Maintaining FY20 profit target

Mensch & Maschine Software 24 July 2020 Update
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Mensch und Maschine

Maintaining FY20 profit target

Software

Scale research report - Update

24 July 2020

Price

€48.2

Market cap

€806m

Share price graph

Share details

Code

MUM

Listing

Deutsche Börse Scale

Shares in issue

16.7m

Last reported net cash at end H120*

*Excludes lease liabilities

€3.7m

Business description

Mensch und Maschine Software (M+M) sells proprietary and Autodesk CAD/CAM software. It reports across two business lines: M+M Software (FY19 31% of revenues, 64% of EBIT) and VAR (FY19 69% of revenues, 36% of EBIT). The company has operations in Europe, the US and Asia-Pacific.

Bull

Largest European Autodesk value-added reseller.

High-margin, internally developed software.

Loyal workforce.

Bear

Reliant on Autodesk’s technology development and channel strategy.

Management owns more than 50% of the company.

Large exposure to DACH economies.

Analyst

Katherine Thompson

+44 203 077 5730

Mensch und Maschine has reported a respectable set of H120 results, with revenue growth of 8.5% and EPS growth of 19.0% y-o-y. Q2 suffered from weaker demand in both divisions due to COVID-19 disruption but good cost control minimised the impact at the net income level. Management is maintaining its EPS and dividend targets for FY20; we estimate that this could be achieved even if H2 revenues fall below H1.

Software business maintained profitability in Q2

The Software business saw 0.9% year-on-year revenue growth in H120 and generated an EBIT margin of 26.3% (+1.7pp y-o-y). This masks divergent performance on a quarterly basis: Q1 revenue growth of 11.3% was offset by a 9.0% decline in Q2. Despite the lower demand in Q2, the EBIT margin only dipped to 25.8% due to good cost control.

VAR business main driver of H2 revenue growth

The VAR business generated 11.9% y-o-y revenue growth in H120, with 29.9% growth in Q1 only partially offset by a 9.4% decline in Q2. The H1 EBIT margin of 7.3% (+1.6pp y-o-y) was made up of a 9.6% margin in Q1 dropping to 3.4% in Q2. Overall at the group level, net income increased 18.4% and EPS 19.0% y-o-y. Net debt was reduced by €14m h-o-h, resulting in a net cash position of €3.7m (excluding lease liabilities) at the end of H1.

Valuation: Stock has recovered from lows

Even taking into account issues arising from the restrictions as a result of COVID-19, the company expects to meet its guidance for 18–24% EPS growth in FY20, equating to an EPS range of €1.17–1.23. Consensus estimates are at the lower end of the company’s guidance, possibly taking a conservative view based on current market conditions. The stock has recovered 62% from its low of €29.8 in March and is up 7% year-to-date; it trades at a discount to peers on all valuation metrics, with a dividend yield of c 2%.

Consensus estimates

Year
end

Revenue
(€m)

PBT

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/18

185.4

18.2

0.71

0.65

67.9

1.3

12/19

245.9

26.3

0.99

0.85

48.7

1.8

12/20e

273.2

31.3

1.16

1.01

41.4

2.1

12/21e

303.4

37.7

1.42

1.20

33.9

2.5

Source: 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 H120 results

Mensch und Maschine (M+M) reported revenue growth of 8.5% y-o-y for H120. Due to good cost control, operating profit increased 19.6% and EPS increased 19.0% over the same period. The company noted that after strong revenue growth of 24.5% y-o-y in Q120, COVID-19 disruption resulted in a decline in Q220 revenue of 9.3% y-o-y. The company closed the period with a net debt position of €10m; excluding finance leases, it had a net cash position of €4m.

Exhibit 1: H120 results highlights

€m

H119

H120

y-o-y

Revenues

120.22

130.38

8.5%

Gross profit

64.12

65.68

2.4%

EBITDA

17.53

21.21

21.0%

Operating profit

13.98

16.72

19.6%

Net income after minority interest

8.44

9.99

18.4%

EPS (€)

0.501

0.596

19.0%

Net debt (including lease liabilities)

21.39

10.04

-53.1%

Source: Mensch und Maschine

Divisional performance

In the two following exhibits, we analyse the divisional performance on a half-yearly and quarterly basis.

Exhibit 2: Divisional performance

€m

H119

H120

y-o-y

Revenues

Software

37.5

37.9

0.9%

VAR

82.7

92.5

11.9%

Total

120.2

130.4

8.5%

Gross profit

Software

35.2

34.7

-1.5%

VAR

28.9

31.0

7.2%

Total

64.1

65.7

2.4%

Gross margin

Software

93.9%

91.6%

-2.3%

VAR

34.9%

33.5%

-1.4%

Total

53.3%

50.4%

-3.0%

EBITDA

Software

11.4

12.4

9.0%

VAR

6.2

8.8

43.0%

Total

17.5

21.2

21.0%

EBITDA margin

Software

30.3%

32.7%

2.4%

VAR

7.5%

9.5%

2.1%

Total

14.6%

16.3%

1.7%

EBIT

Software

9.2

10.0

7.8%

VAR

4.8

6.8

42.5%

Total

14.0

16.7

19.6%

EBIT margin

Software

24.6%

26.3%

1.7%

VAR

5.7%

7.3%

1.6%

Total

11.6%

12.8%

1.2%

Source: Mensch und Maschine

Exhibit 3: Quarterly performance

€m

Q120

Q220

Change (year-on-year)

