With all stocks, I like to buy when the underlying business is performing well with several years of success and growth under its belt. And that’s the case with software solutions provider Cerillion (LSE: CER).
The company has been delivering mission-critical software for billing, charging and customer relationship management for around 24 years. During that time, it mainly served the telecommunications sector but also provides for companies in the utility and financial services sectors.
Prior to being a standalone business, Carillion was part of Logica plc (acquired by others since). But current chief executive Louis Hall led a management buyout in 1999. And the company joined the FTSE AIM market in 2016.
A quality AIM opportunity
But I’m not letting that put me off! Not all businesses on AIM are rubbish. And Cerillion stands out as a top performer with a racy valuation to match. It’s a somewhat rare growth and quality opportunity on the AIM market. But is it a stock to buy now?
There’s no doubt that the valuation looks expensive. With the share price near 1,302p, the forward-looking earnings multiple for the current trading year to September 2024 is just above 28.
That’s set against City analysts’ expectations of a mid-single-digit percentage increase in earnings. So at first glance, the stock looks expensive. However, I’m not letting that put me off either. Historically, some of the best-performing stocks on the market have started big uptrends from high-looking valuations.
However, there’s no denying a high valuation can add risks for new shareholders. If a growth company misses it estimates, the market’s verdict can be brutal and a crashing share price can follow.
But Cerillion delivered some robust figure in its full-year report on Monday (20 November). And Hall spoke of “another year of strong growth and development”. Revenue, pre-tax profit, and the new customer sales pipeline all reached new highs.
Around 79% of total revenue came from existing customers. But the company also closed a new €12.4m deal with a top telecommunications company demonstrating “widening market appeal”.
Embracing artificial intelligence
In a sign of the times, the business introduced artificial intelligence (AI) into its products for the first time. And that evolution could enhance ongoing growth potential for the coming years.
Looking ahead, Hall said the market backdrop for the business is “extremely” favourable. In the current slower growth environment for telecoms companies, there’s a need to extract more revenue from existing assets and improve operational efficiency.
That situation plays into Cerillion’s hands. It’s a strong driver for firms to improve or replace their enterprise software, perhaps as investment in new 5G and fibre infrastructure.
There’s a net cash position on the balance sheet. And increasing recurring revenue supports ongoing cash flow. Meanwhile, the happy financial situation looks set to continue with a “record” back-order book and a “strong” new customer sales pipeline.
It’s instructive to see the share price hardly budging on results day.
Immediate earnings growth may not punch the lights out, but investors seem satisfied with the financial situation here.
Hall is “confident” about Cerillion’s multi-year growth prospects. And I see the high rating as a quality mark, despite the risks.
On balance, Cerillion looks well worth further research and consideration for a diversified portfolio now.