Significant operational improvements in H2

SNP Schneider-Neureither & Partner 7 February 2019 Update
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SNP Schneider-Neureither & Partner

Significant operational improvements in H2

Provisional FY18 results

Software & comp services

7 February 2019

Price

€16.90

Market cap

€112m

Net debt (€m) at 30 September 2018

32.8

Shares in issue

6.6m

Free float

71%

Code

SHF

Primary exchange

Frankfurt (Xetra)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

7.8

(0.9)

(50.0)

Rel (local)

2.5

0.5

(45.2)

52-week high/low

€36.2

€15.1

Business description

SNP Schneider-Neureither & Partner (SNP) is a software and consulting business focused on supporting customers in implementing change, and rapidly and economically tailoring IT landscapes to new situations. It has developed a proprietary software suite, CrystalBridge and Transformation Backbone with SAP LT (T-B), which automatically analyses, applies and tracks changes in IT systems.

Next events

Annual report

29 March 2019

Q119 results

30 April 2019

AGM

6 June 2019

H119 results

2 August 2019

Analyst

Richard Jeans

+44 (0)20 3077 5700

SNP Schneider-Neureither & Partner is a research client of Edison Investment Research Limited

The primary focus in FY18 was on integrating the recent acquisitions and positioning the business for growth in anticipation of the emerging digitisation wave. FY18 revenues of c €131m were below our forecast of €137.9m. Nevertheless, H2 adjusted EBITDA saw a c €5.4m improvement over H1 reflecting significant operational improvements. We have trimmed our FY19–20 revenue forecasts by 4–5% and adjusted EBITDA by 5–7%. Meanwhile, a key appointment has been made to drive sales in North America and SNP is close to announcing the hire of a new COO. SNP has a number of recent successful pilots, which it is optimistic will convert into larger projects. While the shares look punchy on c 32x our FY19e EPS, the rating could fall quickly as new projects come through.

Year end

Revenue
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

122.3

3.8

61.9

0.0

27.3

0.0

12/18e

131.0

(2.5)

(36.4)

0.0

N/A

0.0

12/19e

147.5

5.5

53.6

25.0

31.5

1.5

12/20e

160.0

10.3

104.5

33.0

16.2

2.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Trading update: Sales below, EBITDA roughly in line

FY18 revenues were c €131m and IFRS EBITDA was c €2.8m (we forecast €3.0m, with no additional exceptional items in Q4). The numbers imply that while Q4 software sales were not as good as expected, cost savings made during the year largely made up the difference. Headcount was reduced by 8% in Germany in H2 while total group headcount was reduced by 4% over the year. Management now anticipates FY19 sales of €145–150m while no profit guidance has yet been given.

Management changes: New boss for North America

SNP has hired an industry veteran to drive its growth strategy in North America. The company is close to announcing the hire of a new chief operating officer (COO) who will be responsible for day-to-day operations in both sales and consulting. This will be the first time SNP has had a role in charge of both these areas and it will increase the number of managing directors to three (CEO, CFO and COO).

Forecast changes: Revenues and profits trimmed

We have reduced our FY18 revenue and EBITDA forecasts in line with guidance. For FY19 and FY20, we have cut our revenue forecasts by 4% to €147.5m and €160m respectively, which still reflects attractive growth rates of 13% and 8%. We have cut adjusted EBITDA forecasts by 5% in FY19 to €10.4m and by 7% in FY20 to €15.1m, reflecting EBITDA margins of 7.0% and 9.4% respectively.

Valuation: Strong growth play in the ERP space

The stock trades on c 32x our earnings in FY19e, falling to c 16x in FY20e. Our discounted cash flow valuation (based on c 5.8% organic revenue CAGR over 10 years, 10% WACC, 14.0% long-term operating margin and 2% terminal growth) is €27/share, c 60% above the current share price.

