

11,863

14,532

17,336

CASH FLOW

Operating Cash Flow

 

1,202

323

804

431

3,573

4,281

Net Interest

(34)

(33)

(23)

(34)

(80)

(70)

Tax

(57)

(41)

(54)

(139)

(110)

(630)

Capex

(213)

(153)

(105)

(171)

(252)

(268)

Acquisitions/disposals

0

0

0

(1,369)

0

0

Financing

(499)

(71)

629

(165)

0

0

Dividends

(295)

(335)

(373)

(285)

(373)

(575)

Net Cash Flow

104

(310)

878

(1,732)

2,758

2,737

Opening net debt/(cash)

 

836

732

1,042

164

1,896

(862)

HP finance leases initiated

0

0

0

0

0

0

Other

0

0

0

0

0

0

Closing net debt/(cash)

 

732

1,042

164

1,896

(862)

(3,599)

Source: IS Solutions, Edison Investment Research. Note: 2015 was a 15-month period to accommodate the change in year end to 31 March.

Contact details

Revenue by geography

Windmill House,
91-93 Windmill Road,
Sunbury-on-Thames, TW16 7EF
UK
+44 (0)1932 893 333
www.issolutions.co.uk
www.celebrus.com

Contact details

Windmill House,
91-93 Windmill Road,
Sunbury-on-Thames, TW16 7EF
UK
+44 (0)1932 893 333
www.issolutions.co.uk
www.celebrus.com

Revenue by geography

Management team

Chief Executive: John Lythall

Sales Director (CEO from April): Peter Kear

John co-founded IS Solutions in 1985. He has a background in computer engineering and systems distribution, having worked in this sector since the early 1970s. Prior to IS Solutions, he was managing director of Hawke Electronics, where he and others had undertaken a management buyout and subsequently sold the company to Lex Service.

Peter co-founded IS Solutions in 1985. Prior to working for IS Solutions, he was divisional director for Hawke Electronics, then a subsidiary of Lex Service. Peter will become CEO of the group at the beginning of the new financial year in April.

Finance Director: Carmel Warren

Non-executive chairman : Peter Simmonds

Carmel joined ISL in 2015 following the acquisition of Speed-Trap Holdings, the parent company of Celebrus Technologies, where she was CFO. Prior to joining Celebrus, Carmel held senior positions with UK insurance broker and financial services provider Brightside Group (as director of education) and at business services company Marshall Keen (as FD).

Peter joined ISL in April 2015 as non-executive deputy chairman, and took on the role of chairman after the AGM in July 2015. Peter brings more than eight years' board experience at Dotdigital Group, over six of which were as CEO. Peter brings with him over 20 years’ experience at senior management and board level, principally in the areas of banking, insurance, finance, information technology and outsourcing.

Management team

Chief Executive: John Lythall

John co-founded IS Solutions in 1985. He has a background in computer engineering and systems distribution, having worked in this sector since the early 1970s. Prior to IS Solutions, he was managing director of Hawke Electronics, where he and others had undertaken a management buyout and subsequently sold the company to Lex Service.

Sales Director (CEO from April): Peter Kear

Peter co-founded IS Solutions in 1985. Prior to working for IS Solutions, he was divisional director for Hawke Electronics, then a subsidiary of Lex Service. Peter will become CEO of the group at the beginning of the new financial year in April.

Finance Director: Carmel Warren

Carmel joined ISL in 2015 following the acquisition of Speed-Trap Holdings, the parent company of Celebrus Technologies, where she was CFO. Prior to joining Celebrus, Carmel held senior positions with UK insurance broker and financial services provider Brightside Group (as director of education) and at business services company Marshall Keen (as FD).

Non-executive chairman : Peter Simmonds

Peter joined ISL in April 2015 as non-executive deputy chairman, and took on the role of chairman after the AGM in July 2015. Peter brings more than eight years' board experience at Dotdigital Group, over six of which were as CEO. Peter brings with him over 20 years’ experience at senior management and board level, principally in the areas of banking, insurance, finance, information technology and outsourcing.

Principal shareholders

(%)

Hargreave Hale

14.25

Helium Rising Stars Fund

9.62

Roger Steven McDowell

6.46

Philip McDowell

6.39

John Lythall

6.26

River & Mercantile AM

5.26

Mark Ward

3.53

Peter Kear

3.05

Companies named in this report

Adobe Systems, Computacenter, comScore, Dotdigital, FDM, Google, IBM Corp, K3 Business Tech, Nice-Systems, Redcentric, SCISYS, SDL.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by IS Solutions and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by IS Solutions and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Share this with friends and colleagues

You may be interested in