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Iomart: profits raining from the cloud

Glasgow-based Iomart has reinvented itself to become an internet infrastructure partner for public and private organisations across the UK.

In the last five years, the company has dramatically increased its provision of internet-facilitated ‘cloud’ services. This strategy has led to soaring profits. Ten years ago, Iomart was focussed on the supply of network security software and web services such as internet and email to businesses. In 2004, Iomart acquired the domain name and web hosting service easyspace. As margins in domain names started to fall across the industry, Iomart used easyspace to exploit a nascent industry, datahosting. It is the evolution of this type of service that has seen Iomart grow revenues fast: from £7.4m to £55.6m in ten years.

data storage, access and security have moved up the agenda As businesses have become more dependent on internet communications, issues such as data storage, access and security have moved up the agenda. This has turbocharged demand for Iomart’s services. Iomart meets this demand through a network of their own data centres across the UK. As utility increases at these sites, Iomart’s profit margins accelerate. In 2010, 8

Iomart made an operating profit of £1.2m from sales of £18.3m. By 2014, an operating profit of £11.1m was reported on those £55.6m of sales.

network of their own data centres across the UK Iomart does not have a clear run here. After a slow start, better known blue-chip firms are now putting a cloud offering at the front and centre of their product suite. One example is Oracle Cloud, a broad solution offering CRM, human resources, marketplace and social networking. Similar solutions exist from IBM and Microsoft. Amazon web services and Google’s cloud platform are also formidable competitors. The emergence of these wellfinanced alternatives perhaps explains the recent weakness in Iomart’s share price. The shares have declined from a high of 317p in September of last year to 206p recently in June. Shareholders in FTSE 350 peer Telecity have endured a similar ride in the last twelve months. Nevertheless, profit forecasts at Iomart have been increasing. For the year ending March 2015, the consensus analyst estimate today is for 13.0p of EPS, up from 11.3p this time a year ago. If Iomart can meet the current estimate, that would represent a near 75% improvement on

2014. A more moderate 16.8% EPS rise is forecast for the year after. With the shares at the level that they are today, Iomart will have to deliver the growth that is expected of it. While the industry has become more competitive, there will remain a lucrative niche that Iomart’s blue-chip competitors will dismiss as too small to pursue. Iomart could continue to thrive here, all the while making itself a more attractive takeover candidate. Only last week, the company announced that it had rejected a 285p bid from Host Europe.

profit forecasts at Iomart have been increasing If you are the type of investor that looks to back successful AIM companies for the long term, Iomart looks a decent candidate. Iomart Group (LON:IOM) FOR Successful player in fast-growth market Takeover candidate AGAINST Bigger players growing fast Offering becoming commoditised Market cap Bid:offer P/E (forecast) Yield (forecast) 52week low:high

£276m 258p:259.5p 19.9 0.8% 205p:425p

August 2014 AIM Prospector  
August 2014 AIM Prospector  

Analysis on five AIM-quoted companies: Iomart, Jarvis Securities, NAHL Group, Plastics Capital and Portmeirion