Trading update: Substantial H2 improvement

Group revenues rose by 7% to €131m, including full period contributions from SNP Poland, Innoplexia and ADEPCON (Argentina), which were all acquired during FY17. There was an organic revenue decline of c 5% in Germany and the US, largely due to lower professional services utilisation rates and lower than expected proprietary software sales following S/4HANA project deferrals. Nevertheless, management’s efforts to streamline the business resulted in a significant improvement in profitability in H2 over H1. IFRS EBITDA swung from a €3.5m loss in H1 to a €6.3m profit in H2, while non-IFRS adjusted EBITDA swung from a €1.7m loss in H1 to a €3.7m profit in H2. This equates to an H2-adjusted EBITDA margin of 5.6%.

Management is focused on a new financial strategy including boosting free cash flow. Payment terms have been optimised to improve working capital. The company is selling its car fleet and will instead lease cars and it has made cut backs on travel. The group reduced its headcount in Germany by c 50, falling from c 550 to c 500. These cuts were mostly lower-level jobs, with many leaving on their own accord. Hence we estimate there was only a modest charge for redundancy costs in Q3 and Q4 which we have factored into our operating costs forecasts. Total group headcount fell to 1,286 at the year end, down from 1,350 at the mid-year stage and 1,341 at the end of FY17. The total decline over the 12 months includes the US headcount reductions in early-FY18.

SNP is trialling a near-shore approach, utilising three hubs to help optimise project costs.

DACH region. Utilising the group’s Polish consultants.

North America. Utilising the group’s Argentinean workforce, taking advantage of the extremely weak peso.

Asia. Using Malaysian resources to cover all of Asia, including a nascent market in Australia (SNP recently appointed an SNP veteran to target the Australian market).

Management is excited about a number of recent successful pilot projects, which it believes could become substantial projects. This includes the S/4HANAproject for Volkswagen Saxony, which is close to going live and leaves SNP well positioned to expand its transformation work in the VW group. There is also a project in the US, which involved merging two SAP landscapes and could expand into a larger S/4HANA project, and a project for a car maker in Germany.

Forecast changes: Revenues and EBITDA trimmed

We have reduced our FY18 revenue forecast by 5% to bring in line with the update and cut IFRS EBITDA to €2.8m. Following discussions with the company, we understand that the IFRS EBITDA number translates to adjusted EBITDA of €2.0m (ie a 39% reduction on our €3.3m forecast). We have cut our FY19 and FY20 revenue forecasts by 4% to €147.5m (the middle of management’s guidance range) and €160m respectively. We have cut our adjusted EBITDA forecasts by 5% in FY19 to €10.4m and by 7% in FY20 to €15.1m, reflecting EBITDA margins of 7.0% and 9.4% respectively. We believe the margin can advance further as the business scales and sells more high-margin proprietary software. We now forecast the group to have ended FY18 with net debt of €23.3m, which falls to €21.9m at the end of FY19 and €17.3m at the end of FY20.

Exhibit 1: Forecast changes

€m

Revenue (€m)

Adjusted EBITDA (€m)

EPS (c)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2018e

137.9

131.0

(5)

3.3

2.0

(39)

(19.4)

(36.4)

N/A

2019e

153.4

147.5

(4)

10.9

10.4

(5)

58.6

53.6

(9)

2020e

166.6

160.0

(4)

16.2

15.1

(7)

115.0

104.5

(9)

Source: Edison Investment Research

Approximately €1.1m of exceptional profits are expected in Q4, mostly relating to the write back of the ADEPCON earnout due to the sliding peso. When combined with the cumulative €0.3m exceptional losses over Q1-Q3, the result is an exceptional profit of €0.8m, which represents the difference between IFRS and non-IFRS EBITDA for FY18 (Exhibit 2).

