Guidance upgraded on German DCI activities

Beta Systems 28 May 2019 Update
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Beta Systems

Guidance upgraded on German DCI activities

Technology

Scale research report - Update

28 May 2019

Price

€22.0

Market cap

€105m

Share price graph

Share details

Code

BSS

Listing

Deutsche Börse Scale

Shares in issue

4.8m

Last reported net cash as at March 2019, including €26.3m on deposit

€46.1m

Business description

Beta Systems provides data centre intelligence (DCI) solutions that enable efficient and secure bulk processing of data and identity access management (IAM) solutions. The company’s headquarters are in Berlin and it has sales and support offices in 18 markets globally. Approximately 70% of sales are derived in the DACH region.

Bull

Market leader in mainframe environments and DCI in Europe.

The strong orders indicate there remains life in the mainframe market.

Strong balance sheet.

Bear

Mature mainframe market backdrop.

Subscale IAM business.

FY18 affected by down-cycle in licence renewals.

Analyst

Richard Jeans

+44 203 077 5700

Beta Systems has been performing well, largely due to a strong performance from its core DCI mainframe software business. Consequently, in April, management upgraded FY19 guidance (revenue was upgraded by 4% and EBITDA by 27% at the mid-points) ahead of the interim results. While there has been a surprisingly strong level of orders in the group’s core DCI business in Germany, the IAM business has been performing in line. In our view, the shares are attractive, noting the potential sub 6x FY20 EV/EBITDA ratio, given the strong cash generation and high level of recurring revenues (we estimate 80%+).

H119 results: Operating cash flow jumps 21%

Revenue rose by 8% to €26.9m in H119, while EBITDA jumped by 15% to €6.9m, generating a margin of 25.7%. More importantly operating cash flow jumped by 21% to €10.6m. The bulk of licence revenue is recurring in nature and we note there is a mismatch between earnings and cash flow due to an accounting practice that recognises a new recurring style licence like a traditional up-front licence. Net cash jumped to €46.1m (including €26.3m on deposit) from €35.6m as at 30 September 2018. However, we note that the business is very H1-weighted with revenues and cash flow expected to be significantly weaker in H2.

Guidance: Upgraded in April

Management upgraded guidance in mid-April. FY19 management guidance is for revenues of €48.0–52.0m, which implies c 8.9% growth at the mid-point, and for EBITDA of €8.0–10.5m, implying margins of c 18.5% at the mid-point. The guidance upgrade was due to surprising orders in the DCI business in Germany.

Valuation: Modest valuation after adjusting for cash

After stripping out end-FY18 net cash of €35.6m, the group enterprise value is c €70m. Based on the mid-point of management’s FY19 EBITDA guidance, this implies an EV/EBITDA ratio of a modest 7.5x. Longer-term guidance suggests EV/EBITDA could potentially fall below 6x in FY20 (eg 5% revenue growth and 20% top of range margins implies 6.6x EV/EBITDA, or 5.6x based on the end-H119 net cash position). In our view, these valuations are very modest for a software business that has the potential to deliver 20%+ EBITDA margins and writes off all its R&D expenditure (c 20% of sales) in the year incurred. Additionally, the group’s main division, DCI, could benefit from the disruptions caused by the acquisitions of its two major competitors, BMC and CA, in 2018.

Historical financials

Year
end

Revenue
(€m)

EBITDA
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

09/16

46.4

7.0

5.7

0.99

0.0

22.2

N/A

09/17

49.8

10.8

9.3

1.51

0.0

14.6

N/A

09/18

45.9

5.5

4.3

0.76

0.0

28.9

N/A

Source: Company accounts

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.