Q120

Q220

Revenue

Software

20.5

17.4

11.3%

-9.0%

VAR

58.2

34.4

29.9%

-9.4%

Total

78.6

51.8

24.5%

-9.3%

EBIT

Software

5.47

4.48

14.2%

0.9%

VAR

5.61

1.16

66.3%

-15.8%

Total

11.08

5.64

35.8%

-3.0%

EBIT margin

Software

26.7%

25.8%

0.7%

2.5%

VAR

9.6%

3.4%

2.1%

-0.3%

Total

14.1%

10.9%

1.2%

0.7%

Source: Mensch und Maschine

Software business revenue was essentially flat year-on-year for H120; this masks the strong rate of growth in Q120 (+11.3%) offset by a 9.0% decline in Q220 as COVID-19 made it harder to sign new business sales. While the Software gross margin declined by 2.3pp y-o-y in H120, EBIT grew 7.8% resulting in a 1.7pp increase in the EBIT margin to 26.3%. This was particularly evident in Q220 where EBIT increased 0.9% y-o-y despite a 9% revenue decline.

The VAR business saw H120 revenue growth of 11.9% y-o-y, with 29.9% growth in Q120 partially offset by a 9.4% decline in Q220. VAR EBIT increased 42.5% y-o-y in H120, expanding the EBIT margin by 1.6pp to 7.3%. On a quarterly basis, in Q120 EBIT grew 66.3% and the margin expanded 2.1pp to 9.6%. In Q220, the revenue decline resulted in a 15.8% decrease in EBIT and a 0.3pp decline in the margin to 3.4%.

Outlook and consensus estimates

Despite the weaker demand experienced in Q220, the company believes that as long there is a modest improvement in demand in H2, it should meet its targets for FY20 (EPS of €1.17–1.23 and a dividend of €1.00–1.05). Management noted that the emphasis would be on achieving the profitability target for FY20 with less focus on revenue and gross profit.

Having reported EPS of €0.6 in H120, M+M will need to generate roughly the same level of net income in H2 to reach the target. As M+M managed to reduce its cost base in Q2 (we estimate that operating expenses declined 13% q-o-q), we expect the company to maintain this focus during H2, which means that it should be able to generate the desired level of net income on lower revenues than in H1.

Consensus forecasts (which have not yet changed post results) are just below the bottom of the EPS target range for FY20 while the dividend forecast is within the range. This assumes that H220 revenues increase 9.5% compared to H120 while EBIT decreases 10% h-o-h.

Exhibit 4: Consensus forecasts

€m

FY20e

FY21e

Revenues

273.2

303.4

Revenue growth

11.1%

11.1%

EBITDA

41.4

47.6

EBITDA margin

15.1%

15.7%

EBIT

31.7

38.4

EBIT margin

11.6%

12.7%

EPS (€)

1.16

1.42

DPS (€)

1.01

1.20

Source: Refinitiv (as at 23 July)

Valuation

The stock trades at a large discount to peers on EV/sales and EV/EBIT multiples and at a smaller discount on a P/E basis, reflecting its lower operating margins versus peers. Its dividend yield is at the top end of its peer group.

Exhibit 5: Peer financial metrics and valuation multiples

Company

Quoted

Ccy

Share

price

Market

cap m

EV (rep

ccy) m

EV/sales

EV/EBIT

P/E

Div yield

EBIT margin

CY

NY

CY

NY

CY

NY

CY

NY

CY

NY

MENSCH UND MASCHINE

48.2

806

802

2.9

2.6

26.3

20.9

41.4

33.9

2.1%

2.5%

11.2%

12.7%

AVEVA GROUP

GBp

4215

6,806

6,761

8.5

7.9

32.5

28.1

41.2

35.8

1.1%

1.2%

26.2%

28.2%

CENIT

9.7

81

68

0.5

0.4

31.6

9.4

58.8

23.4

4.4%

4.4%

1.5%

4.5%

NEMETSCHEK

65.0

7,474

7,641

13.1

11.5

64.4

49.9

79.4

61.2

0.5%

0.6%

20.3%

23.1%

RIB SOFTWARE

25.5

1,323

1,233

4.5

3.8

40.8

26.2

51.8

36.3

0.7%

0.9%

11.0%

14.6%

AUTODESK

US$

240.7

52,769

52,938

14.2

12.0

50.0

36.5

63.7

44.9

0.0%

0.0%

28.4%

32.8%

DASSAULT SYSTEMES

159.9

42,101

44,680

9.8

8.9

35.5

30.3

43.4

37.6

0.5%

0.5%

27.6%

29.4%

HEXAGON

SEK

585.0

205,305

22,183

6.0

5.6

25.9

21.4

29.9

25.2

0.9%

1.1%

23.2%

26.0%

PTC

US$

83.8

9,699

10,468

7.4

6.7

26.8

22.7

36.5

29.8

0.0%

0.0%

27.5%

29.4%

Average

8.0

7.1

38.4

28.1

48.7

35.6

1.0%

1.1%

20.7%

23.5%

Median

7.9

7.3

34.0

27.1

47.6

36.1

0.6%

0.8%

24.7%

27.1%

Source: Refinitiv. Note: Priced at 23 July.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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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