Exhibit 2: Reconciling non-IFRS EBITDA with IFRS EBITDA

2017

2017

2017

2017

2017

2018

2018

2018

2018

2018

Q1

Q2

Q3

Q4

FY

Q1

Q2

Q3

Q4e

FYe

Non-IFRS EBITDA

(1.6)

2.9

0.6

5.0

6.9

(1.2)

(0.5)

2.5

1.2

2.0

Exceptional items

(0.2)

(1.7)

(0.5)

(1.2)

(3.6)

(0.2)

(1.6)

1.5

1.1

0.8

IFRS EBITDA

(1.8)

1.2

0.1

3.8

3.3

(1.4)

(2.1)

4.0

2.3

2.8

Source: Company accounts, Edison Investment Research

Incoming orders were €132.3m in FY18, which indicates that the book-to-bill ratio was just above 1x for Q4 and the year as a whole; in Q2 and Q3 the ratio was below 1x.

Exhibit 3: New orders and backlog

2017

2017

2017

2017

2017

2018

2018

2018

2018

2018

€'000

Q1

Q2

Q3

Q4

FY

Q1

Q2

Q3

Q4e

FYe

Incoming orders

24,400

33,200

37,400

35,700

130,700

40,900

26,300

31,500

33,600

132,300

Quarterly revenues

21,598

26,430

33,011

41,304

122,343

31,553

33,492

33,727

32,228

131,000

Book-to-bill ratio (x)

1.13

1.26

1.13

0.86

1.07

1.30

0.79

0.93

1.04

1.01

Backlog

40,800

48,500

62,200

61,300

 

70,200

63,300

61,400

56,000

 

Source: Company accounts, Edison Investment Research

Management changes: New US boss and new COO is close

SNP has hired software industry veteran Derek Oats as CEO and president of the group’s North American operations. Mr Oats’ appointment follows the departure of the group’s US-based chief revenue officer who had been responsible for the entire group’s sales strategy. Mr Oats will work from SNP’s Dallas, Newark and Philadelphia offices, reporting directly to SNP’s CEO and Chairman Dr Andreas Schneider-Neureither. The plan involves expanding the US sales department to bring the US operations back on track.

SNP is close to announcing the hire of a new COO who will be responsible for the group’s day-to-day operations, covering both sales and consulting. This will be the first time that SNP has had a role in charge of both areas.

Following the appointment of the COO, SNP will have three managing directors: Dr Andreas Schneider-Neureither, CEO, responsible for development, IT and marketing; Dr Uwe Schwellbach, CFO, responsible for finance, human resources, legal and administration; and the new COO responsible for sales and consulting.


Exhibit 4: Financial summary

€'000s

2015

2016

2017

2018e

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

56,236

80,685

122,343

131,000

147,500

160,000

Cost of sales

0

0

0

0

0

0

Gross Profit

56,236

80,685

122,343

131,000

147,500

160,000

EBITDA

 

 

5,484

8,124

6,868

2,000

10,357

15,070

Adjusted Operating Profit

 

 

4,222

7,114

5,113

(1,288)

6,771

11,404

Amortisation of acquired intangibles

0

(657)

(2,021)

(1,600)

(1,600)

(1,600)

Exceptionals

356

400

(3,600)

800

0

0

Associates

(3)

8

(24)

0

0

0

Operating Profit

4,575

6,865

(532)

(2,088)

5,171

9,804

Net Interest

(828)

(1,137)

(1,327)

(1,200)

(1,300)

(1,100)

Profit Before Tax (norm)

 

 

3,394

5,977

3,786

(2,488)

5,471

10,304

Profit Before Tax (FRS 3)

 

 

3,747

5,728

(1,859)

(3,288)

3,871

8,704

Tax

(1,195)

(1,517)

(807)

746

(1,641)

(3,091)

Profit After Tax (norm)

2,198

4,460

2,980

(1,741)

3,829

7,213

Profit After Tax (FRS 3)

2,552

4,211

(2,666)

(2,541)

2,229

5,613

Minority interest

0

(147)

234

(267)

(289)

(312)

Adjustments for normalised earnings

0

0

0

0

0

0

Net income (norm)

