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Part 1
This is factual, company RNS sourced, with a little obvious comment. I had actually prepared notes and now this brief summary. I was going to do a little more on it for my own purposes, but that will probably only amount to guessing at figures, which is not helpful to others. It is basic, and only intended as a flavour.
Reading the holdings RNSs, it can be seen that substantial numbers of shares have recently changed hands in bulk transactions at the then existing market prices ( primarily as a result of the founders, Mxc Capital, realising funds to persue new investments ) I see that as current consolidation around this price, though there has been a small pull back from the all-time high. In the interest of balance the CFO's recent sale of shares ( RNS ) from options rates a mention, but bearing in mind this represents only a portion of the options available to him now or later, and undisputable current progress sufficient to justify a dividend, and though nice for him, I do not personally see that as significant to us non option-holders.
As half year end approaches, and shareholders make their minds up on price against progress, it was useful to read back for my own understanding of where the company sees itself at this point. It seems straightforward. I summarise.
Castleton trades in a slow moving market. Potential customers come from a position of having disparate software, from various providers, under contract, and in some cases dated infrastructure. Associations carefully consider their choices and associated costs going forward, as they review their IT with a view to increased efficiency. Castleton has become a major supplier of fully integrated products in that competitive market, to the extent it is able to say of 21st. August contract "that further enforces our strategy of becoming the single service provider capable of delivering innovative software in the cloud with managed services."
Part 2
In my view, on the dividend, there is perhaps more to the future prospects giving rise to capital growth, than there is to the progressive dividend itself, which after all will be based on sustainable company growth. It is sensible to put the dividend, whatever it is but progressive, in perspective alongside retained cash to pay down debt, and for growth, because Castleton is in that mode. The CFO's comments are relevant to that growth, and point to targeting expenditure on Managed Services to provide new revenue streams.
"Given the strong cash generation of the business, the Group has the confidence to increasingly invest in customer related capex and infrastructure in the coming year as we seek to win new hosted and managed service deals. The Group will also look to continue the investment in software development."
Castleton has made it's acquisitions, and dealt with the expense of integrating the companies. The cost base has stabilised, and the dividend to come is evidence of that. Dean Dickinson is now fine-tuning the two Divisions, to better promote sales.
In the Software Division, cross-selling of solutions is progressing well, with the aim of each customer taking the full suite, and will continue for the foreseeable future, with new solutions added and development of existing. No change there.
Castleton is now seeking over time, as customers increase their number of solutions purchased, to migrate those 700 or so software customers to the more lucrative Managed Services Division ( with some recent success ) and the company, from cash, intends to target investment into customer facing managed services propositions directly linked to sales, (most of which will likely be capitalised rather than expensed ) aimed at improving it's competitive edge when tendering for contracts. There is a new emphasis here, based I believe on Castleton's comparatively recent referenceability, having stated a previous reticence to tender without the now available evidence of successful implementation and quality of service from pioneer users.
Part 3
So I see it as growth plus a dividend. In that last connection, the CFO's comments on full year results should be borne in mind to avoid unnecessary disappointment at the dividend level. Earnings per share going forward (on which a dividend will be based ) will be less than reported on 19th. June, due to the application then of non-recurring exceptional and tax credits. But it will be progressive in line with EPS.
So for me, primarily interested in growth, any dividend figure ( likely with half year results ) will be acceptable. I shall be more interested in the PBT figure this time around, which for the corresponding period last year was £0.18m. Last full year was £1.82m. It would therefore be unsurprising to see a 400% plus increase in PBT this half year over H1 last, bearing in mind the announcement that this financial year started well, with trading "comfortably" in line with expectations, and also that the individual value of new contracts has started to grow.
I anticipate a trading update in October, as before, and similarly the half year results in November. With a stable and growing company like this, and in the market in which it operates ( slow moving but providing increasing contracted core revenue ) the sense of what the company has so far reported is more than likely to be what we shall get. I therefore expect to see a strong set of results, and bearing in mind the reported growth of 9% in contracted backlog of revenue at start of year, probably exceeding the company's 10% revenue growth year on year minimum target. I have mentioned an increase in PBT, though this half year will show a reduced EPS from last full year. But the bottom line and the EPS must be capable of supporting payment of a dividend.
It also seems, as the company said it would be implemented this year, that results would be a suitable time to formalise the dividend. Castleton do not report the cross-selling but we may have prior news, as the company enhances its ability to make full suite sales and secure Managed Services contracts.
That is spot-on operationally. And measured otherwise. It is inadvisble to go too far down the road of forecasting results. None of us are in a position to do that. Slow but sure progress is the goal - achieved so far, and no reason apparent why that should change. I would add that working with customers already on the books, should result in sales at lesser cost, with profitability increasing.
