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.
