Digitization And Geospatial Data Demand Will Drive Long-Term Upside Potential

Catalysts

About IDOX

IDOX provides specialist software and geospatial data services that help public and asset-intensive organizations digitize operations, improve decision-making and manage regulatory processes more efficiently.

What are the underlying business or industry changes driving this perspective?

• Accelerating digitization and cloud migration across U.K. local government, supported by planning reform and unitary authority consolidation, should drive larger, stickier platform deals similar to North Yorkshire and lift recurring revenue growth and long-term EBITDA margins.
• Rising reliance on data rich spatial insight in telecoms, utilities and infrastructure, illustrated by the Vodafone win and Ordnance Survey partnership, underpins management’s push toward a 10 percent share of a GBP 300 million market and is likely to outgrow the group average on both revenue and margin contribution.
• Persistent funding and capacity pressures in health and social care, combined with mandated outcomes improvements, are increasing demand for workflow automation and financial management tools such as Lilie and Plianz, supporting higher software penetration per customer and expanding divisional EBITDA.
• Global investment in energy transition, transport and infrastructure safety is widening the addressable market for EIM and iFit, where recent contract wins and 80 percent order intake growth indicate scope for double digit revenue compounding and operating leverage.
• A disciplined buy and build strategy, backed by net cash and up to GBP 120 million of available facilities, allows IDOX to bolt on niche, high recurring revenue assets at sensible multiples, which is intended to enhance group growth, raise the recurring revenue mix further and support progress toward the 35 percent EBITDA margin target and stronger earnings.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming IDOX's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.0% today to 12.8% in 3 years time.
• Analysts expect earnings to reach £13.9 million (and earnings per share of £0.03) by about December 2028, up from £6.2 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £18.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 35.8x on those 2028 earnings, down from 51.1x today. This future PE is greater than the current PE for the GB Software industry at 33.6x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.91%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• U.K. local government consolidation and budget pressure could lead to harder pricing negotiations, elongated procurement cycles or scope reductions, which may cap total contract values and slow adoption of higher value modules, limiting revenue growth and constraining EBITDA margin expansion over time.
• Transition from on premise licenses and nonrecurring project work toward cloud and highly recurring SaaS contracts may depress near term license and services revenue if renewal cycles or migrations slip, creating a mismatch between strong order intake and reported revenue and delaying the uplift in net margins and earnings.
• The geospatial strategy relies on scaling relatively low margin activities into a higher margin repeatable platform. However, integration complexity across multiple acquired assets, intensified competition for large telco and infrastructure contracts and slower than expected AI productization could leave divisional margins structurally below the rest of the group, diluting group EBITDA margins and earnings growth.
• The buy and build model assumes plentiful sensibly priced targets and flawless integration. Rising seller valuation expectations, higher financing hurdles and post deal execution risk could result in overpaying for assets or under delivering on synergies, depressing return on invested capital and limiting future earnings accretion.

• Public sector clients in health, social care and elections are exposed to shifting political priorities and changes in central funding. A future government could delay technology projects, reallocate budgets or change procurement frameworks, which would introduce revenue volatility and make the targeted steady mid to high single digit growth in revenue and earnings harder to sustain.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £0.85 for IDOX based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £108.2 million, earnings will come to £13.9 million, and it would be trading on a PE ratio of 35.8x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of £0.69, the analyst price target of £0.85 is 18.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.