Too few 1s and 0s? UK tech companies attract international investors

The UK’s reputation for ‘old economy’ stocks could lead investors to overlook cutting-edge tech companies that are attracting attention from private equity investors. Nigel Yates, portfolio manager on the UK sustainable equity team, highlights some of the stocks that are creating a buzz.

The Nasdaq Index has been on fire during 2023, boosted by falling US inflation and the AI hype that has hit fever pitch. However, this enthusiasm has been somewhat lacking in the UK tech sector. Stubborn inflation and concerns about the domestic economy have led asset allocators to avoid the UK and its ‘old economy’ stocks.

This has left the UK trading at 30-year relative lows versus international peers, with seemingly no end in sight to the apathy.

Assumptions about ‘old economy’ stocks have led global investors to shun UK

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Source: Panmure Gordon/Refinitiv. August 2023.

Investor disinterest hides break-out UK companies

With sectors like banks, oil and utilities dominating the UK’s market capitalisation, it is understandable why at first glance the UK may seem a little dull. But dig, a little deeper and the ‘old economy’ moniker is far from the full story.

Take Blancco Technology Group (Blancco), for example, a holding within the AXA Framlington UK Sustainable Equity Fund. This is a company that is a global leader in data erasure and at the most recent update in July 2023, was growing revenue by more than 20%, powered by sustainability tailwinds and regulation.

Secure data erasure enables electronic devices to be reused, with the only viable alternative being to physically destroy and dump. The UN estimates that 53 million tonnes of e-waste are generated each year, with that figure expected to double by 2050.¹ This led sculptor Joe Rush to powerfully depict this crisis in his ‘Mount Recyclemore’ statue made out of old electronics for the 2021 G7 summit.

Pleasingly, companies are responding to this challenge by adopting more progressive sustainability practices around e-waste. It is certainly something that we are picking up at AXA IM through our company sustainability analysis and engagement, creating an opportunity for companies like Blancco, as the market is likely to grow in the coming years.

It seems we are not the only ones to have noticed the potential that exists at Blancco. Francisco Partners (a US private equity firm) has made a takeover approach for the business, excited at both the prospects for the business and the company’s (lowly rated) valuation. Clearly, some investors are looking to go global in the UK.

The downside of any bid is that investors and their clients lose the benefits that companies with a bright future can afford them. That is why any potential offer needs to be given serious consideration and shouldn’t be accepted at any price.  

In the case of Blancco, the bid at the current level appears opportunistic in our view and given that the company is trading above the offer price, the market seems to agree. Without an improved offer being made investors might be better off sitting tight as the company benefits from the powerful secular forces that are demanding a move towards a more circular economy.

There are more great tech opportunities for UK investors

GB Group (GBG) has also recently been the subject of takeover interest from a US-based private equity business. GBG is a global identity verification, location intelligence and fraud prevention company. The company offers software and data that helps organisations validate and verify the identity and location of their customers, an essential part of the functioning of an ever-increasing digital world.

Whilst the company has suffered in recent times from the post COVID slowdown of the ‘internet economy’, it has a long track record of solid growth and is currently trading at a significant discount to its average 10-year valuation. As online commerce moves back to its historical growth trend, so too should the prospects for this business.

Kainos is a global IT provider operating through two specialist business divisions, Digital Services and Workday Practice. Their Digital Services division develops and supports custom digital service platforms for public sector, commercial and healthcare customers. Their Workday Practice is focused on the deployment of Workday Inc’s finance, HR and planning software to leading organisations across the public, commercial and healthcare sectors. They are one of Workday’s most respected partners, experienced in complex deployment and integrations and trusted by their customers to launch, test, expand and safeguard their Workday systems.

Kainos too has a long track record of growth helped by the drive and determination of the UK government and organisations to simplify and enhance processes whilst extracting efficiency savings and reducing cost through the implementation of digital solutions, such as that for the DVLA.

Workday, too, continues to report robust growth and future prospects, which should provide continued tailwinds for Kainos as a trusted implementation partner of the software. More recently Kainos has begun to develop software itself to provide enhancements for companies that are already using the Workday system such as their Smart Test capability. Kainos have set an ambitious target for their Workday software business to reach £100m annual recurring revenue by 2026.

Whilst by UK standards Kainos is not considered a ‘cheap’ company, its valuation and share price performance has deviated meaningfully from that of Workday Inc recently and it can be held up as another example of an overlooked and underappreciated UK technology company.

Companies shown are for illustrative purposes only as of 31/07/2023 and may no longer be in the portfolio later. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.