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Avisen – Group Repositioned for Growth; Increased Target Price 10.6p; Reiterate Stance of Buy

Avisen, the AIM quoted business technology and profit improvement specialist, released results for the 12-months ended 31st January 2011 on 27th July 2011 and understandably, those results do not fully reflect last April’s disposal of Inca Software for a total consideration of £8.5 million to Logicalis that complete the group’s fundamental repositioning nor the current growth potential of the core businesses.

The group came to market through a reverse takeover in February 2009 and since then has been very corporately active. Although more recently shedding non-core activities and building up a development cash reserve, estimated at £6.3 million with a further £1.0 million of deferred consideration that will be received on the anniversary of the disposal of Inca Software.

The reshaping has left Avisen with two operations: Avisen , a business technology and profit improvement operation, and Storage Fusion, a SaaS-based enterprise storage environments service.

Nevertheless, the group’s strategy remains to grow organically and by the acquisition of complementary businesses that strengthen its activities. Indeed, the group ‘… continues to actively seek new acquisition opportunities.’ and we would be surprised not to hear something relatively soon. In the meantime, Avisen will concentrate on leveraging its recent significant success as a reseller of Acorn Systems’ software while Storage Fusion will focus on developing and enhancing its SRA ( Storage Resource Analysis) product, which is beginning to gain traction in the market.

The presentation of the group’s statutory financial accounts are again complicated by corporate actions during and post the accounting period, principally the treatment of Inca Software as a discontinued activity following the agreement to sell the business in January 2011, impairment charges of £4.5m relating to the Xploite business as well as strategic, integration and other one off costs.

Nevertheless, it is the underlying performance of the continuing businesses and whether there is sufficient available development capital that matters, and in the case of the latter there is currently at least £6.5 million in cash. Moreover, it is reassuring to note that both Avisen and Storage Fusion both made progress with combined sales revenues advancing 15.4% from £2.279 million to £2.631 million, of which Storage Fusion contributed £0.23 million for its 9 months since acquisition as a start-up business. The group’s continuing businesses recorded a 7.5% reduction in EBIT losses primarily due to a considerably reduction in Avisen’s loss from £0.565 million to £0.061 million although partially offset by a 25% increase in Head Office costs to £1.293 million and an initial loss of £0.127 million from Storage Fusion. Net finance expenses of £0.27 million (2010: nil) trimmed the improvement to a pre-tax loss of £1.513 million from £1.607 million.

Table: Divisional Profit & Loss Account , £000

Year ended 31st January	2011A	2010A	YoY % change
Avisen	2,401	2,279	5.4
Storage Fusion	230	0	NA
Revenue	2,631	2,279	15.4
Avisen	(61)	(565)	(89.2)
Storage Fusion	(127)	0	NA
Head Office	(1,293)	(1,034)	25.0
EBITDA	(1,481)	(1,599)	(7.4)
Depreciation	(5)	(8)	(37.5)
EBITA	(1,486)	(1,607)	(7.5)
Amortisation	0	0	NA
EBIT/Operating Profit	(1,486)	(1,607)	(7.5)
Net Finance Income/(Expense)	(27)	0	NA
Pre-tax	(1,513)	(1,607)	(5.8)

The group’s consultancy business, Avisen, grew revenues 5.4% to £2.401 million but recorded a considerably improved full year EBITDA loss of £0.061 million despite the costly piloting of Acorn System’s profitability software to cornerstone clients, such as Tesco Direct and Unilever; the latter signing a multi-year contract on 14 th July 2011 to provide a Global Cost to Serve Solution to Unilever’s Global Supply Chain and Customer Service Function; ‘… This contract will generate significant revenues over the next three years …’ , and we estimate that annualised revenues could be of the order of up to £5 million. Therefore, we anticipate that this division will continue to advance strongly and our forecasts do not assume any further conversions of Acorn System pilots – highly unlikely. Consequently the business should be comfortably profitable this year and going forward. Storage Fusion generated £0.23 million in revenue during its first 9-months of trading within the group but its heavy product development together with market research and promotion costs resulted in an EBITDA loss of £0.127 million. Nevertheless, the group believes that it has ‘…a highly compelling product which, with some further enhancements could bring significant revenues to the Group. Satisfaction with our offering was evidenced by a sale to a large bank in September 2010 and since the year end a sale to a worldwide information technology company who will be acting as one of our partners. We are also very encouraged by the pipeline of partner and storage vendor interest in our software offering and believe that this is likely to convert into sales during the second half of financial year 2012. …’ Consequently, our expectations for Storage Fusion, which allows for sales slippage, are for a strong advance in revenues during the current financial year but for continued losses due to the ramping up of its commercialisation programmes and the further costs associated with the on-going product enhancements as well as the specific development of the Enterprise Edition, which should be available from this September.

