AIM listed Nexus Management is an IT stock with a proven product
The group has a proven and profitable track record
Recent sales have exceeded even the management's expectations
Profits are racing ahead even before the roll out of business marketing
Earnings are set to multiply in the current year
A strong management team completes the picture
Nexus is a tiddler with massive potential
At 0.89p Nexus is a buy with a 12 month price target of 3p.

As both I and the Fridgemeister of WatsHot.com have said on many an occasions, that smaller cap tech is a great place to park your cash right now. Ratings are undemanding as the market doesn't appear particularly interested. This will change in due course and when it does, today's tip, will be one of the chief benefactors. Of course this recommendation does not rely on a correction in an entire segment of the market, its earnings growth alone merits a substantial re-rating.

With both UK and US based operations centres, AIM traded Nexus Management is on the cusp of a rapid ramp up in sales and profitability. It is outperforming even its own ambitious expectations and with a superb management team at the helm, this is a company that will continue to deliver. At 0.89p, Nexus is a sub-penny stock which has just outgrown the Microcap league and whose shares I expect to treble within a year. The stance is "buy" at up to 1.25p with a 12 month target price of 3p.

Nexus - the business

AIM traded Nexus Management is a fast growing, profitable, specialist IT Managed Services Provider operating in the UK and the US. Through its data centre in Maine and call centre in Scotland, Nexus offer consumers and smaller business customers the same calibre of service that FTSE 100 companies receive in such areas as Data Storage, Disaster Recovery, Help-Desk, Remote Server Management and Wide Area Network Management and Monitoring.

Following the acquisition of a strategic stake in US based PD Financial in conjunction with a three-year marketing deal, Nexus Management's earnings are set to soar. Having already proved its status as a profitable, high growth managed service provider, the group is on the cusp of a rapid ramp up in sales and profitability.

NexMail is the name of the group's fully managed email platform, which gives smaller businesses the full corporate email experience without the capital expenditure. Billed on a "per user per month" basis, the service incorporates all of the features an enterprise user would expect such as Windows Mobile and Blackberry support, Spam and Virus filtering and archiving. Other services include, remote backup and disaster recovery, which allow for fast and efficient transfer of customer data to the Nexus datacentre where multiple copies of the data are stored. Network management and monitoring allows customers to pass the metaphorical networking buck to Nexus, which monitors and manages all aspects of networking for clients world-wide. Hosting and Co-location offers customers a safe and secure datacentre for hosting of mission critical servers. Unlike other “dark” sites the Nexus data centre is manned by trained staff with people always available to assist. The group certainly doesn't fall short on service.

The company recently bought a strategic 24% interest in a US marketing company, PD Financial, which sells electronic goods to consumers using private label financing through a partnership with GE. Nexus and PD Financial have signed a marketing agreement together, which will accelerate Nexus’s US penetration of both consumers and small businesses and will significantly add to Nexus’s top line growth. PD Financial is a privately held direct marketer of brand-name electronic products such as HP, Compaq, Panasonic, Sony and Apple and also has a five-year private label credit card agreement with GE Money Bank, with an initial credit facility of $100 million. PD Financial uses highly sophisticated targeting to identify which consumers are most likely to make purchases and then offers a combination of both brand name goods and attractive finance to these potential customers.

Current trading

Operating activities for the company, for the six months ending September 2006 produced revenue of £1,430,000 an increase of 17% over the previous six months and profit of £54,300, an increase of 63% over the previous 6 months. Meanwhile, the impact of the PD Financial agreement looks like it could be very significant indeed in the current year. In October, PD Financial generated revenues of $3.3 million, including sales of 1,394 new computers. Significantly, it sold 445 new Nexus Management help desk service contracts during the month even though the deal was in place for only half of the month. Nexus Management receives a net $120 upfront from each Help Desk customer for 120 minutes of off peak help desk support. Not bad going at all. From my conversations with the company, it is my understanding that PD Financial increased its mail volume in November and should have generated even higher computer sales than in October, which in turn I would hope has meant further Help Desk contracts.

Management

The group is headed up by chief executive Roger Richardson, who originally begun his tenure with the company as sales director in September 2002. His previous experience was in building software businesses in Europe for corporate luminaries such as Legent, Serena and Visionael. In 1999, he was appointed vice President of International Operations at US group Serena. Richardson is ably assisted by finance director Peter Weller, a qualified charted accountant who previously held a senior position at Coral Racing. Making up the numbers is venture capitalist and banker Boris Adlam, a man that gave a very impressive pitch on Trading Places a couple of weeks back. Adlam is not a techie but he understands numbers.

Financials & Forecasts

When we consider what has been achieved in such a short period of time, you can perhaps see why the year ahead is so very exciting. Next year too is another story entirely, with further growth expected from business marketing. I should point out that the results detailed above only reflect consumer marketing and do not take into account the anticipated move by PD Financial into business marketing (B2B) planned for 2007, which is Nexus's traditional area of strength. This reinforces my optimism following its 24% investment in this fast growing company.

For the year to 31st March 2005, the company reported a loss of £100,000 on revenues of £1.2 million. The company has since changed its year end and so the last reported results covered the interim 12 month period to 31st March 2006. Revenues were up 100% to £2.473 million with a post tax profit of £93,108 recorded. And so, for the 12 months ending 30th September 2006 (year just ended) the group should deliver pre and post tax profits of £290,000.With the move into business marketing (B2B) coupled with the continued benefits from its agreement with PD, I see no reason why profits this year won't top the seven figure mark. On a conservative basis, the 12 months to 30th September 2007 should produce a profit if £1.1 million, equating to earnings of 0.1375p per share. For next year, again based on highly conservative variables, Nexus (if it remains independent) should be topping 0.2p per share in earnings. But of course in addition as PD ramps up its sales the value of the 24% stake in that enterprise will also increase. I would not be surprised to see PD list on Nasdaq in due course and I would suspect that 24% of a quoted PD would easily be worth almost as much as Nexus' current market value. That, however, is a speculative bonus.

Conclusion

Nexus Management is a fast growing, highly profitable group with a great management team and numbers that read like a dream. Having established the infrastructure, the company is now poised to benefit from a rapid ramp up in both sales and profitability. A high growth tech-focussed business with a very high cash conversion rate such as this should comfortably attract an earnings multiple of at least 15, and so based on my conservative numbers for this year alone, we have a starting point of over 2p as an initial target price (i.e. what the shares should be at now). I consider my forecasts for 2008 to be conservative also and on that basis by September 2007 as we enter the next financial year the shares should be trading at, at least, 3p.  An IPO of PD would add massively to the upside but let's not speculate. As things stand: Nexus Management is a "buy" at up to 1.25p with a 12-month target price of 3p.

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