Talking Tech

Talking Tech is produced by the Progressive Tech Team of George O’Connor, Ian Robertson and Gareth Evans. Our aim is to bring you up to date with the tech news cycle each week. We comment via blog and podcast on the slings and arrows of the sector at a time of huge change.

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April 3, 2024

US and Them valuation: “Physician heal thyself”

Colleague Ian Robertson opines that there is a lot of “posturing and noise about the issue of UK-listed stocks trading at huge discounts to those in the US”. We are reminded to dust down our valuation sheets.

Mr Robertson argues that cross-border valuation should factor in the effect of exchange and interest rates, accounting, market cap., free float, liquidity as he adds to a long list. We concur. Yet the UK has a small tech constituency, analysts value companies relative to themselves (Y/Y compares) and peers. A UK tech company will not have a domestic peer, so we are forced to scan the horizon to uncover a look-a-like. It is tiresome. Establishing global cohorts can lead to companies being measured on a ‘better’ basis but it can also lead to valuation mean revision across a cohort. From an operational perspective that may be wrong. The argument that UK companies can go to the US and (hey presto) supersize their valuation is a myth. That is what the numbers say.

What the numbers tell us

In the light of our valuation review (see the data section of this report), we conclude:

  • On a sector-wide view the wider basket of UK tech companies (n=92) trade at a discount to their US brethren. Over time the valuation jaws have opened.
  • In general, the basket of US tech offer better growth, better ‘Rule of 40’, better EBITDA and FCF margins than the UK.
  • The US group contains some rockstar companies – look and dream Londoners.
  • Looking at specific companies shows that some UK techs trade in line with US peers, others at a discount, more at par.
  • The data points are too messy to shovel up concrete conclusions beyond ‘sloganeering’.
  • Acknowledging Mr Roberson’s point suggests that there may be some fundamental reasons why US companies score a better valuation – i.e. the companies may be ‘better’ or just different.
  • While judging ‘better’ seems a tad subjective, Net Promoter Score, NPS, levels that field. Let’s take an example: Sage shares trades in line with US peers. Using independent NPS (source: Comparably) Sage scores worse. In addition, to better understand product progression, let’s review cloud migration. This should be a pressing issue for this previously ‘desktop’ cohort, Sage has the slowest migration with 28% of revenue being ‘cloud native’. Here we may have an illustration where peer valuation gets to a conclusion not warranted by the fundamentals.
  • Let’s pick on Computacenter. From a valuation perspective its shares trade roughly in line with peers. Peer review shows that Computacenter has the best operating cash conversion (i.e. measuring the ability to generate cash out of the P&L). As cash is the ‘thing’ for valuation Computacenter merits a premium.
  • How about Darktrace? Here we have visibly slowing ARR growth. This suggests a discounted valuation given that this is a critical KPI and that the cohort ARR growth has since turned the corner . . . (tah dah) it does.
  • Meanwhile over at Kainos. UK investors have long valued T&M businesses higher than global peers. These are very transparent business models with highly visible input KPIs – London likes ‘forecastability’. As all T&M companies face the same challenges around these operational inputs, irrespective of geography, so they should all be valued similarly ceteris paribus. Interestingly London has the reverse as plcs Made Tech and TPXimpact shares trade on deep discounts to the cohort. Have investors forgotten that ‘what is good for the goose is good for the gander’?
  • Note: We acknowledge that Exchange venues have different styles, and grew partly because they serve local markets but also because they offer a bit of comparative advantage. So, for example the UK market ‘leans into’ dividend and income from techs (UK FY1 div yield average since June 2016 1.8%, US 1.1%), the US steers towards stronger ‘growth’. Also the UK market is a global leader in smaller companies (<£1bn market cap) which would not be viably listed entities in the US. So when picking a venue think about what the locals appreciate.
  • Knowing any of this will not change the opinion of companies who are intent on listing in the US (adios, amigos). Nor will it change thoughts of those US companies looking to list in London (howdy, folks).
  • Our list is not exhaustive, it could be but we make the numbers concur with Mr Robertson. In a further ‘hat tip’ we borrow Ian’s conclusion “For all the noise, we are in fact none the wiser about the nature of the discount and we certainly don’t have anything that tells us the discount won’t close or expand. (Sorry, this is an exercise in thought and logic, not sentiment or wishful thinking.)”

The data

Current tech valuation heatmap

Source: Company data, Yahoo Finance, Analyst

US & UK valuation gap (FY1 EV/EBITDA) since Jan 2016

Source: Company data, Yahoo Finance, Factset, Bloomberg, Analyst

US & UK: Selected other factors

Source: Company data, Yahoo Finance, Factset, Bloomberg, Analyst

US and UK Index performance cal2024 YTD

Source: Yahoo Finance, London South East, Bessemer

Selected company cohorts (FY1 PE x)

Source: Company data, Yahoo Finance, Factset, Bloomberg, Analyst

Sage and Cohort NPS scores

Source: Comparably

Computacenter and Cohort Cash conversion (%)

Source: Company data, Yahoo Finance, Analyst

IT Service (T&M) KPI dashboard

Source: Company data, Analyst

Darktrace and Cohort ARR Y/Y growth rates

Source: Company data, Analyst

UK & US FY1 Dividend yield (%)

Source: Company data, Yahoo Finance, Factset, Bloomberg, Analyst

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Opinions contained in this communication represent those of PERL and/or our affiliates at the time of publication and PERL does not undertake to provide updates to any opinions or views expressed. PERL does not hold any positions in the securities mentioned in this communication, however, PERL’s directors, officers, employees, contractors and affiliates may hold a position,  and/or may perform services or solicit business from, any of the companies or related securities mentioned.

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