Digital services partnerships on track

Vectron Systems 14 May 2019 Update
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Vectron Systems

Digital services partnerships on track

Technology

Scale research report - Update

14 May 2019

Price

€10.65

Market cap

€77m

Share price graph

Share details

Code

V3S

Listing

Deutsche Börse Scale

Shares in issue

7.3m

Net debt at end FY18

€1.2m

Business description

Vectron Systems produces high-end, proprietary POS systems for the hospitality sector. Vectron is also diversifying into providing systems designed for online marketing services, which has been given impetus recently through partnerships with DeutschlandCard and Metro.

Bull

Flexible, comprehensive POS systems.

Strong position in DACH hospitality market.

Partnership with DeutschlandCard.

Bear

Dependent on the German economy.

Management owns more than 50% of Vectron.

Low level of recurring revenues.

Analyst

Katherine Thompson

+44 203 077 5730

Although a slowdown in demand for Vectron’s traditional point-of-sale (POS) systems had a negative effect on revenue growth and profitability in FY18, the company has made good progress in extending its offering into the digital domain. By supporting Vectron POS owners to offer loyalty and online services, partnerships with DeutschlandCard (DC) and Metro promise to deliver recurring revenues once the schemes are launched.

FY18 saw a pause in demand for POS systems

FY18 financial results were affected by a drop in demand for Vectron’s POS systems that started in H217. This reflects a pause in buying after merchants satisfied the cash register regulations that came into force in 2017, as seen in the strong revenues generated in FY16 and H117. The next phase of regulation is due to come into force in CY20; consequently management expects demand to pick up this year and next to satisfy these regulations. Consensus forecasts reflect this. Vectron raised €5m from the issue of 661k shares in February, returning the company to a net cash position.

Making progress with digital partnerships

Vectron is keen to reduce its dependency on hardware sales, which are unpredictable and one off in nature. Adding digital services to Vectron’s POS systems provides a route to recurring revenues and supports its POS users with their customer marketing and retention efforts. The collaboration with DeutschlandCard (DC) has been formalised and will enable DC holders to generate and redeem points in hospitality venues that use Vectron POS systems when launched later in Q219. This should widen the appeal of DC and generate more footfall for Vectron POS customers, while generating transaction revenues for Vectron. The pilot with Metro’s digital arm, Hospitality Digital, has been widened to test pricing and distribution models.

Valuation: Factoring in return to profitability

Consensus forecasts are for strong revenue growth in FY19 and FY20 with a return to profitability in FY19. We assume that analysts have factored in a regulatory-driven resumption in demand for POS systems starting in FY19. On this basis, Vectron’s valuation falls to attractive levels by FY20.

Consensus estimates

Year
end

Revenue
(€m)

EBIT

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/17

32.4

1.7

0.16

0.06

66.6

0.6

12/18

24.8

(5.5)

(0.59)

N/A

N/A

N/A

12/19e

35.9

2.3

0.19

0.06

56.1

0.6

12/20e

56.5

9.1

0.85

0.12

12.6

1.2

Source: Company reports, analyst reports on Vectron Systems website, 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.

Review of FY18 results

Exhibit 1: Vectron results highlights

€m

2017

2018

Revenues

32.38

24.82

Revenue growth

(4.0%)

(23.3%)

EBITDA

2.25

(3.77)

EBITDA margin

7.0%

(15.2%)

EBIT

1.74

(5.45)

EBIT margin

5.4%

(22.0%)

Profit after tax

1.08

(3.88)

EPS (€)

0.16

(0.59)

Net cash/(debt)

1.7

(1.2)

Source: Vectron Systems

Exhibit 2: Half-yearly revenues by product and geography

€m

y-o-y change

H117

H217

FY17

H118

H218

FY18

H118

H218

FY18

POS systems

12.81

7.41

20.22

8.29

6.26

14.55

(35.3%)

(15.5%)

(28.0%)

Germany

9.47

5.30

14.77

6.12

4.53

10.65

(35.4%)

(14.5%)

(27.9%)