I note also during my reading that the conditions for a contingency consideration payment to 365Agile will not be met.
Thus only a remaining £400k of the normal 600k pa cash consideration remains to be paid to 4th. April 2019, whereupon the mobile is Castleton's in social housing in perpetuity at no further charge - a relief of £600k per annum. There will be no final payment of £300k.
That's convenient. No point in paying any more than necessary to 365 Agile. Though strictly they still have the mobile for other sectors, whatever that might be worth.
On the matter of figures, the published 'expectation' for the current full year is £26.3m revenue. The revenue seems achievable, representing an increase of 13% with Castleton said to be targeting a minimum 10%. I pass on the rest. We shall know a lot more in October/November.
It does not seem out of the way, does it.
That is revenue, but there are other matters when considering the bottom line of the future and the dividend.There is also the improvement of margins on individual products and overall.
I have frequently mentioned the Agile mobile agreement. Castleton has been paying £600k per year since April 2016. That will end in March 2019. £600k to the good going forward.
With Castleton Strategic Modelling ( formerly HousingBrixx ) Castleton has been paying £300k per year since May 2015. That ended in June. £300k to the good going forward.
Those are one-offs, but taken together are significant savings every year going forward compared to previous years, and are on top of further sales revenue and profit. Increase in margins.
Then there is the repeat revenue, subject to existing, multi year contract. "Recurring revenue represents 60.1% of total revenues (2017: 64.8%), the decrease in percentage terms due to the strong performance of non-recurring revenues, predominately implementation revenues, during the year." Excellent service has to be provided, and contracts retained, but they do not have to be resold. Increase in margins.
So increasing revenue is very important, and with 60% of the 700 or so customers only taking one of many Castleton products, sales penetration is still very low, and with continued success there is much more that may be achieved through cross-selling and subsequent lucrative migration to Managed Services, under contract. But profitability is in truth the bottom line, and that is what Dean Dickinson is working towards - increasing cumulative repeat revenue, thus increasing repeat profit, at improved margins.
I already get all that, with the profit planned to increase as a percentage of revenue. The benefit of much of it, including the one-offs, will have greater impact next financial year if all goes as planned. As previously discussed, there's also the BGF loan notes for Kypera to deal with at some stage, costing £125k minimum a year on the £2.5m outstanding. They'll have that in the mix too, with Castleton able to redeem January on.
Mr.Dickinson and staff will know the importance of keeping the contracts - we know from the sales meeting and from the Castleton Conference that ' from now on the customer will be at the centre of everything we do.' The LTIP should help in keeping the senior managers up to the mark. And Mr. Dickinson got £185k worth in here,( doubled his money ) with 2.4% in growth shares and other options. No longer evergreen, which was done away with when MXCP paid off, the better to appeal to investors, and backed up now by the future divi.
He's earning his options, which is I suppose what they're about.. Done well and sustained since he took over, and his pay is a relative pittance at £65k.
Incidentally, we now know that just under 3% of MXCP shares went to Old Mutual, but no idea of who had the other 4%. So I assume they went to holder(s) under 3%.,
I have had to look at that, and am always ready to be corrected on these things. I believe I am right in saying we are a little better off than that, in respect of the original loan notes outstanding for Kypera. The original loan notes were £1.5m MXCP and £2m BGF. Mxcp were paid off during the current period. It therefore leaves the BGF - 5% interest rolled up into the loan, which will need paying by Feb. 2021, with Castleton permitted to settle Feb. 2019 on without dilution, and BGF able to convert at any time and in the money ( according to me ) today to the tune of say £570k on conversion, taking the rolled up interest into account. It is, as you know, all catered for as part of Castleton's debt. Without taking any other consideration into account, if I was BGF I would convert, now or later. If I was Castleton, I would want to prevent that. They will be talking to each other.
I have always had confidence in Dean Dickinson and the CFO.
Yes. Well, after all that I got limited options, and I'm holding.
The rest is their bag.
Shares are trading comfortably and above £1 from the all-time high of 105. That is healthy, following as it does the large transactions seen recently at the prices stated. Looking ahead, shareholders will take a view on the trading update in early October, and the price will reset, and possibly again in November when greater detail is reported.
I commented on 3rd. and 4th. Sept. I expect no sea changes. Personally, if the Castleton model continues as previously and as foreseen by the board, and for other reasons, I believe growth and particularly profitability are likely to make an even stronger showing next financial year.
Dates for the diary are 24th.Sept and 23rd.Oct, after which the board will be free to be more specific about the dividend, but I do not expect that until Nov. results.