Elecosoft plc

www.elecosoft.com TICKER: ELCO     EXCHANGE: AIM

Elecosoft is a developer of on-premise and Cloud/SaaS software for the Architectural, Engineering, Construction and Operator (AECO) and digital marketing industries. Its award winning 6D solutions (>100,000 users) cover project planning, estimating, design/CAD, visualisation, site operations and Building Information Management (BIM).

LATEST REPORTS

 
Shire acquisition is 'amazing'
Published: Sep 12 2018

Elecosoft is a developer of on-premise and Cloud/SaaS software for the Architectural, Engineering, Construction and Operator (AECO) and digital marketing industries.
‘BuildTech’ software is digitising the entire property/infrastructure life cycle (say 75 years). Covering initial design, build and commissioning, right through to maintenance, repair, upgrade and final demolition. Strangely, though, this seems to have been somewhat overlooked by UK investors, despite the sector expanding at a healthy 11% clip and being worth c. $6bn pa.
This apparent indifference however is not shared abroad, where overseas BuildTech stocks trade on EV/turnover multiples of >5x. In our view, correctly reflecting the software’s outstanding value to end-users. It should only be a matter of time before ratings of similar UK listed peers like Elecosoft catch up. Particularly if the company continues to deliver impressive results, as it did once again this morning. 
H1’18 adjusted EBIT and operating cashflow climbed 33.5% (to £1,755k) and 35.8% (£2,287k) respectively on revenues of £10,554k, up 7% LFL (constant currency vs 5.4% reported). Similarly, underlying EPS rose 38% to 1.8p, the dividend was hiked 40% to 0.28p, EBIT margins widened to 16.6% (13.1% LY) and cash conversion came in at a better than expected 107% (LTM).
Additionally, this organic growth will be enhanced going forward by the transformational acquisition of Shire Systems on 4th July for £5.1m (cash/debt free) - equivalent to modest 2018 EV/revenue, EV/EBIT and PE multiples of 2.5x, 6.5x and 8.0x. Executive Chairman John Ketteley, who is usually pretty reserved, saying that Shire is absolutely “amazing”.
Ultimately, the deal could generate synergies many times higher than the £5.1m price. Clearly this won’t happen overnight, albeit by offering total cradle-to-grave solutions, we believe Elecosoft should be able to churn out double digit top line growth, 20%+ adjusted EBIT margins and 90%+ cash conversion across the cycle. 
So what does this mean with regards to the valuation? Well, based on the astute Shire purchase and substantial prospects ahead – not least, cross/up-selling, expansion outside of Europe and entry into adjacent verticals – we calculate the stock is worth 110p/share (vs 90p before) using a range of benchmarks and 12% discount factor.
 
How to profit from the surge in BuildTech
Published: Aug 02 2018

How can an outside investor gauge the quality of a company’s software? Speak to experts, test the product, ask clients and/or review industry awards/journals. Elecosoft scores highly on all of these counts - yet to us what really stands out is its customer base.
All told, ELCO’s software is used by >90% of the UK’s top 100 construction firms & 7/10 biggest retailers; 40 of the top 50 Swedish & 14 of the largest German construction groups; 70% of the EU’s flooring manufacturers and 15% of 400 largest US contractors. Generating retention rates of >90% and almost 60% recurring revenues (Support, maintenance & SaaS).
The good news from this morning’s positive trading update, is that the Board are well on track. H1’18 revenues climbed 7% LFL in constant currency (5% post forex headwind) to circa £10.5m (LY £10.0m) with adjusted PBT jumping 45% to £1.45m (LY £1.0m), on the back of favourable operating leverage and continued tight cost control.
Consequently, we reiterate our FY18 sales and EBIT forecasts of £22m and £3.6m respectively. Albeit, note that these are tilted towards the upside, especially given recent £ weakness vs the €/$. Likewise, H1 cash generation was strong, ending June with net funds of £2.6m compared to £1m at the start of the period – equivalent to cash conversion of >105%. Plus, even after last month’s strategic acquisition of Shire Systems for £5.1m (cash/debt free basis), we expect net debt to close Dec’18 at a modest £2.8m, or 0.62x EBITDA.
Similarly, while our top level 90p/share valuation remains unchanged, we once again emphasise that there is possible upside here too. In fact, despite this year’s re-rating, the stock appears cheap vs peers who trade on higher EV/sales, EV/EBIT and PE multiples.
 