2,198

4,313

3,214

(2,009)

3,541

6,901

Net income (FRS 3)

2,552

4,064

(2,431)

(2,809)

1,941

5,301

Average Number of Shares Outstanding (m)

3.7

4.3

5.2

5.5

6.6

6.6

EPS - normalised (c)

 

 

58.8

100.4

61.9

(36.4)

53.6

104.5

EPS - normalised & fully diluted (c)

 

 

58.8

100.4

61.9

(36.4)

53.6

104.5

EPS - FRS 3 (c)

 

 

68.3

94.6

(46.8)

(50.9)

29.4

80.3

Dividend per share (c)

34.00

39.00

0.00

0.00

25.00

33.00

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

9.8

10.1

5.6

1.5

7.0

9.4

Adjusted Operating Margin (%)

7.5

8.8

4.2

(1.0)

4.6

7.1

BALANCE SHEET

Fixed Assets

 

 

15,243

30,109

75,171

73,526

71,994

70,697

Intangible Assets

11,675

24,179

67,012

65,380

63,748

62,115

Tangible Assets

1,999

3,161

5,187

5,174

5,275

5,609

Other

1,570

2,769

2,972

2,972

2,972

2,972

Current Assets

 

 

29,996

58,424

78,614

75,236

76,977

80,678

Stocks

0

371

371

398

448

486

Debtors

16,084

25,652

43,781

41,879

47,153

51,149

Cash

13,769

31,914

33,877

32,375

28,791

28,457

Current Liabilities

 

 

(13,703)

(32,631)

(40,531)

(38,035)

(42,689)

(45,973)

Creditors

(11,101)

(14,523)

(29,295)

(26,799)

(31,452)

(34,737)

Short term borrowings

(2,602)

(18,108)

(11,236)

(11,236)

(11,236)

(11,236)

Long Term Liabilities

 

 

(15,513)

(7,327)

(53,157)

(45,583)

(40,583)

(35,583)

Long term borrowings

(12,344)

(5,531)

(49,487)

(44,487)

(39,487)

(34,487)

Other long term liabilities

(3,169)

(1,796)

(3,670)

(1,096)

(1,096)

(1,096)

Net Assets

 

 

16,024

48,575

60,097

65,144

65,700

69,818

CASH FLOW

Operating Cash Flow

 

 

1,879

1,005

(5,316)

1,377

9,652

14,302

Net Interest

(167)

53

(798)

(1,200)

(1,300)

(1,100)

Tax

(554)

(412)

(1,366)

697

(1,532)

(2,885)

Capex

(1,779)

(3,451)

(5,234)

(3,275)

(3,688)

(4,000)

Acquisitions/disposals*

(3,228)

(5,923)

(28,783)

(11,701)

(1,716)

0

Shares issued

0

30,129

18,293

17,600

0

0

Dividends

(483)

(1,264)

(1,932)

0

0

(1,651)

Net Cash Flow

(4,332)

20,137

(25,136)

3,498

1,416

4,666

Opening net debt/(cash)

 

 

(3,431)

1,176

(8,275)

26,847

23,349

21,932

Other

(275)

(10,686)

(9,985)

0

0

0

Closing net debt/(cash)

 

 

1,176

(8,275)

26,847

23,349

21,932

17,266

Source: Company accounts, Edison Investment Research. Note: *Includes additional payments for Adepcon in FY18 and FY19, and final payments for RSP, Astrums/Hartung, Harlex and Innoplexia in FY18.

General disclaimer and copyright

This report has been commissioned by SNP Schneider-Neureither & Partner and prepared and issued by Edison, in consideration of a fee payable by SNP Schneider-Neureither & Partner. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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General disclaimer and copyright

This report has been commissioned by SNP Schneider-Neureither & Partner and prepared and issued by Edison, in consideration of a fee payable by SNP Schneider-Neureither & Partner. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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.

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New Zealand

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

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United States

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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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