NetDimensions: Positioned For Strong Growth

NetDimensions (NETD.L) is growing at a fast pace with organic revenue growth of 34% in H112 following 25% underlying growth in FY11. The group, which provides software that helps customers to deliver corporate training and develop talent, is positioning itself to maintain this strong growth. It is expanding into emerging markets, increasing the emphasis on direct selling and broadening its product range to enable cross-selling of new modules to its global customer base. Nevertheless, the shares are still trading at half the 2007 IPO price. The group had $7.8m of net cash at 30 June (ie, c 19.7p per share) and the P/E is attractive at c 6x FY13 earnings on a cash-adjusted basis.

Investment case: Fast grower with a healthy cash pile
NetDimensions generated 32% compound revenue growth since FY04 through the provision of its learning management system (LMS) software to enterprises. The industry dynamics are attractive, with annualised growth exceeding 14% over 2007 to 2011. Customers typically operate in highly regulated industries and the group has blue-chip clients, including the BBC, Cathay Pacific, ING and Progress Software, which provide strong references. NetDimensions is widening its product set and management believes the strategy could double sales from existing clients. The group is increasing investment in sales and marketing, reducing its dependence on resellers, and offices have recently been established in China and Germany.

Forecasts: Asia and new modules boost opportunity
Revenues surged by 34% in H1 to $5.9m and adjusted EBIT loss shrank to $0.2m. We are conservatively forecasting the group to generate 13% revenue growth in FY12 to $13.8m (hence a similar H2 to the very strong H211) and 14% growth in FY13 to $15.7m. We expect operating margins to pull back in FY12 due to the increased headcount and marketing spend, but to rise back above 10% in the medium term. The group was strongly cash generative in H1 with its net cash pile rising by $0.9m to $7.8m over the period. We assume the group is roughly cash neutral in H2, and we forecast end FY12 net cash to of c $6.8m after the payment of the maiden dividend.

Valuation: Sector has rich valuations in the US
While NetDimensions has a profitable track record, its shares trade on modest ratings of 0.4x FY13 revenues and 3.6x EBITDA. This looks appealing relative to its AIM quoted UK peers (0.9x revenues and 5.5x EBITDA) and its larger US competitors (c 4x FY13 revenues and c 29x EBITDA). Our discounted cash flow analysis, which incorporates potentially conservative assumptions, suggests a valuation of 65p.

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