Some readers will remember the name Sopheon (SPE:AIM) since we have updated many times on our previous Great Idea from 2 June 2017 at 330p. We actually first flagged the company in August 2016 at 202p.

The shares have been on a rampant run, nudging above £10.00 twice this year. We still think there is very decent upside from current levels. Before we explain our reasons, it’s first important to understand what Sopheon does.

The Surrey-based software company helps streamline the research and development process for clients and provides product lifecycle management tools. From early roots as a provider of process automation tools, it has emerged as an innovation management solution to complex manufacturers.

Sopheon has more than 60,000 users across 50-plus countries worldwide, featuring the likes of NASA, Merck and BASF. Its Accolade platform is used on innovation projects worth an estimated £25bn.

Analysts at stockbroker FinnCap calculate a fair value over the next year or so of roughly £13.00, and here’s why we agree.

EXPANDING AND MORE PREDICTABLE

Sopheon is successfully expanding beyond its traditional industrial engineering-type space. Areas like consumer goods, food and drink, and technology development are proving to be useful new growth areas, while the company is also closing watching insurance, automotive and other industries.

Bit by bit Sopheon’s revenues are becoming more predictable. Half year to 30 June 2018 figures reveal recurring revenue grew to $13.7m from $10.5m a year earlier. Recurring revenue  has roughly doubled in about three years.

Once you factor in contracted maintenance income from multi-year licences, $27.2m of the current full year’s $31m forecast revenue is effectively in the bag, and that’s before the typically busy fourth quarter for new licence sales.

FinnCap suggests current earnings expectations are pitched conservatively. That means there is ongoing potential for guidance upgrades, something the company has been able to do multiple times over the past few years.

Forecast $0.432 earnings per share (EPS) this year will be less than the $0.472 achieved in 2017 but not something to worry about. It goes back to the conversion last December of loan notes into equity, a one-off event that will not impact the financial performance beyond 2018. FinnCap’s 2019 estimates call for EPS of $0.537 on unbroken revenue growth to $35m.

The business had $15.5m net cash at the end of June this year (2017: $6.6m), forecast to rise to $21.4m by the end of 2019. It has also started paying dividends, although this year’s prospective yield is very small at 0.3%. (SF)

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