Written 28 March 2008. Consult 'Investment Approach' tab for outline of what criteria gets a firm on the research list).

Writer holds Ascribe plc equity.

Quantitative rating of 60/100, as is, on recorded accounting data. Qualitatively, the company is considerably better than that and sits on a borderline ridiculous valuation in most of the 'in context' ways it can be cut.


Ascribe plc develops and markets health care software aimed at supporting patient, clinical and business processes to health care providers in the UK and internationally (notably Kenya, Australia and New Zealand). The company's year end is June and it next reports in September. Go here for the last set of full year results and here for the latest interims (12 March 2008).

Its admission to this research list is an example of 'criteria flexibility' given that Ascribe is marginally more expensive in price-to-sales terms than would usually get this far. However, this is a company with a free operating cash yield of over 11%; and on harsh forecasts likely to yield greater still come the next full year figures in 6 months time.

Somewhat paradoxically, a point of weakness is short-term liquidity. This is due to £5.6m of deferred income on Ascribe's balance sheet (the other side of customer prepayments), one of the nicer short-term liabilities to have within a total of £10.4m. Still, whilst prepayments are a source of cash funding they come with contractual obligations that can bite back in the event of poor cash management.

Earnings quality is exceptional, driven by the company’s recurring revenue maintenance contracts – 70% of turnover; and where Ascribe have used equity to acquire (but nothing in the last financial year) it has yet to show up detrimentally in its return on assets numbers. In fact, its past purchases appear prudent and revenue driving.

But all is not rosy. Gross margins were off 3 points without explanation last year end (although they recovered at the last interims). And the shares have been crucified in the market following a period of over valuation and recent (but now resolved) contract push backs.

Perhaps to mitigate this much management chatter has focused on order levels and larger order sizes in 2008; as well as upon an apparent health purchasing decentralisation initiative from the government which Ascribe calculate as beneficial to the company.

Yet it will take a lot to stop the shares digging the crater, especially in uncertain times. Moreover, management may talk its talk but order conversion and navigating the political vagaries of government policy are the perennial points of risk for this small health care company.

All to prove but with respectable investment merits to consider.

Exhibit: Ascribe plc tear sheet


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