Growth continues apace

DATAGROUP 5 February 2019 Update
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DATAGROUP

Growth continues apace

IT services

Scale research report - Update

5 February 2019

Price

€35

Market cap

€292m

Share price graph

Share details

Code

D6H

Listing

Deutsche Börse Scale

Shares in issue

8.349m

Last reported net debt at 30 September 2018

€12.1m

Business description

DATAGROUP is a full IT outsourcing provider, focused on the German Mittelstand market. The company offers the full range of IT services on a modular basis, through its CORBOX ‘cloud-enabling platform’. Services include service desk, end-user services, data centre services, application management and SAP services.

Bull

A compelling growth strategy, scaling the business across the Mittelstand sector.

Cloud services business model gives it a clear advantage over competitors.

Centralised SLA-based approach with a focus on customer satisfaction puts company in a strong position to consolidate a fragmented market.

Bear

Highly exposed to the German economy.

Acquisitions bring risks, but DATAGROUP has a proven track record in integrating acquisitions.

Increased debt levels, but the group is still well within its covenants.

Analyst

Richard Jeans

+44 (0)20 3077 5700

DATAGROUP recorded another strong year of growth with revenue increasing by 22%, including 3.3% organic growth, or 6% when adjusting for discontinued activities from acquisitions. The recent acquisitions of ikb Data, HanseCom and ALMATO all performed well. During the year the group won its largest ever contract worth high double-digit million euros. This deal, with NRW Bank, was only attainable due to the ikb Data acquisition. With the shares having drifted back c 25% over the last year the rating looks increasingly attractive at c 8x EBITDA.

Consolidating a fragmented IT services market

DATAGROUP is consolidating the highly fragmented German IT services market, focusing on Mittelstand companies with revenues of €100m to €1bn. This involves both buy-and-build and buy-and-turnaround approaches, transitioning the acquired businesses to DATAGROUPs more effective business model. DATAGROUP’s CORBOX solutions are cloud-based, focused on fixed-price contracts, based on standardised processes that are certified according to ISO 20000 and backed by service level agreements (SLAs). DATAGROUP believes there is a huge opportunity in the Mittelstand space as these companies typically rely on their own expensive in-house IT departments and have difficulty adapting to new technologies. The broad range of services allows customers to fully outsource their IT operations. Much of the work is done remotely and the group can scale its data centre services and shared services desk to support a large number of customers.

FY18 results: Underlying organic growth was 6%

Revenue grew by 21.9% to €272.1m and EBITDA rose 27% as margins expanded from 12.1% to 12.7%. The company signed 20 new CORBOX customers during the period and significantly extended business with 14 existing customers. The group ended FY18 with net debt of €12.1m, up from €4.1m a year earlier.

Valuation: Increasingly attractive after the drift back

DATAGROUP offers an excellent track record, high recurring revenues, a clear focus on the large German Mittelstand sector and an increasing number of key differentiators following the acquisitions of ikb Data and ALMATO. The shares look increasingly attractive trading on c 17.5x FY20e earnings and c 8x EBITDA, given an outlook underpinned by a favourable business model supported by attractive business drivers, which also provide a compelling case for acquisitions.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

09/17

223.1

27.0

1.41

0.45

24.8

1.3

09/18

272.1

34.5

1.55

0.60

22.6

1.7

09/19e

283.3

36.3

1.66

0.55

21.1

1.6

09/20e

297.1

38.5

2.00

0.60

17.5

1.7

Source: Refinitiv

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

FY18 results: Underlying organic growth of 6% excluding companies in transformation

Group revenue grew by 21.9% to €272.1m, boosted by the acquisitions of ikb Data, HanseCom and ALMATO. Organic growth was 3.2%; this rises to 6% when excluding the impact of discontinued businesses from acquisitions ie DATAGROUP sheds unprofitable business after making acquisitions and there is an ongoing managed decline in business from Hewlett Packard Enterprise relating to the acquisition of SAP and application management services from 2016. Recurring revenues jumped by 27% to €199m, representing 73% of the total, up from 70% a year earlier and 88% of gross profit was generated from these recurring revenues. Personnel expenses represented 49.5% of group revenue, which was 420bp lower than the prior year, Consequently, EBITDA jumped by 27.4% to €34.5m, with the margin rising by 60bp to 12.7%. The company is recommending an increase in the dividend by a third to 60c.

DATAGROUP signed 20 new CORBOX customers during the period, taking the total number of CORBOX customers to 150, and the company significantly extended business with 14 existing customers. The ikb Data acquisition created a new vertical in financial services, which would otherwise have been difficult to build as application management skills in financial services are very specialised. Ikb Data lost one client (ikb Leasing) but signed three more, including the record NRW.Bank deal worth high double-digit million euros, along with Bankhaus Lampe and BayernIinvest. The contract with IKB Deutsche Industriebank, which sold the ikb Data business to DATAGROUP in 2017, is up for renegotiation shortly. HanseCom has been successfully reorganised and renamed Operate IT. ALMATO is proving to be value accretive and adds useful skills in the productivity enhancing robotic process automation (RPA) space.

