ACSO bought

This week I bought an initial holding in Accesso Technology Group, following the announcement of its acquisition of TE2.

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Accesso Technology Group

Accesso is a developer of ticketing and virtual queuing technology. It sells its services to theme parks and the like. It’s origins come from developing unique IP in virtual queuing technology called Lo-Q (so customers don’t have to queue up for rides at theme parks) but since then it has expanded through acquisition into the related market of ticketing. I like the idea of investing in a UK technology company that is a global leader in figuring out solutions to the quintessential British passtime of queuing. However, this wasn’t a major factor in my decision to buy.

Quality

Accesso is a growth business in that it is relatively immature but has invested heavily in its potential to grow. This is a lot of what you are paying for when you buy the shares. This is of course true of many of the businesses that I invest in, but to me Accesso seems particularly ambitious to dominate its market. I like this but it probably makes it somewhat higher risk than some of my other investments. I think it looks like a high quality business:

  • Business economics: Accesso’s returns on capital and margins are not obviously very attractive – both are currently at about 10%. However, I believe these figures are likely to substantially understate its profitability in the future. This is because it has been investing very heavily in R&D, acquisitions of complementary businesses and in globalising its business so it can support customers across the world. The underlying business model of partnering and revenue sharing with its customers looks likely to be very profitable and cash generative, with lots of repeated revenues at low incremental costs. Cash generation is currently pretty decent.
  • Track record: Accesso has an excellent track record, though is still a fairly young business. It has experienced quite stellar growth with its share price having appreciated almost 60,000% from its low point, around 12 or 13 years ago. There’s been some little ups and downs but it’s clearly been doing something right so far.
  • Competitive advantage: Accesso’s main competitive advantage comes from the technology it has developed and continues to develop further. Its products currently appear to be the clear market leaders. While it is possible for competitors to develop similar competing products, Accesso’s experience and the scale of its investment in R&D and the infrastructure required to support its products likely gives it a considerable competitive moat. In addition, it is likely to benefit from its reputation and the customer relationships it has developed.
  • Growth prospects: it has excellent growth prospects. Accesso’s existing contracts are based on revenue sharing with its customers so it will benefit from their growth. In addition, there is still a lot of scope for it to sell new products or cross sell to existing customers as Accesso develops its relationship with them. There also appears to be a large addressable market of potential new customers.

Pricing

The price has fallen over recent weeks in advance of the announcement of the acquisition of TE2. At the current price the valuation appears attractive to me given the growth prospects.

I like the sound of the acquisition. TE2 has technology aimed at analysing customer behaviour and personalising their experience. I have to say that I don’t get a very clear sense of exactly what this means in practice from looking at its website, but it seems very complementary to Accesso’s offering so there should be opportunities for cross selling and/or integrating the technology into Accesso products. From a strategic perspective, it also keeps Accesso ahead of he competition (as well as taking out a potential future competitor) The acquisition seems highly priced given TE2 current profitability but I’m not bothered by this as TE2 is growing fast and because I see the acquisition as more of an investment in technology than in profit/cash flow.

Share price momentum is not as good as I would normally hope for in an investment. However, I feel that there should be support at around this price: partly because the placing to fund the acquisition was made at around the current price, suggesting there is¬†institutional support at this price and partly because the share price spent a long time building a base at around ¬£16 before breaking out earlier this year. So I’m hoping for it to bounce but if it falls much below ¬£16 I’m out. Normally I prefer to buy stocks breaking out with strong momentum but I’ll see how this goes.

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