Is an H2 catalyst coming?

mVISE 12 September 2019 Update
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mVISE

Is an H2 catalyst coming?

Software & comp services

Scale research report - Update

12 September 2019

Price

€3.02

Market cap

€26m

Share price graph

Share details

Code

C1VX

Listing

Deutsche Börse Scale

Shares in issue

8.6m

Last reported net debt at 31 December 2018

€9.4m

Business description

mVISE’s core competencies are IT infrastructures and integration, combined with data management and analytics. With over 160 full-time equivalent (FTE) staff, mVISE supports digitisation projects and offers cloud products such as the integration platforms as a service elastic.io and SaleSphere.

Bull

mVISE is well placed to benefit from the digital revolution with its orientation to the Internet of Things, digitalisation, integration, data science and security.

The new strategy is growing margins via increased high-margin product sales and staff efficiency.

Recent acquisitions, particularly elastic.io, have boosted the group’s product offerings, supporting margin and earnings prospects.

Bear

Project-based consulting business faces risk of skilled employee cost inflation.

Own-developed software product SaleSphere has not achieved expectations.

Debt levels rose sharply in H118 with the purchase of a consulting team from SHS Viveon.

Analyst

Dan Gardiner

+44 (0)20 3077 5700

mVISE interims highlight a business continuing to make progress on its three-year 2018+ strategy. Headline revenues rose nearly 7% y-o-y and 12% organically. With new white-label partners now marketing elastic.io, a big acceleration in product and associated (high-margin) consulting sales is expected in H2 and the company has maintained its FY19 guidance. We see the shift to cloud-based, big data-driven platforms providing an excellent long-term growth tailwind. In our view, these prospects are not reflected in a consensus FY20 P/E of 12.1x.

H1 progress, acceleration anticipated in H2

Organic growth of 11.8% y-o-y represented a healthy performance but is below the c 25% rate implied by the mid-point of FY19 guidance. Low professional services utilisation in Q2, a slow start from SaleSphere and a delay to the start of elastic.io marketing contributed to weaker than expected growth. Combined with an uptick in development costs, this led to a dip in EBITDA margins (from 7.2% in H118 to 1.3% in H119). Nevertheless, the company re-iterated FY19 guidance. H2 is typically seasonally stronger – with a full period of large partners now selling elastic.io and SaleSphere orders ramping, product sales should grow substantially. This product growth should pull through high-margin consulting revenue.

Strategy: Products capitalise on growth opportunity

mVISE believes the shift to cloud-based platforms and growth in big data provides an excellent long-term growth opportunity. Customers engage it to help devise, integrate and implement migration and hybrid strategies. Augmenting the core professional services business with high-margin software products (elastic.io and SalesSphere) should accelerate growth, raise margins and enhance visibility. mVISE’s three-year 2018+ strategy targets revenue of €33–35m in FY20 (a 33% CAGR) and 19% EBITDA margins (+7pp) primarily driven by product sales.

Valuation: Delivery in H2 a catalyst for re-rating?

mVISE’s interims prompted a 12% fall in the share price and a 20% cut to consensus EPS estimates (below company guidance). The 12.1x FY20 EPS multiple implied by the current €3.02 share price is still 19% below its nearest peers. The company has delivered substantial growth historically and is exposed to healthy fundamental trends that should sustain this trajectory. In our view, if mVise delivers the acceleration in H2 it anticipates, it could prove a catalyst for the shares.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

PBT
(€)

EPS
(€)

EV/EBITDA
(x)

P/E
(x)

Yield
(%)

12/17

14.8

2.0

0.5

0.16

18.1

18.9

N/A

12/18

22.5

2.5

1.3

0.12

14.3

25.2

N/A

12/19e

25.9

4.0

2.4

0.18

8.8

16.8

N/A

12/20e

29.8

4.6

2.9

0.25

7.7

12.1

N/A

Source: Company data, Refinitiv (based on one estimate)

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.

Interims: Progress but revenue growth below trend

After delivering an impressive 52% y-o-y revenue growth in FY18, H1 growth slowed to 6.6% y-o-y (11.8% on an organic basis), well below the 22% needed to deliver FY19 guidance. While demand for consulting (95% of sales) was healthy (up 13.1% y-o-y), growth was affected by low utilisation in Q2 as two major projects were completed. The bigger shortfall was in products (5% of sales). SaleSphere signed five new customers (including FinTyre, Konica Minolta, Yokogawa and Schomburg) but none of these contracts generated material revenue in H1 and a reduction in project revenues saw sales fall year-on-year. A delay in the development of elastic.io also affected sales.