Exhibit 1: Financial summary

€000s

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Year ended 30 September

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

Income statement (€000s)

Revenue

146,183

156,935

152,380

157,574

174,918

223,142

272,100

Services & maintenance revenue

102,980

116,082

114,413

120,773

135,907

180,631

220,085

% group revenue

70%

74%

75%

77%

78%

81%

81%

Trade revenue

42,923

40,541

37,707

36,592

38,821

42,297

51,770

Other/consolidation

280

312

260

209

190

214

245

EBITDA

9,549

12,553

11,686

15,339

19,103

27,041

34,463

EBITDA margin

6.5%

8.0%

7.7%

9.7%

10.9%

12.1%

12.7%

EBIT

3,792

6,091

6,213

9,604

12,675

18,590

20,423

EPS

0.37

0.25

0.14

0.65

0.75

1.41

1.55

DPS

0.20

0.20

0.20

0.25

0.30

0.45

0.60

Balance Sheet (€000s)

Total non current assets

69,647

66,109

60,754

68,062

92,178

102,864

114,448

Total current assets

31,019

35,590

34,345

35,285

67,568

110,526

101,002

Total assets

100,666

101,699

95,099

103,346

159,746

213,390

215,450

Total non-current liabilities

(32,416)

(49,420)

(44,056)

(39,013)

(97,367)

(95,881)

(86,707)

Total current liabilities

(45,552)

(29,767)

(29,778)

(40,283)

(34,012)

(57,928)

(61,488)

Total liabilities

(77,968)

(79,188)

(73,834)

(79,296)

(131,379)

(153,809)

(148,195)

Net Assets

22,698

22,511

21,264

24,051

28,367

59,581

67,255

Cash flow

Net cash from operating activities

8,456

10,947

9,286

9,431

9,518

32,477

18,990

Net cash from investing activities

(17,950)

(5,210)

(4,301)

(9,295)

(3,711)

(19,749)

(19,104)

Net Cash from financing activities

12,056

2,778

(6,937)

(7,513)

16,545

16,027

(14,365)

Net Cash Flow

2,562

8,516

(1,951)

(7,375)

22,352

28,755

(14,479)

Cash & cash equivalent end of year

2,883

11,398

9,448

2,072

24,424

53,179

37,800

Source: Company accounts

Operating cash flow dipped by 42% to €19.0m, mainly due to a big swing in working capital reflecting the extraordinary high cash conversion in the prior year. According to DATAGROUP, after stripping out one-off effects, underlying operating cash flow actually rose from €20.6m to €21.7m. Capex increased by 42% to €14.8m, largely reflecting heavy investment in datacentre hardware and infrastructure as well as operating and business equipment, and after a small amount of fixed asset disposals and net interest paid, free cash flow fell to €4.7m from €22.4m. After acquisition expenditure, dividends and interest, net debt, including acquisition liabilities, rose by €8.0m to €12.1m (using Datagroup’s net debt definition).

The group generated 6% organic growth, excluding companies in transformation (mostly discontinued unprofitable contracts from acquisitions) which deducted 2.7%. Consequently, total organic growth was 3.3%. These numbers compare favourably with industry growth rates of 2.6% in Germany (Bitkom, February 2018). Acquisitions contributed 18.6% to the growth, taking total group revenue growth to 21.9%.

Exhibit 2: Growth rates

Source: Company accounts

As is standard company practice, no FY19 guidance has yet been given and management will update guidance at the time of the AGM. However, the group has an ambition to generate revenues of c €750m in 2025, including acquisitions. It also aspires to a long-term EBITDA margin of 13%, which we suspect could be increased given that the target is already almost met, and there are a number of drivers that could take margins higher, including utilising ALMATO’s artificial intelligence expertise to automate group processes.

Exhibit 3: EBITDA margins continue to rise

Source: Company accounts

Expanded management board

In October, Andreas Baresel took on the role of chief production officer (CPO), responsible for the overall management of the individual service factories within the group. Mr Baresel was previously managing director of DATAGROUP Business Solutions, the largest DATAGROUP company, where he has worked as a director since 2012. He was responsible for the development and expansion of the IT service business in Southern Germany. The promotion means three people now sit on the management board: CEO Max H.-H. Schaber, COO Dirk Peters and CPO Andreas Baresel.

Acquisition strategy

The group has made 21 acquisitions since its IPO in 2006, with the last in January 2018 (ALMATO). Activity has slowed, as the market is not as attractive following a rise in valuations. Nevertheless, DATAGROUP is maintaining its acquisition strategy, which is to make infill acquisitions on regions where it is underrepresented in Germany, or to increase its technological expertise. The group has plenty of capacity to make acquisitions, with net debt to EBITDA currently at c 0.4x, compared with a 3.5x limit on its promissory notes. There is also a 21% equity ratio covenant on the promissory notes, compared with the current 31.9% modified equity ratio. A low equity ratio was one of the reasons why the group carried out its €21m capital increase last year.


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Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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