Other EU

3.21

1.97

5.18

2.06

1.62

3.68

(35.7%)

(17.7%)

(28.9%)

International

0.14

0.14

0.28

0.10

0.12

0.22

(27.0%)

(14.9%)

(20.9%)

Software

1.69

1.03

2.72

1.16

0.89

2.05

(31.4%)

(14.1%)

(24.9%)

Germany

1.16

0.68

1.84

0.77

0.64

1.41

(33.5%)

(6.9%)

(23.6%)

Other EU

0.52

0.33

0.85

0.36

0.23

0.58

(31.7%)

(30.5%)

(31.2%)

International

0.01

0.02

0.03

0.04

0.02

0.06

260.0%

(13.6%)

71.9%

Goods for resale/service

4.81

4.64

9.44

4.43

3.80

8.23

(7.8%)

(18.1%)

(12.9%)

Germany

3.48

3.64

7.12

3.44

2.81

6.25

(1.2%)

(22.7%)

(12.2%)

Other EU

1.28

0.92

2.21

0.96

0.95

1.92

(24.9%)

3.1%

(13.2%)

International

0.04

0.07

0.11

0.03

0.03

0.06

(26.8%)

(58.9%)

(47.4%)

Total revenues

19.31

13.07

32.38

13.88

10.94

24.83

(28.1%)

(16.3%)

(23.3%)

Source: Vectron Systems

As previously flagged at Vectron’s H118 results, demand dropped in FY18 compared to FY17 as regulatory tailwinds diminished. Revenues declined in all geographies and for all product types, resulting in a 23% decline in revenues y-o-y. This resulted in a loss for the year and shifted the company into a net debt position. The cost of materials declined 20% y-o-y, reflecting the lower volume of systems sold. Personnel costs increased 5% y-o-y as the company invested in digital services, including the joint projects with DeutschlandCard and Metro. The company wrote-down capitalised development costs by €1.2m, reflecting the investment in the now discontinued GetHappy service. Excluding this, the company would have reported an EBIT loss of €4.2m.

Business update

DC relationship formalised

Following on from the letter of intent signed in August, in December DC and Vectron Systems signed a co-operation agreement. The aim is to distribute the DC via Vectron’s POS systems to hospitality customers, starting with the collection and redemption of points. Catering businesses of all sizes will be able to access an established and successful multi-partner bonus programme, while DC holders will be able to use their cards in the hospitality sector. The agreement provides for a separate hospitality area on the DC website and in the DC app so participants can immediately see in which restaurants they can collect and redeem points. Additional functionality for online reservations and orders will be integrated into the solution in due course. DC has 20 million participants (making it the second-largest loyalty scheme in Germany after Payback) and is partnered with well-known companies such as EDEKA, Netto Marken-Discount and Esso. Vectron started marketing the scheme in January, with market launch planned later in H119.

Hospitality Digital pilot extended

Hospitality Digital, the digital arm of METRO Group, launched a pilot project with Vectron last September, incorporating 100 caterers. Initial results were encouraging and both sides have agreed to extend the field test to significantly more catering establishments. The extension will test various pricing and distribution models for combinations of Hospitality Digital service packages and Vectron POS systems. In particular, the test will focus on a bundled solution that incorporates the Duratec cash register, the digital DISH platform developed specifically by METRO for the hospitality industry and the Hospitality Digital reporting tool dashboard. The partners also provide installation and on-site training. In the case of larger installations, Vectron brings in dealers and external service providers.

Adding alternative payment methods to tills

In March, Vectron announced a co-operation with epay, a subsidiary of payment processor Euronet. epay is a full-service provider for payment and prepaid solutions, specialising in alternative payment methods and offering a large portfolio of prepaid and gift card products. Vectron will be able to offer caterers and bakers cashless payment options enabling them to access new customer groups and additional revenue via alternative payment methods and prepaid solutions. epay will gain access to merchants in the hospitality and bakery segments.