The slowdown in revenue growth combined with an uptick in software development costs, which led to a 11.6pp decline in gross margin (from 83.5% in H118 to 71.9%). As a result, EBITDA fell to €0.1m and EBIT turned negative. However, as a result of a reduction in receivables, FCF was positive (€0.4m), reducing net debt from €9.8m to €9.4m.

Exhibit 1: Revenue growth in H1 vs historic and implied H2 rates

€m

H118

H218

FY18

H119

H219e*

FY19e*

Revenue - headline

9.2

13.3

22.5

9.8

17.7

27.5

Growth y-o-y (%)

52.0

6.6

33.1

22.2

Revenue - adjusted

8.8

13.2

22.0

9.8

17.7

27.5

Growth y-o-y (%)

48.9

11.8

33.4

24.8

Professional services

8.4

11.3

19.7

9.5

13.0

22.5

Product sales

0.4

2.0

2.8

0.5

4.5

5.0

- elastic.io

0.3

1.8

2.1

0.5

-

-

- Salesphere

0.1

0.1

0.2

0.0

-

-

Source: Company data/guidance. Note: *Midpoint of €26–29m range. H2 figure implied.

Acceleration anticipated in H2

mVISE believes these issues will prove temporary and, with a typically seasonally stronger H2, management remains confident it can meet FY19 guidance. The SaleSphere orders secured in H1 should become revenue generating and, now that all three large white-label partners (Magic Software, Deutsche Telekom and AppDirect) are commercially active, elastic.io product sales should also grow substantially. In FY18 nearly 90% of elastic.io revenue was generated in H2. Expansion of the white-label contracts at the year-end should be a further boost and product growth should also pull through high-margin product-based consulting revenue. In addition, the nationwide restrictions on hiring non-payroll staff is expected to have a beneficial impact on both demand and pricing of software consultancy.

Reaching the mid-point of FY19 guidance (revenue of €27.5m and EBITDA margin of 15%) requires generating €17.7m of revenue in H2 (an acceleration to 33% y-o-y) and EBITDA margins above 20%.

Longer-term prospects

In March 2018 mVISE launched 2018+, a three-year strategy to target revenue of €33–35m in FY20 (a 33% CAGR) coupled with raising EBITDA margins to c 19% (+7pp). In our view, this ambition is supported by the excellent long-term growth trends in its core market. Companies are looking to steadily migrate from on-premise software solutions to cloud-based platforms to exploit scale economies and increase flexibility. mVISE’s professional services proposition helps customers manage this transition and integrate big data and analytics tools. To support its growth here, mVISE plans to expand its headcount from 160 to over 200.

To augment its professional services growth, mVISE is also developing custom software products. Annualising just €1m or 5% of sales in H119, the current company results presentation appears to imply software products generating €9–10m (c 30% of sales) by FY20. Aside from the growth opportunity, subscription software products should prove more scalable, higher-margin and offer good visibility. Product sales should pull through high-margin, product-based consulting revenue.

SaleSphere is a software solution that aims to digitalise the instore sales processes by bringing in data from the customer relationship management, product information management and enterprise resource planning systems. Despite a slow start, the uptick in orders in H1 gives mVISE confidence in SaleSphere’s long-term prospects.

Exhibit 2: mVISE targets for revenue vs consensus estimates

Exhibit 3: mVISE targets for EBIT vs consensus estimates

Source: Refinitiv, company accounts

Source: Refinitiv, company accounts

Exhibit 2: mVISE targets for revenue vs consensus estimates

Source: Refinitiv, company accounts

Exhibit 3: mVISE targets for EBIT vs consensus estimates

Source: Refinitiv, company accounts

Valuation

We value mVISE by deriving a multiple from its nearest listed consulting peers. Applying a peer group average 14.9x rating to its FY20 P/E consensus estimates suggests a €3.7 per share valuation, 23% upside to the current price. Delivering on its guidance suggests an FY20 EPS of c €0.37. Applying the same multiple to the guidance-based FY20 EPS suggests a share price of €5.5, nearly double the current price. In our view, delivery on a challenging H2 target could prove a significant catalyst for the shares. In addition, software companies tend to be more highly rated. As mVISE’s software revenues rise in the mix, arguably its multiple should also increase.

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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.

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 research department of Edison 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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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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This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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.

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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.

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Schumannstrasse 34b

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