IS Research - Informed, Insight and Integrity

Provider of software and IT services to the banking sector Gresham Computing has issued a year end trading update this morning in which it says that results for the year to December will be ahead of expectations and that the order book and pipeline for 2012 looks strong. Under new leadership, this will be the second year that Gresham has outperformed expectations after a long run of disappointing results.

Current market expectations call for revenues of £11.6m, up 27% on 2010 and EBITDA of £1.6m; more than double the level achieved in the previous year. Cash flow is also expected to be ahead of expectations which currently put year end net cash at £3.2m.

The main driver of growth in 2011 for Gresham was its virtual accounts business which delivered significant growth in both services work and ongoing recurring account fees. Although not yet a meaningful revenue contributor, the newly launched Clareti Transaction Control (CTC) application, a specialist matching engine, has landed its first client and has a strong prospect list. We look forward to a more detailed update on CTC at the full year results.

First thoughts

Gresham shares were one of the stand-out performers of 2011 having all but doubled to 52p and had been even higher during the year. Driving this performance has been increasing confidence in the renewed growth story under CFO turned CEO Chris Errington and Chairman Ken Archer. At the core of the strategy is a simplification of the business and, crucially, a much more realistic view on the deliverability of revenues from new ventures; most notably CTC.

With the strong share price performance, Gresham’s market cap is now back over £30m valuing the company at around 25x 2011 earnings (before any upgrades); a hefty rating but one that reflects the potential for further outperformance, especially if CTC starts to gain revenue traction.