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Questor: this software firm has found a clever way to profit from the ‘WeWork revolution’
Questor share tip: newly floated Essensys sells the software that allows flexible workplaces to function smoothly
Flexible workspaces are cool – we have WeWork to thank for that – and enjoying spectacular growth. This week’s stock has carved out a clever niche in the supply of software that makes everything run smoothly for the operators and occupants of these offices.
Essensys, which floated only last week on Aim, has been growing pretty impressively itself. Founded in 2006, its “Connect” software, which provides the vast majority of its sales, is now installed in 303 sites. Its technology, which is based in the “cloud” and also includes a package called “Operate”, handles everything from booking new tenants to providing the Wi-Fi.
“Flexible working is growing massively,” said Richard Penny, who bought the shares when they floated for his Crux UK Special Situations fund. “It’s now a global industry but Essensys was ahead of its time when it started to supply software to it.”
He said the package of different functions handled by the software made it “mission-critical” to its customers, which include Industrious, an operator of about 50 sites in America, and Landmark, which has about 40 in Britain.
Essensys therefore tends to hang on to its customers; the company itself put its “churn” rate at just 2pc a year. “It’s the market leader in what it does,” Penny said.
Naturally, if its customers are happy with the product and are themselves growing by opening more sites, they will tend to install Essensys software there too. This gives the company good visibility and predictability for its own growth, the fund manager added.
Contracts already signed should take the number of sites that have the Connect software to 357 next month, while customers’ growth forecasts should account for a further 103 new sites by July next year.
Some of Essensys’s growth will be international. The company already operates in 13 countries and Penny said that as customers expanded into new cities they would take its software with them.
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In common with many “cloud” software suppliers, Essensys does not sell its packages upfront for a one-off sum but in effect rents them by the month. It typically charges about £4,000 a month per site for Connect. This model offers more consistent revenues and means that growth is smoother.
Sales have grown from £12.1m in 2016 to £16.4m last year. Pre-tax profits have been lumpy, falling from £225,000 in 2016 to a loss of £1.1m the following year and recovering to a £416,000 profit in 2018.
Penny said over the next few years he would expect profits, on the “Ebitda” measure, to broadly mirror sales growth while the company invested but thereafter to exceed sales growth. The latter can take time to flow to the bottom line as the company recruits more staff to handle its expansion, he added.
Relative to a market value of about £87m, a profit of less than half a million pounds suggests a lofty valuation. But Penny said: “This is the kind of stock that is always going to trade expensively. It should be able to compound its earnings for many years to come.”
Private investors weren’t able to take part in the flotation, which was at 151p, so they can only buy in the market. The shares have now risen to 181.5p, but Penny said he didn’t see that level as prohibitive.
One problem with successful British technology companies has been their tendency to be taken over, usually by foreign rivals, before investors can reap the full rewards. This is what happened to Questor’s tip of the year, SafeCharge, as we reported last week. Readers are in line for gains of about 86pc but some may wish they could have retained ownership for longer.
Could the same happen to Essensys if it is as successful as we hope? In this case the management has retained a stake of about 45pc, which will be enough to block any offer that they regard as insufficient. “We think their ambition will be to grow over the next 10 years or so,” Penny said. “We love the fact that they have such a big stake.”
Software firms can make great investments and this one seems to have a commanding presence in a fast-growing industry. One to tuck away for the long term.
Questor says: buy
Ticker: ESYS
Share price at close: 181.5p
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