Table: Divisional Profit & Loss Account, Forecasts, £000

Year ended 31st January	2010A	2011A	2012F	2013F
Avisen	2,279	2,401	5,500	7,600
Storage Fusion	0	230	1,500	2,401
Revenue	2,279	2,631	7,000	10,000
Avisen	(565)	(61)	2,656	3,479
Storage Fusion	0	(127)	(183)	214
Head Office	(1,034)	(1,293)	(959)	(1,151)
EBITDA	(1,599)	(1,481)	1,514	2,542
Depreciation	(8)	(5)	(47)	(83)
EBITA	(1,607)	(1,486)	1,467	2,460
Amortisation	0	0	0	0
EBIT/Operating Profit	(1,607)	(1,486)	1,467	2,460
Net Finance Income/(Expense)	0	(27)	33	40
Pre-tax	(1,607)	(1,513)	1,500	2,500

Finally, the group fully recognises that its greatest burden is Head Office costs, which will only be fully addressed through a significant scaling up of the group through complimentary acquisitions. Nevertheless, with revenues surging ahead at both Avisen and Storage Fusion, even on a very conservative basis and without any acquisitions, the group is becoming increasingly profitable as indicated by the above divisional profit & loss account table.

We believe that the group has been finally stripped back to its long term core activities of Avisen and Storage Fusion, which individually appear to have exciting growth potential that should begin to become apparent when the interim results are released in mid-October and, therefore, no longer appropriate to value the company on a sum of the parts basis. We will now value the company using EV/Sales, EV/EBITDA and P/E metrics; initially adopting relatively cautious forward multiples of 1.0x, 5.0x and 9.0x respectively because of the considerable reshaping that has previously occurred and clouded the underlying performance. However, as the group delivers against its strategy we would anticipate raising these multiples towards industry norms. On a FY2013 EV/Sales multiple of 1.0x the indicative share price is 9.7p while a 5.0x EV/EBITDA multiple suggests a share price of 11.2p and a 9.0x P/E (discount of 51.6% to the sector’s 18.6 multiple) a share price of 10.9p or an initial average target price for the emergent group of 10.6p (previous target price 9p). Therefore, with the shares trading at 5.625p and an increased target price of 10.6p, we reiterate our recommendation of Buy.

Forecast Table

Year to 31 January	Sales (£000)	Pre-tax Profit (£000)	Earnings per share (p)	Price Earnings Ratio (x)	Dividend (p)	Yield (%)
2010A 1	2,279	(2,262)	(1.25)	NA	0.0	0.0
2011E 1	2,631	(7,801)	(0.65)	NA	0.0	0.0
2012E 1, 2	7,000	1,500	0.72	7.8	0.0	0.0
2013E 1, 2	10,000	2,500	1.21	4.7	0.0	0.0

Notes:
1 Excludes exceptional items
2 Nil tax charge.

Key Data
EPIC	AVI
Share Price	5.625p
Spread	5.5p – 5.75p
Total no of Shares	223.2 million
Market Cap	£12.55 million
Net Cash	£6.3 million (est.)
12 Month Range	3.625p – 7.85p
Market	AIM
Website	www.avisen.com
Sector	Software & Computer Services
Contact	Marcus Hanke Chief Executive 07976 749408