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Research: TMT
After a difficult FY20, DATAGROUP’s earnings are set to recover significantly in FY21, mostly driven by a recovery of earnings in its Financial IT services (FIS) unit, which took a hit in FY20. We believe the M&A-driven business model is intact and an EBIT margin of 9% should be within reach in the medium term. Trading at 27.5x FY21e P/E on consensus estimates, DATAGROUP is valued at a 12% premium to peers.
DATAGROUP |
FY21 set to breathe recovery
IT services |
Scale research report - Update
28 January 2021 |
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After a difficult FY20, DATAGROUP’s earnings are set to recover significantly in FY21, mostly driven by a recovery of earnings in its Financial IT services (FIS) unit, which took a hit in FY20. We believe the M&A-driven business model is intact and an EBIT margin of 9% should be within reach in the medium term. Trading at 27.5x FY21e P/E on consensus estimates, DATAGROUP is valued at a 12% premium to peers.
FY20 earnings took a hit, but FY21 looks much better
DATAGROUP’s FY20 results (EBT of €6.6m) were affected by disappointing developments at FIS, resulting in a €24.6m hit, of which €12m was from risk provisions with restructuring costs accounting for most of the rest. The adjusted EBIT margin was 5.9% (FY19: 7.7%) with c 17% higher revenues (of which 2% was organic) at €358m. CEO Max Schaber’s comments in the FY20 annual report were optimistic after a very good start to FY21, with strong expectations of increases in profitability reflecting an improved cost situation and efficiency. The turnaround at FIS and improvement at Robotics unit Almato (DATAGROUP Mobile Solutions) are important drivers for this.
Business model intact and 9% EBIT margin feasible
DATAGROUP’s business model of offering a fully outsourced cloud-enabling service-as-a-product contract for German SMEs is fully intact. Demand for these services, which result in recurring revenues, are likely to increase due to the working at home trend, which increases demand for cloud solutions. With (potential) clients now used to virtual meetings, the vital commercial sales process is gaining traction. The business model targets 12–16% revenue growth with 4–6% organic growth and increasing EBIT margins to >9%. This margin ambition will not be achieved in 2022, as previously communicated, but remains the ambition in the medium term and with the ongoing recovery of FIS it seems feasible.
Valued at a premium compared to peers
After the profit warning in early September, DATAGROUP’s shares decreased to below €40, but the share price is now approaching €60. At current consensus estimates, the share is still trading at a premium to peers of 12% on FY21e P/E of 27.5x.
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Consensus estimates
Source: DATAGROUP, 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.
FY20 highly affected by M&A and restructuring
On 20 January, DATAGROUP published final FY20 results to end September that were in line with the preliminary results reported on 16 November.
Revenues increased 16.8% to €358.2m. Acquisitions contributed to the bulk (14.8%) of this revenue growth due to the acquisitions of Portavis in March and much smaller Cloudeteer in June. Organic growth for the full year was roughly 2%, which implies a roughly flat H220, affected by the pandemic (H120: 4% organic growth). As DATAGROUP’s project business only accounts for a very small part of revenues, projects postponements had a limited effect.
Despite COVID-19-related delays, especially in H220 and with sales teams unable to visit, or restricted in visiting, (potential) customers since March, DATAGROUP acquired 21 new customers in FY20, which resulted in the c 2% organic growth for the year. The proportion of recurring revenues were 74%, compared to 69% in the previous year.
Operationally, DATAGROUP suffered only a mild effect from the COVID-19 pandemic, with 90% of employees able to work from home and services to clients executed without restrictions. In contrast, DATAGROUP had to take a large charge of €26.6m for its FIS business, of which €12m was risk provisions. Delays, especially because it had to hire ~100 freelancers for more than a year, to help in the transition of FIS clients to DATAGROUP’s standards, were not foreseen.
This negative effect was partially offset by €11.6m bad-will payments from the Portavis acquisition. All in all, EBITDA before risk provisions increased by 14.8% to €53.8m and the EBITDA margin before risk provisions was slightly lower at 15.0%. EBIT before risk provisions slipped by 11.2% to €21.0m from €23.6m in 2019, or a 5.9% margin. Total EBT deteriorated by 69.5% to €9m (was €21.7m in FY19). Net income was €0.2m, compared to €14.5m in FY19, further affected by a high tax rate due to non-taxable expenses in the financial services sector.
Exhibit 1: Key FY20 figures
€000s |
FY19 |
FY20 |
Change |
Revenues |
306,765 |
358,211 |
16.8% |
Services & maintenance |
242,500 |
304,717 |
25.7% |
Trade |
63,754 |
52,899 |
(17.0%) |
Other |
512 |
595 |
16.3% |
Own work capitalised |
777 |
1,743 |
124.4% |
Changes in capitalised contract costs* |
14,303 |
7,274 |
|
Total revenues |
321,845 |
367,228 |
14.1% |
Material expenses/purchased services* |
105,447 |
119,143 |
13.0% |
Gross profit |
216,398 |
248,085 |
14.6% |
Personnel expenses* |
153,241 |
187,991 |
22.7% |
Other income |
11,102 |
19,811 |
78.4% |
Other expenses |
27,378 |
26,098 |
(4.7%) |
EBITDA before risk provisions |
46,881 |
53,807 |
14.8% |
EBITDA after risk provisions |
46,881 |
41,807 |
(10.8%) |
Depreciation and amortization |
23,255 |
32,819 |
41.1% |
EBIT |
23,626 |
20,988 |
(11.2%) |
Financial result |
(1,936) |
(2,375) |
22.7% |
EBT |
21,690 |
6,613 |
(69.5%) |
Taxation |
7,176 |
6,364 |
(11.3%) |
Net income |
14,514 |
249 |
(98.3%) |
EPS (€) |
1.74 |
0.03 |
(98.3%) |
Source: Company data. Note: *The term ‘capitalised contract costs’ was introduced in FY20. In the previous year, €8.062m was shown under personnel expenses and €6.241m under material expenses.
