M&A powers sales growth at Iomart

Cloud services provider Iomart (IOM) is hoping that an increasingly complex technical landscape will lead more SMEs to seek out its IT expertise. Top-line figures suggest they already are – but investors evidently have reservations about the group’s ability to grow organically.

Shares fell 7 per cent on the day of the company’s annual results, even though revenue from cloud-managed services, its largest division, was up 17 per cent to £75mn. This outcome was driven by around 3 per cent organic growth and approximately £9mn in sales from three recent acquisitions.

Iomart has completed 24 of these deals in the last 14 years, with an average revenue of around £4mn each. In a statement, chief executive Lucy Dimes said it’s looking to be bolder with M&A and “target growing businesses [...] with revenues of more than £10mn in order to accelerate our growth trajectory”. 

According to analysts at Peel Hunt, the outlook for the current financial year is for low single-digit sales growth prior to any further acquisitions. “If this materialises it would be the eighth year in a row that Iomart has not managed double-digit organic growth,” they said.

Cash generated from Iomart’s operations was up 8 per cent to almost £37mn, while its cash conversion ratio was 97 per cent – both signs of a healthy business with scope for further purchases. Its pre-tax margin, however, was down slightly. 

The group’s consensus forward earnings multiple of 14x fairly reflects this mixed picture. In the longer term, demand for cloud services is likely to accelerate, but we’ll wait to see this potential reflected in Iomart’s sales. Hold.

Last IC View: Hold, 164p, 13 June 2023