New $4.5m contract win in North America

SNP Schneider-Neureither & Partner 4 May 2018 Update
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SNP Schneider-Neureither & Partner

New $4.5m contract win in North America

Q1 results

Software & comp services

4 May 2018

Price

€34.50

Market cap

€189m

Net debt (€m) at 31 March 2018

32.6

Shares in issue

5.5m

Free float

53.0

Code

SHF

Primary exchange

Frankfurt (Xetra)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.1

(0.6)

(9.5)

Rel (local)

3.2

0.2

(10.6)

52-week high/low

€43.4

€28.5

Business description

SNP Schneider-Neureither & Partner is a software and consulting business focused on supporting customers in implementing change, and rapidly and economically tailoring IT landscapes to new situations. It has developed a proprietary software suite, CrystalBridge and Transformation Backbone with SAP LT (T-B), which automatically analyses and applies and tracks changes in IT systems.

Next events

AGM

30 May 2018

Q2 results

2 August 2018

Q3 results

31 October 2018

German Equity Forum

26-28 November 2018

Analysts

Richard Jeans

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

While Q1 revenue grew by 46%, the underlying growth was affected by customers deferring projects, particularly around SAP S/4HANA. However, new orders were healthy, and the book-to-bill ratio jumped to 1.3x. This included part of a $4.5m new contract in the US and we expect FY18 to follow a similar path to FY17 with a stronger than normal H2. Meanwhile, SNP remains focused on bedding down acquisitions and the management team has been restructured to reflect the global nature of the business. Also, there has been some streamlining. The outlook remains favourable, particularly on the M&A-driven side of the business, with global M&A at record highs. Given the favourable industry drivers and the potential for margin recovery, the shares look attractive on c 22x our FY19e earnings.

Year end

Revenue
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

80.7

6.4

109.7

39.0

31.5

1.1

12/17

122.3

0.2

(7.4)

0.0

N/A

0.0

12/18e

151.2

6.2

74.3

30.0

46.4

0.9

12/19e

165.3

12.9

160.1

40.0

21.5

1.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Q1 results: Book-to-bill ratio rises to 1.30x

Group revenue grew by 46% to €31.6m, including organic growth of 2% and the impact of four acquisitions. There was also a c €450k FX tailwind. SNP reported an operating loss of €2.6m, which was after €1m of exceptional costs that are not expected to continue. Net debt increased by €5.8m to €32.6m.

Contract win with Spectrum Brands

SNP has won a $4.5m contract to provide transformation software and services to Spectrum Brands, the global consumer goods company listed on the NYSE, as it carves out its batteries and appliances divisions. The contract consists of two projects, one of which was booked after the period end, and includes a software component of $1.9m. The deal is evidence that SNP’s US business is regaining traction after the appointment in January of a US-based chief revenue officer.

Forecasts: Modest tweaks on maintained guidance

We have increased our interest and capex forecasts and created a new cloud revenue category. Otherwise, our forecasts are broadly maintained. Our adjusted EPS falls by 3.3% in FY18 and by 1.6% in FY19, while year-end net debt goes up by €0.6m to €34.8m in FY18 and by €1.5m to €29.8m a year later.

Valuation: Strong growth play in the ERP space

The stock trades on c 46x our FY18e EPS, which falls to c 22x in FY19e and c 16x in FY20e. Our discounted cash flow valuation (based on c 7% organic revenue CAGR over 10 years, 10% WACC, 15.8% long-term margin and 2% terminal growth) is €40.50/share, 14% above the current share price. Increasing the organic revenue CAGR to 10% increases the valuation to c €53/share, while a 15% CAGR takes the valuation to c €83/share, with other variables remaining constant.

SNP Schneider-Neureither & Partner is a research client of Edison Investment Research Limited

Q1 results: Slow start to year, but outlook looks good

While Q1 was weaker than management expected, SNP is maintaining guidance for FY18, with revenue in the €150-155m range and an EBIT margin in the mid-single digits. Despite the weak Q1, new orders rose by 68% to €40.9m, while the backlog jumped by 72% to €70.2m. Consequently, the group’s financial performance is expected to pick up as the year progresses.

