Eleco - HY Results - Research & Management Interview - 14 September 2021

H2 has started well, albeit as the company aggressively transitions from perpetual licensing (23.5% of H1’21 turnover, up 8% vs H1’19) to recurring revenues (55%, and +10% vs H1’19), this will inevitably temper top and bottom line progression. It will involve longer sales recognition and greater upfront investment (all self-funded) in order to later reap the rewards of predictable and more profitable income streams (eg SaaS). By switching from a product-led to a customer centric organisation, we believe this perfectly positions the group to flourish in the new cloud & digital age.

We think the Board is doing all the right things - and have raised our valuation from 135p to 150p/share, thanks to the improved earnings visibility, CLVs and the risk/reward profile.

Moreover the stock trades at a considerable discount to peers, on 4.1x 2021 EV/revenues and 17.5x EV/EBITDA compared to 9.7x and 28.5x for the sector. Eventually this gap should close, which over a 3-5 year period, could (in theory) propel the price substantially higher.