If you are looking for a high quality GARP - growth at a reasonable price - stock with a strong position in an untapped sector then Fadel (FADL) fits the bill, generating robust growth, attractive 60%+ gross margins and predictable revenues.
After raising £8m at 144p a share in its April 2023 IPO, the board is on a mission to more than treble turnover organically over the next 5 years from an estimated $14.6m this year (up +11.4% on 2022) to $50m by 2028 - a 27% compound annual growth rate. Add in some synergistic M&A, and we could ultimately be talking about a $100m revenue business.
So what does Fadel do? Well, the firm is a leading brand compliance, rights & royalty management software platform, serving a host of blue chip clients such as Hasbro, Whirlpool, Marvel, L’Oreal, Coca Cola and Pearson.
Its two software divisions - IP management and Brand Vision - significantly improve client productivity by efficiently processing complex royalty contracts & licensing requirements, and help them achieve outstanding returns on investment. Behind that is the use of artifical intelligence to empower marketers to both manage vast libraries of digital content and monitor associated usage rights for online infringements.
In the meantime, though, there is still some wood to chop, which was the main motivation behind the recent AIM listing. The listing is intended to support plans to invest in growth via new hires and technology over the next 2 years, before becoming cashflow and adjusted PBT positive in 2025 on forecast turnover of $22.2m.
In today’s first half update, it said that current trading was said to be in line with FY23 expectations, after delivering first half revenues of $5.3m - versus $6.7m in H1 2022 - with an estimated $9.3m to come in the second half. And with net cash of $7.3m at the end of June it has ample funding to execute its long term strategic objectives, supporting broker finnCap's 260p a share price target.
Although the $14.6m FY23 sales target will be skewed to the second half, that reflects positive growth expected from licensing and support renewals and net new sales, evidenced by a number of new contracts being signed - in Life Sciences, Publishing and Tobacco - which together have added $1.5m of recurring contracts to the order backlog.
These type of deal typically run for 3 years and are worth $250k-$500k a year each. This strong exit run-rate will provide real momentum heading into 2024, especially as 80% of revenues are recurring in nature.
One point for investors to bear in mind is liquidity. Post IPO, Fadel's stock is ‘REG-S’ restricted until April 2024. Meaning some UK brokers including Hargreaves Lansdown are unable to separately identify US citizens from UK nationals, and so can't trade the shares until the REG-S status is lifted. That said, this is not an issue for either AJ Bell or Interactive Investors.
CEO Tarek Fadel commented: “I am pleased to report that trading for FY23 continues to be in line with expectations. We are delighted about our future prospects.”