Cavendish Tech Chat | Top Tech picks for 2025 (plus - please support Herald)

Shivering here in Blighty this winter, we are more focused on the myriad consequences of the government’s activity, and even more so of its inactivity (in a lack of support for the UK equity markets), rather than a new phone, car, or health gadget, all being showcased at CES, the annual January Las Vegas tech showcase. We read about it so you don’t have to, and there’s really not much of note this year, which is one of evolution, not revolution, and inevitable and frequent mentions of AI. I don’t think I’ve ever registered a CES with more derivative development, where nothing was really notable. 

 

Closer to home then, after failing to understand that IHT relief on AIM is not a “loophole” but instead provides an incentive to invest in higher risk UK investments, our indiscriminate pensions relief continues to support US capital markets. Enforcing pension fund investment specifically in the UK won’t work without legal challenges – but incentivising investment through relief, or withdrawal of reliefs at the point of investment if it is invested overseas, do. The inactivity of the current and former governments and the consequent poor UK valuation environment opens the door to short term opportunists like Saba Capital (see below), with severely negative potential consequences.  

 

Nevertheless we have, however, done our best to provide some top picks for 2025, of which our premium research subscribers will already be aware.  Among the “13 for 2025”, 4 are tech:  

 

Concurrent: Management’s transformation of the business and successful growth strategy implementation has become increasingly evident. Increased R&D investment has led to an expanding product portfolio and a growing number of design wins have been building strong, long-term revenue growth momentum. With strong order intake in 1H24 (+23% vs 1H23), the order backlog ended the period at £24.4m, with a healthy pipeline of opportunities across both Products and Systems. During FY23 Concurrent had concluded 8 major design wins with customers, adding a further 8 in 1H24 alone. The largest ever Systems order ($3.7m) was also recently secured in November 2024, after which a further $3.3m product order was secured from an existing US Defence prime customer in December 2024. The order book has been evolving to include a greater proportion of multi-period orders with an increase in scheduled and customer project milestone orders. Custom products are also increasingly going through customer specific modifications, helping secure additional non-recoverable engineering (NRE) revenue and positioning the business well competitively versus larger competitors. The group is demonstrably on a path towards becoming a materially larger business.

 

Eleco: Eleco is focused on scaling its best-of-breed SaaS solutions for the construction and maintenance of buildings and structures, with a diverse customer base in verticals from construction to public-sector healthcare, manufacturing, and retail, and global operations are focused on the UK, Scandinavia, Germany, and the US. The c$11bn global construction and design software market offers ample opportunity to expand with new and existing customers, where Eleco differentiates due to extensive experience in developing solutions for the built environment, strong customer relationships, and an excellent reputation (Construction Computing Awards Project Management Software of the Year for the 11th consecutive year). Successful migration to SaaS has driven recurring revenue to over 70%, and we expect the c90% gross margin and strong operational gearing, will drive robust growth in EBITDA, free cash flow, and shareholder returns. Eleco is trading on 12-month forward multiples of 3x EV/Sales with +15% growth, 13x EV/EBITDA with +21% growth, and 3% FCF yield – compared to the Architecture, Engineering, Construction, and Operations (AECO) software peer group on 8x EV/Sales with +11% growth, 26x EV/EBITDA with +13% growth, and 3% FCF yield;  and an active AECO software M&A market where transactions have typically taken place at 4-27x EV/Sales in the past 4 years.

 

Ebiquity: Ebiquity is at the start of a journey of reinvigoration. New CEO, Ruben Schreurs, has a strong track record of identifying industry trends, innovating scalable digital products, and delivering profitable growth. Several improvements can be made to optimise the business model:  a greater focus on sales culture through increased variable compensation incentives to drive top-line growth and longer-term reduce the highly fixed cost base; the cost base could be made more flexible using contractors given seasonal and cyclical demand dynamics; and seasonal pricing could be introduced to encourage demand in quieter periods and achieve higher margins in busier times. On an FY25E EV/EBITDA of just 3.7x versus data management peers on 10.1x, it looks remarkably undervalued and a prime candidate to more than double shareholder value over the next 12-months with proof of execution.  

 

iomart: iomart has trundled through the past few years, with pedestrian organic growth if any, and an increase in churn from a long tail of one particular product set (self-managed infrastructure) as it struggled to broaden and update the relevance of its historic product set. A few more small bolt-ons were not going to be sufficient hereon in. Nevertheless, M&A has always had a part to play in delivery of IOM’s strategy, and this year the group has fully grasped the public-cloud nettle through the acquisition of a high-quality, Microsoft-focused public cloud services provider. Atech was acquired for £57m in a competitive bid process, on a valuation which raised some eyebrows, and yet only equates to the Cavendish Tech 40 Index multiples for EV/Sales and adj EV/EBIT; and introduces 128 Microsoft credentials and a very strong UK presence and referenceability. Our point is that on a sum-of-the-parts basis, it doesn’t add up– with Atech’s LTM performance valued at market multiples and giving an unchallenging 1.7x EV/sales and 13.9x EV/Adj EBIT, that leaves old IOM on 0.7x FY26 EV/sales, 5.9x EV/Adj EBIT. Even if you’re not managed services, or iomart’s, biggest fan, a correction is due. 

 

Before I go, I will hark back to the comment made above, referring to the poor valuation environment. While it gives space for our top picks to improve without testing the valuation peaks of our valuation table above, it is causing yet further issues. Whereas M&A of strong but undervalued UK tech assets has diminished investment choices, now the funds themselves are at risk. 

 

Back in 1995, as a graduate surveyor, I used to collect the rent for the charitable estate that owns Charterhouse Square, ‘phoning the tenant companies and sometimes collecting in person. That was when I first met Katie Potts, who had just set up the Herald Investment Trust. At the time I obviously had no idea quite how important Katie would be to the career path I eventually chose, and to the UK technology environment. 

 

Katie and her team at Herald have been a fundamental part of UK Tech since the Trust’s IPO in February 1994 with £65m of capital. The Herald Investment Trust’s current value of £1.3bn includes core holdings and support for many companies which have been champions of UK tech (see Imagination Tech’s Sir Hossein Yassaie’s letter in the FT highlighting Herald’s support as key to the four companies involved in the development of the iPhone, for example).  Herald has supported 584 fund raisings and 66 UK IPOs since 2007. However, Saba Capital, a US hedge fund has targeted 7 UK Investment Trusts, including the Herald Investment Trust, which would involve removing the HIT board and taking over the fund management. While Saba has promised to return cash to investors who seek it, the liquidation of Herald’s holdings would take place “after at least a year”, creating an overhang in the underlying often illiquid holdings in many stocks, and over a protracted period. The NAV would collapse, making the promise of a return of 99% of NAV (since it would be the NAV at that time, not now) misleading. There would not only be strongly negative consequences for those stocks, but also the valuation context for the UK listed tech environment, as well as further denuding the UK of a core participant in funding growth in smaller tech businesses, a hardy band who are already dwindling in number.

 

This would be a tragedy – and we strongly encourage vocal support from as many market participants as possible in highlighting the important contribution and value that the Katie and the Herald Investment Trust have made thus far, and hopefully for many more years to come.  

 

Happy Friday