MoneyTalks: Broker says Dropsuite is a Buy, and IPG Group to rise from renewable energy transition

Ord Minnett rates software stock Dropsuite a Buy as we transition to renewable energy
Taylor Collison slaps Outperform rating on electrical components provider, IPD Group

Dropsuite is undervalued, says broker

Broker Ord Minnett says software company Dropsuite (ASX:DSE) is an undervalued, profitable growth story after initiating a BUY rating on the stock with a price target of 33c (vs current price of 30c).

Founded in Singapore in 2011, the $200m market-capped Dropsuite is a cloud-based software platform offering backup, archiving, and recovery solutions for businesses.

The company specialises in protecting critical data from Microsoft 365, Google Workspace, QuickBooks, and others. Its products are distributed via a network of around 4,000 IT reseller partners globally.

Ord Minnett believes DSE operates at the intersection of three mega-trends, being:

(1) the rise of cybercrime,

(2) the migration of on-premise hosting to the cloud,

and (3) MSP (Managed Service Provider) industry growth.

“These themes have long runways and will continue to act as positive tailwinds,” said the broker.

Over the past seven years, Dropsuite has delivered extraordinary growth, with a CAGR of >70%, and has managed to do so profitably – delivering positive free cash flow in each of the past six quarters.

“Additionally, DSE’s management are prudent capital allocators, having built a ~$150m business on just ~$43m of outside capital (of which only ~$18m has been spent). We expect this performance to continue,” said Ord Minnett.

At the Inspire Conference 2023 in August, Microsoft provided a first look at its 365 Backup and Archive solution. DSE’s price fell 22% on the day and has not recovered since.

“However, based on our work and discussions with industry participants, we conclude that fears of any existential risk to DSE’s business are overblown. Accordingly, we believe the market’s scepticism is providing an opportunity,” wrote Ord Minnett.

This is because DSE’s Microsoft 365 (M365) Backup product is considered a product leader, as evidenced by its consistent outperformance vs peers on both a qualitative (industry awards), and quantitative (market share) basis.

In 2023, DSE ranked number 1 of its peer group for product features, satisfaction, experience and capability – for a fourth consecutive year.

“Further, our discussions with industry participants also highlight DSE as a product leader in the space,” said Ord Minnett.

IPD Group to benefit from renewable energy transition

Taylor Collison has slapped an Outperform rating on IPD Group (ASX:IPG), with a 12-month price target of $4.80 (versus current share price of $4.69).

The $485m market-capped IPG is a distributor of electrical infrastructure products to major construction and renewables projects nationwide.

IPG tracks its origins back to the 1950s and listed on the ASX in December 2021, raising $40m at $1.20 per share.

The company has seen growth especially since 2019 due to acquisitions and from expanding distribution relationships with equipment manufacturers. More recently IPG has been investing in expanding its capabilities and growing a national team of consultative salespeople.

Taylor Collison believes the electrical industry is booming, and that there’s a strong argument we are still in early innings amidst a major infrastructure project upswing, as well as a transition toward renewable energy systems.

“IPD offers a ‘picks and shovel’ exposure to the booming electrical sector without taking on individual project or contract risks common to contractors and other listed players,” wrote Taylor Collison.

“But there are more strings to IPG’s bow than simply riding project cycles. Since listing, they’ve expanded supplier and customer bases, entered new product categories, and have materially increased market share.”

Taylor also believes IPG’s management has an ambition to grow its share to multiples of the current level, and they are pursuing this with urgency.

“Their capital allocation record is excellent, and there’s a long runway to deploy capital to match the market leader’s offering. Shareholder alignment is high with management owning around 20% of the shares on issue.”

According to Taylor, IPD can grow rapidly through acquisitions.

“Past acquisitions have not only delivered growth and operating leverage, but also enhanced IPD’s capabilities and contributed to development of key supplier partnerships. We think this model is repeatable, and recent M&A looks set to replicate this model.

“IPD’s balance sheet is modestly geared, and capex requirements are minimal beyond funding working capital.

“A policy of retaining 50 per cent of earnings and access to capital markets will provide ammunition for future M&A,” noted Taylor Collison.