Financial position challenged
The acquisitions also had a major impact on the balance sheet, especially Portavis. The balance sheet total increased from €320.1m on 30 September 2019 to €385.3m on 30 September 2020, partially driven by higher pension (€35m) and risk provisions (€12m). The latter related to restructuring measures to improve the delays and increased costs related to the integration of new customers in the financial services sector.
The equity ratio fell from 23.1% at end FY19 to 17.2% at end FY20. Adjusted for the effects of IFRS 16, the equity ratio would have been 19.5%. This loan should be repaid by 2022.
For the vast majority of DATAGROUP’s debts, mostly promissory loan bonds, net debt/EBITDA has to be <3.0x. Net debt improved by 4.1% from €65.7m at 30 September 2019 to €63.0m at 30 September 2020 and net debt/EBITDA amounted to 1.3x, compared to 1.4x in the previous year, well within covenants. Given this ratio, DATAGROUP’s financial position should not be a limitation to its acquisitive growth path.
2021 will be strong, but 2022 targets will not be met
Despite a slowdown in large segments of the German economy in the wake of new lockdowns, DATAGROUP reported ‘excellent first months’ with the publication of the annual report, compared with a ‘good start to the new fiscal year’ that was reported in November. The more positive wording in the annual report signals an improving business performance. Almato, which was acquired in 2019, suffered from project postponements and cancellations due to the pandemic, but is also starting new projects again.
Given the intensification of the COVID-19 pandemic, management has indicated that a meaningful forecast for FY21 is not possible. However, the company anticipates moderate growth in revenues and operating profit that should improve strongly given the benefits of experience from the first lockdown and the absence of negative one-offs. The contribution from FIS should improve significantly as results are turning around faster than planned. All subsidiary companies are reporting above budget according to CEO Max Schaber’s comments during the conference call following the publication of the annual report.
The ambition of reaching a 9% EBIT margin by FY22 is out of reach, as already stated with the H120 results. Nevertheless, CEO Max Schaber reiterated in the conference call that the 9% EBIT margin is still a strong medium-term ambition. Given the ongoing recovery at FIS, we believe this aspiration could be within reach.
M&A continues to be an important growth driver
Inorganic growth is an important pillar in DATAGROUP’s strategy and acquisitions, especially of Portavis and 200 employees in March 2020, had a significant impact on DATAGROUP’s results. DATAGROUP also took a 24% stake in much smaller Cloudeteer (29 employees) in June, with the option to acquire the remaining 76%. As this is a minority stake, it is not consolidated in revenues.
According to Max Schaber, DATAGROUP is in discussions with five or six M&A targets of which two are nearing the end. Together these two would add roughly €40m revenues, albeit at higher multiples than DATAGROUP is used to paying. EV/EBIT levels for acquisition targets in the M&A market have increased from a maximum of 4x historically to 5–8x now, reaching double digits for IT security companies, an area where DATAGROUP wants to expand.
Valuation
DATAGROUP is trading at a premium of 12% on consensus FY21e P/E and a discount of 8% on FY21e EV/EBITDA versus its peers. Compared to peers that are more dependent on selling time or projects, DATAGROUP has a much more resilient business model, with a recurring revenue base of over 75%. Furthermore, it has further margin potential, a solid track record of integrating acquisitions, creating cross-selling synergies from upselling additional services and a clear focus on the large German SME sector, which could justify a premium compared to peers.
However, despite the high recurring revenue base, the company has not provided specific earnings guidance given the uncertainty around the new lockdown measures in Germany.
Exhibit 2: Peer group comparison
Market cap |
P/E (x) |
EV/EBITDA (x) |
|||||
(local CCY m) |
2019 |
2020e |
2021e |
2019 |
2020e |
2021e |
|
Allgeier |
€234 |
14.4 |
8.9 |
6.8 |
5.6 |
4.5 |
4.0 |
ATOS |
€7162 |
8.6 |
9.5 |
9.0 |
5.0 |
6.6 |
6.3 |
Bechtle |
€7582 |
44.7 |
39.2 |
35.5 |
24.0 |
21.3 |
19.7 |
Cancom |
€1848 |
35.4 |
37.3 |
30.5 |
11.3 |
12.8 |
10.7 |
CENIT |
€117 |
17.1 |
N/A |
39.2 |
7.4 |
14.4 |
10.1 |
GFT |
€334 |
16.8 |
22.4 |
15.1 |
9.3 |
11.0 |
8.9 |
QSC |
€207 |
2.8 |
N/A |
N/A |
1.2 |
N/A |
24.4 |
S&T |
US$1418 |
29.0 |
27.8 |
21.3 |
13.0 |
11.7 |
9.6 |
SNP Schneider |
€407 |
N/A |
N/A |
40.8 |
26.9 |
30.6 |
17.1 |
All for One Steeb |
€293 |
17.9 |
27.3 |
22.6 |
9.4 |
8.1 |
7.3 |
Peer average |
|
20.7 |
24.6 |
24.5 |
11.3 |
13.4 |
11.8 |
DATAGROUP |
€491 |
33.9 |
47.3 |
27.5 |
12.4 |
12.6 |
10.9 |
Premium/(discount) |
|
63% |
92% |
12% |
10% |
-6% |
-8% |
Source: Refinitiv. Note: Priced at 22 January 2021. Valuation multiples for DATAGROUP are not calendarised.
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Research: TMT
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