Looking for Recession-proof Investments

Along with ‘e-banking’ that was going to change the face of banking and ‘e-tailing’ the face of shopping, ‘e-learning’ was going to change the face of learning. And, to be fair, it has.

The trouble is e-learning has not made much money for shareholders. I still bear the scars from an unprofitable entanglement with iTrain, now called ILT Solutions.

And so it was that I approached another company in this area with a certain degree of caution. This is Intellego. Since its AIM flotation four years ago, it is yet to make a profit.

But it is getting close.

It is forecast to break even this year, before reaching the dizzy heights of a £400,000 profit in 2009/10. Such a profit would represent two-fifths of Intellego’s £1m market capitalization. This is fascinating, but the shares have a shocking bid/offer spread of 0.5p-1p.

This means that if you bought up to the ‘Normal Market Size’ of 3,000 shares, it would cost you £30 worth of shares – but they would immediately have a sale value of only £15. A 50% loss straight away – and that’s even before dealing expenses.

Taking steps in the right direction

But still, these things can change. Intellego seems to be going the right way about increasing the size of the company and getting to a point where investors could take it seriously.

When it came to AIM in 2004, Intellego was just a distributor of other companies’ software. This was low margin and, as chairman Angus Forrest explained to me, if Intellego was to boost its profitability it needed to be selling products that it had devised itself.

E-learning is about training while sitting at your computer (or even at a cash till). It’s an interesting market, as it’s a good deal cheaper and more efficient than trying to gather together all staff into one room for a session conducted by a professional trainer. Furthermore, such is the non-stop barrage of rules and regulations, that professional compliance training is to a large extent a recession-proof necessity.

That, anyway, is the theory.

Intellego’s interim statement yesterday was reassuring. Underlying sales growth was 20% and Forrest said that, while customers were taking longer to make their mind up, Intellego is yet to see any business cancelled or otherwise lost as a result of the economic climate.

But Intellego’s sales growth has more to do with the successful acquisitions that it has made in the past than with the economy. At the end of 2006 it bought the Newcastle-based e-learning provider eMedit, which at the time was a ‘financial disaster’ but it did bring the skills necessary for the production of e-learning courses and a customer base focussed on the highly-regulated pharmaceutical industry.

Last year Intellego then bought retail-focused Copia. Clients include B&Q and HMV. This year Intellego snapped up Professional Development Partnership, which works with the financial services industry and, from the receiver, Zenosis, which had a library of pharma compliance products.

The acquisitions have paid for themselves quickly – the result of some overhead reduction, but above all by boosting sales. Small private companies can lack the credibility necessary to secure large contracts, but with Intellego’s backing they have been able do so.

Copia, for example, has doubled its annual turnover, won important business with Boots, Three Mobile and Spec Savers while Intellego supplied Home Information Training Packs to seven of the top ten providers, including the market leader Rightmove with whom it has also signed a three-year deal to supply compliance and best practice e-learning courses to estate agents.

Confident of a swing into profit

These additional sales require little extra investment, and this is one reason why Forrest is optimistic that Intellego can achieve a significant swing from loss to profit.

He also believes that the business is now of better quality, relying much less upon distribution for third parties, and much more upon the sale of its proprietary courses in return for an annual license fee and upon associated services such as implementation.

Pearson, RBS, Bradford & Bingley and Lafarge have all placed repeat business with Intellego this year, while it also has opportunities for cross-selling particularly to customers in the pharmaceuticals industry.

So, for Forrest that maiden profit is now in sight, and he told me that he is confident that Intellego can achieve £400,000 profit ‘unless there is a complete meltdown.’ Training budgets have always been one of the first things to be cut in previous recessions. Will it be different this time? The next twelve months will provide the answer.

Meantime, I have found three recession-proof penny shares. They form my “bounceback” report that I’ve been working on the past few months. This report is being signed-off behind the closed doors of our compliance department as I write.

I’m going to chase them now. I’m confident that I’ll have it ready to send to you by later on today.

Thanks for being so patient! It will be worth the wait, I promise.

Until then,

Regards,
Tom Bulford
for The Penny Sleuth

P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.

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