A 'match made in heaven'
Published: Jul 05 2018

Elecosoft is a developer of on-premise and Cloud/SaaS software for the Architectural, Engineering, Construction and Operator (AECO) and digital marketing industries. Its award winning 6D solutions (>100,000 users) cover project planning, estimating, design/CAD, visualisation, site operations and Building Information Management (BIM). BIM acts as the essential lubricant to oil all the connecting parts.
M&A is a bit like ‘panning for gold’. Most prospectors lose money, but the successful ones do the homework, know where to look and crucially understand their markets inside out. Similarly, we think Elecosoft - following its ‘transformational’ £2.4m acquisition of BIM (Building Information Modelling) SaaS provider, ICON back in October 2016 - has done it again. 
Announcing this morning that it has purchased Shire Systems Limited, a leading UK computerised maintenance management software (CMMS) developer based in Southampton, for £5.1m on a cash/debt free basis. Corresponding to modest 2018 EV/sales, EV/EBIT and PE multiples of circa 2.5x, 6.5x and 8.0x respectively - compared to the sector on 3-5x, 15-25x and 20-30x
In our view, today’s acquisition could ultimately generate synergies many multiples higher than the £5.1m price tag. Plus, we understand Shire has an impressive management team, which should assist the integration process, and longer term help shape the future direction of the business as a whole.
Regarding the numbers, Shire delivered normalised PBT of £0.7m in 2017 on turnover of £1.9m – and YTD is tracking at a slightly higher run-rate of £0.4m and £1.0m for Jan-May’18. Consequently, given this and the newly increased debt facility (from £2m to an £8m, 5 year term loan with Barclays Bank), the Board believes the acquisition “will be earnings enhancing in H2’18”. 
As such, we have upgraded our PBT estimates for this year and next to £3.4m (£3.3m before) and £4.0m (£3.8m) – along with lifting our valuation from 85p to 90p/share.
 
Building a smarter future
Published: May 17 2018

Delivering infrastructure projects on time, to-spec and within budget has proved a mine-field for corporates & politicians alike. Typically, 80% are late and 40% over-spent with little thought on how best to manage the asset once complete - not exactly ideal! Luckily things are changing...and fast. Technologies such as data analytics, IoT, VR/AR, robotics & artificial intelligence, are transforming the $8 trillion global construction market. In turn helping to drive strong demand at Elecosoft (ELCO), a leading BIM (Building Information Modelling) software developer.

Nor has M&A been too far behind either, with many deep pocketed rivals (eg JLG Technology, Bentley, Nemetschek, RIB Software, Autodesk, Trimble, Hexagon, Dassault & Oracle) hovering up competitors at often hefty premiums.

 Together this has created a ‘virtuous circle’ for ELCO shareholders of improving results, rapid growth, robust visibility and future ‘take-out’ possibilities, as the firm becomes one of the few remaining sizeable, pure-play BIM experts left standing.

 In terms of results, ELCO posted 2017 turnover up 12.4% to £20.0m (split 4% LFL, 4% forex & 4% acquisitions), EBIT margins of 13.9% (12.4% 2016), 102% cash conversion and a 50% hike in the dividend to 0.6p (yield 0.8%). The balance sheet is ship-shape too, closing December 2017 with £1.0m of net cash.

 For 2018, we expect more of the same on the back of 8% higher revenues (£21.6m) – split 7% H1 & 9% H2. Leading to a 21.4% jump in adjusted EPS (20.2% LY) to 3.5p, as the benefits of operating leverage and 30%+ EBITDA drop-through rates kick in.

 A view consistent with today's trading update: like-for-like top line growth accelerated from 4% in 2017 to 7% (constant currency) during the 1st 4 months. Translating into “significantly higher PBT than last year, and [being] comfortably in line with market expectations”.

Even after its recent appreciation, the stock is still not expensive. Trading on EV/sales and PEG ratios of 2.5x (vs peers on 5x) and 1.0x (1.6x) respectively, whilst being 15% below our 85p/share valuation.

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