One AIM stock that’s had a great run recently is Cerillion (LSE: CER), the billing, charging, and customer relationship management software solutions provider. Since I listed the company as my top micro-cap stock for November, its share price has risen 93%. Meanwhile, over the last 12 months, the stock has jumped 133%.
I looked at Cerillion on a few occasions last year, and was always impressed by the stock. However, I never bought it for my own portfolio. It’s fair to say I’m now kicking myself. Is it too late for me to buy? Let’s take another look at the investment case.
Cerillion: strong growth in H1
Earlier this week, Cerillion posted a half-year trading update for the period ended 31 March. And the numbers were very impressive, exceeding management’s expectations.
For the period, revenue is expected to total around £12.8m, a 25% increase on the same period last year, while adjusted EBITDA is expected to be approximately £4.8m, a 77% increase on the figure posted last year.
Cerillion said this performance – which represents its strongest-ever six-month trading period – reflects three major factors: on-going work on new customer implementation projects, strong demand from existing customers, and two major contract wins totalling £18.4m.
Looking ahead, Cerillion is optimistic about the future, also saying its sales pipeline remains “strong.” It also said the prospects for the remainder of the financial year are “very positive.”
This update shows Cerillion has a lot of momentum right now. It suggests to me the company is likely to continue generating growth in the near term, which is what I want to see as a prospective investor.
A high-quality business
Looking at Cerillion’s financials, there’s a lot to like, in my view. For starters, the company has been quite profitable in the recent past. Over the last four years, return on capital employed – a key measure of profitability – has averaged 12.7%.
Secondly, the balance sheet is strong. At 30 September 2020, long-term debt was just £4.7m. By contrast, total equity was £16m. Third, the company has a good dividend growth track record. Since paying its first dividend in FY2016, the company has strung together four consecutive dividend increases.
Overall, Cerillion appears to be a high-quality business that’s profitable and financially sound. It’s exactly the kind of company I like to invest in.
Risks
What about the risks? Well, one risk is the stock’s valuation, which has risen on the back of the recent share price rise. Currently, analysts expect Cerillion to generate earnings of 17.2p this financial year. This means, at the current share price, the forward-looking P/E is 33.3. That’s not an outrageous valuation, in my view, but it does increase risk.
Another issue is that recurring revenue is still relatively low. Last financial year, for example, recurring revenue represented 29% of total revenue. Ideally, this would be higher and that would reduce top-line uncertainty. However, it’s worth pointing out that recurring revenue did jump nearly 60% last year.
Cerillion shares: my move now
Overall, I like this stock a lot. But I’m hesitant to buy now after the huge share price rise over the last few months. So, for now, I’m going to keep CER on my watchlist. If the share price pulls back a little, I may add the stock to my portfolio.