Financials

On 1 January 2019, Vectron acquired the remaining 25% of Posmatic that it did not already own, at an undisclosed cost. Posmatic and bonVito were not consolidated in FY18 but we expect the company to consolidate both businesses in FY19.

In February, the company issued 661,199 new shares at a price of €7.6 per share, resulting in gross proceeds of €5.03m and net proceeds of €4.88m, which are to be used in the development of digital services.

Since FY18 results were announced there have been no changes to consensus forecasts (see Exhibit 3). Analysts are expecting a resumption in revenue growth in FY19 with a forecast of 45% followed by growth of 58% in FY20. We assume this factors in an uptick in demand for POS systems driven by regulatory requirements coming into force in FY20. This also drives a resumption in profitability.

Exhibit 3: Consensus forecasts

€m

FY19e

FY20e

Revenues

35.9

56.5

EBITDA

3.0

9.9

EBIT

2.3

9.1

EPS (€)

0.19

0.85

DPS (€)

0.06

0.12

Revenue growth

45%

58%

EBITDA margin

8.3%

17.5%

EBIT margin

6.3%

16.0%

Source: Analyst reports on Vectron Systems website, Refinitiv

Valuation

Based on consensus forecasts for a resumption in revenue growth and a return to profitability in FY19e, the stock is trading at the upper end of its POS provider peer group and at a discount to hospitality-focused online marketing services companies.

Exhibit 4: Peer group valuation

Company

Quoted ccy

Share price

Market cap (m)

EV (rep ccy, m)

EV/Sales (x)

EV/EBITDA (x)

P/E (x)

Div yield

EBITDA margin

CY

NY

CY

NY

CY

NY

CY

NY

CY

NY

Vectron Systems

EUR

10.65

77

79

2.2

1.4

26.3

8.0

56.1

12.6

0.6%

1.2%

8.3%

17.5%

POS system providers

Ingenico Group

EUR

71.42

4,510

6,061

1.9

1.8

10.6

9.7

14.9

13.5

1.9%

2.3%

17.6%

18.2%

NCR Corp

USD

31.1

3,735

7,423

1.1

1.1

7.0

6.7

11.1

9.8

N/A

N/A

16.3%

16.6%

Aures Technologies

EUR

23.8

95

90

0.7

0.7

6.8

5.6

11.4

9.6

3.7%

3.9%

11.0%

12.3%

PayPoint plc

GBp

1018.0

695

661

5.5

5.3

10.4

9.9

16.0

15.3

8.2%

8.3%

53.0%

53.3%

Universe Group

GBp

5.5

14

12

0.5

0.5

3.9

3.4

27.5

11.0

0.0%

0.0%

13.4%

13.4%

mPOS provider

Square Inc

USD

66.0

27,912

27,733

12.2

9.0

66.4

42.5

87.6

58.7

0.0%

0.0%

18.3%

21.3%

Online marketing services

Just Eat

GBp

665.0

4,538

4,461

4.3

3.4

25.3

18.9

83.6

40.5

0.0%

0.0%

16.8%

18.2%

GrubHub

USD

66.6

6,072

6,189

4.5

3.6

24.5

17.0

46.3

30.2

0.0%

0.0%

18.5%

21.0%

Takeaway.com

EUR

77.5

4,442

4,502

11.0

8.1

420.0

54.0

N/A

100.1

0.0%

0.0%

2.6%

15.0%

Eagle Eye Solutions Group

GBp

152.5

39

41

2.3

1.9

180.9

20.1

N/A

N/A

0.0%

0.0%

1.3%

9.5%

Delivery Hero

EUR

41.9

7,856

7,492

6.6

4.6

N/A

N/A

N/A

N/A

0.0%

0.0%

-24.5%

-4.6%

Average

4.6

3.6

75.6

18.8

37.3

32.1

1.4%

1.4%

13.1%

17.6%

Median

4.3

3.4

17.6

13.5

21.8

15.3

0.0%

0.0%

16.3%

16.6%

Source: Vectron estimates as per Exhibit 3, all other companies Refinitiv (as at 13 May)

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

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General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

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.

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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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

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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