SFT
🔄 Software Circle, a UK micro-cap, pivoted from digital printing to become a serial acquirer of vertical market software (VMS), aiming to replicate the Constellation Software model on a smaller scale.
🤝 Led by an experienced board including individuals from PNR Real Value, Chapters Group, and Judges Scientific, the company benefits from significant expertise in the serial acquirer space.
📈 Despite the drag from its legacy printing business (Netel), the company shows high growth potential through acquisitions bought at attractive multiples (4-6x EBITDA), though it carries higher risk due to its small size and strategy execution dependency.
@adriarivero:
“Software Circle is a company I previously mentioned. It’s interesting, more novel due to its business model pivot. It was a small UK company (£120M market cap) in digital and physical printing. It gradually shifted, inspired by the PNR Real Value fund manager who invests in serial acquirers, to become a serial acquirer buying vertical market software (VMS) companies, like a tiny Constellation Software (with caveats). It buys small software firms, like driving school software or hotel software. The idea is it’s much smaller than Constellation, so potentially has much more growth ahead. It trades on the UK’s AIM market. They changed the name, so the chart might look odd. They buy small software companies in the UK, which is attractive now due to low valuations. They target high gross margin, niche businesses, paying around 4-6 times EBITDA, which is attractive. The board is key: the CEO/CFO lack VMS expertise, but the board includes Matías from PNR (Chairman), Mark from Chapters Group (representing them), and recently, the CFO of Judges Scientific. That’s a lot of acquisition experience. A major catalyst is its small size; just 2-3 acquisitions can mean 50-100% growth. But risks exist: strategy execution, need for more acquisitions. The legacy printing business, Netel, is still about 50% of sales, has lower margins (12% vs 30-50% for software), and declined last year, masking the growth of the acquired software part. As software acquisitions grow, overall margins should expand significantly. Catalysts: dilution of Netel, rapid growth from small acquisitions, central costs diluting over higher sales. Ideally, they’ll fund future buys with cash flow, not just debt. We need to monitor ROIC, track record, and acquisition quality. The outlook suggests reaching £25M sales at a conservative 15% EBITDA margin. It trades at a high multiple, like Constellation, due to expected growth. The stock grew ~50% since I bought it, but it’s very illiquid and volatile. Idea came from Daniel Porté, a course professor.”
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