H119 results: Strong orders for DCI mainframe software

Revenue rose by 8% to €26.9m in H119, while EBITDA jumped by 15% to €6.9m, generating a margin of 25.7%. More importantly operating cash flow jumped by 21% to €10.6m. We note that the business is very H1-weighted with revenues and cash flow expected to be significantly weaker in H2. The performance included full period contributions from LYNET and AUCONET, which were acquired in 2018. Revenues in DACH countries jumped by 17% to €19.9m, while in Western Europe, revenue surged by 30% to €3.4m.

The bulk of group software is sold on a rental basis and Beta recognises rental revenues on a similar basis to a traditional licence. This adds volatility to revenues and brings revenues forward compared with a cash flow model. The predominant rental model means that c 80%+ of group revenues are recurring (licences and maintenance), while much of the services revenues have a recurring feature, which would take the recurring revenues to more than 90% of the total.

The group has two continuing divisions: data centre intelligence (DCI, solutions for data centre automation) and identity access management (IAM, solutions for central user and access management). A third division, digitalisation (DIG), has been established via the acquisition of LYNET in 2018. The DCI business has been performing particularly well with new business achieved from both existing and new clients. The strong new order situation was a surprise, resulting in the upgrade to guidance. The DCI market has long sales cycles and orders are typically between €0.1m and €3.0m. The strong order situation is a positive indication that there remains life in the mainframe market as big bank and insurance customers seek to optimise and modernise their equipment. There was particular interest in the new generation software product ‘Symphony’ for the intelligent data centre. The IAM business has been performing broadly in line with expectations. The three recent acquisitions have been successful integrated.

Licence revenues fell, as weakness in ‘other Europe’ and North America segments over-shone slightly stronger results in the DACH region and Western Europe. Maintenance and services made solid gains helped by the inclusion of LYNET. Other activities mainly reflects third-party product sales of LYNET.

Net cash jumped to €46.1m (including €26.3m on deposit at Deutsche Balaton, Beta’s largest shareholder) from €35.6m as at 30 September 2018. The company received €3.8m back from Deutsche Balaton during the period. The company typically holds between €25m and €35m at Deutsche Balaton where it achieves attractive interest rates on its deposits, occasionally in special projects yielding 3–4%, but more typically at c 1%.

Exhibit 1: Revenue breakdown

€m

FY17

FY18

H118

H119

Change (%)

Licence

18.3

11.8

8.6

8.3

-3.3

Maintenance

24.1

24.9

12.0

13.5

12.1

Services

7.4

8.6

4.1

4.7

13.3

Other activities

0.0

0.6

0.2

0.4

117.2

Sales revenues

49.8

45.9

25.0

26.9

7.8

Source: Beta Systems

Guidance upgraded on core German DCI activities

FY19 management revenue guidance has been increased to a range of €48.0–52.0m, which implies c 8.9% growth at the mid-point, and for EBITDA of €8.0–10.5m. The guidance increase reflects stronger sales and stable costs. This translates to a margin of c 18.5% at the mid-points which makes management’s long-term goal of 15–20% EBITDA margins look potentially very conservative. The EBIT guidance is €6.0–8.5m (previously €4.5–6.5m); we note that the difference between EBITDA and EBIT is mostly explained by amortisation of intangibles resulting from purchase price allocations according to IFRS.

Exhibit 2: Management’s revised FY19e guidance

€m

FY14

FY15

FY16

FY17

FY18

FY19e (old)

FY19e(new)

Revenues

33.8

41.6

46.4

49.8

45.9

46.5–49.5

48.0–52.0

Licences

7.6

10.4

14.5

18.3

11.8

11.5–12.5 

 

Maintenance

19.8

23

23.8

24.1

24.9

26–27 

 

Other

6.4

8.1

8

7.4

9.3

9–10 

 

EBITDA

(1.3)

3.5

6.9

10.8

5.5

6.3–8.3

8.0–10.5

EBITDA margin

N/A

8%

15%

22%

12%

15%

Liquidity

21.8

27.4

39

44.1

35.6

 

 

Source: Company accounts and announcements

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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 12, Office 1205

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NSW 2000, Australia

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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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 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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