Q1 group revenue grew by 46% to €31.6m, including organic growth of €0.3m, or c 2%, and the impact of four acquisitions (Innoplexia, SNP Poland, Adepcon and ERST). There was also a c €450k FX tailwind. There was an operating loss of €2.6m, which was after €1m of exceptional costs that are not expected to continue. This included €0.3m of acquisition-related expenses, €0.4m from the changeover to IFRS 15 and €0.3m in other factors, mainly being redundancies in North America. Around 25 full-time positions were eliminated in Q1, which is expected to generate savings in the lower single-digit millions.

The group is continuing to evolve following the significant acquisitions of the last two years. The two-person executive board has been replaced with a six-person leadership team to reflect the global nature of the group. Much of management time has been on transforming the group processes following the recent acquisitions. SNP rehired Dieter Matheis late last year on a temporary contract as global CFO to assist in the process. Meanwhile, the overall group strategy, to build a global, software-based IT services business providing support in transformation projects, both at international and regional levels, remains intact.

The DACH (German-speaking) area has been performing well (10% revenue growth y-o-y to €15.4m), as have BCC (€4.8m revenues) and Adepcon (€4.2m revenues), which are the major acquisitions of 2017, and the UK (€2.0m revenues, up 33%). BCC, now called SNP Poland, has been fully integrated, while Adepcon continues to operate as it did previously. The laggard regions have been North America and Asia. North America saw a 22% decline in revenues to €3.6m, which largely reflects the lumpiness of orders, as a large order recently completed. In Asia, revenues rose by 7% to €1.6m, representing 5% of group revenues, compared with 10% of employees. The new transformation contract with Spectrum Brands is a positive development for the North American business and also highlights the emphasis on increasing software sales. Henry Göttler, who was running the Asian business, has left the group.

There were several project delays, which mostly related to SAP S/4HANA and resulted in lower utilisation levels as well as lower software sales. S/4HANA is very complex to implement, and the S/4HANA projects are expected to be staggered or implemented over the coming months.

Professional services revenue jumped by 33% to €25.4m, reflecting a 6% organic decline and €7.4m from acquisitions. The company has also added a new cloud revenue category that incorporates the hosting activities of the recently acquired SNP Poland, with €0.4m revenue generated in Q1.

Total software licence sales more than doubled to €5.7m, including €1.8m from acquisitions and 56% organic growth. The total includes €1.9m of third-party software resales. Despite the strong organic growth, sales of SNP’s high-margin applications, including Interface Scanner, DPM and Dragoman, were lower than expected.

Exhibit 1: Quarterly analysis

Quarterly analysis

2016

2017

2017

2017

2017

2017

2018

2018

2018

2019

€'000

FY

Q1

Q2

Q3

Q4

FY

Q1

Q2-Q4

FYe

FYe

Professional services

66,640

19,089

22,151

25,936

31,157

98,333

25,441

89,516

114,957

125,556

Cloud

 

 

 

 

 

 

424

1,376

1,800

1,971

Licences

11,982

1,733

3,042

5,935

8,389

19,099

3,697

23,974

27,671

30,300

Maintenance

2,063

776

1,237

1,140

1,758

4,911

1,991

4,830

6,821

7,469

Total revenue

80,685

21,598

26,430

33,011

41,304

122,343

31,553

119,696

151,249

165,297

Other operating income*

1,228

235

295

171

1,217

1,918

833

 

 

 

Cost of materials

(8,276)

(2,260)

(3,244)

(7,037)

(6,674)

(19,215)

(5,135)

 

 

 

Personnel costs

(47,207)

(14,657)

(15,511)

(18,849)

(22,455)

(71,472)

(21,363)

 

 

 

Other operating expenses

(17,811)

(6,692)

(6,461)

(7,156)

(9,626)

(29,935)

(7,183)

 

 

 

Other taxes

(95)

(28)

(277)

(32)

(196)

(533)

(118)

 

 

 

Op costs (before depreciation)

(72,161)

(23,402)

(25,198)

(32,903)

(37,572)

(119,075)

(32,966)

(107,401)

(140,367)

(146,954)

Adjusted EBITDA

8,524

(1,804)

1,232

108

3,732

3,268

(1,413)

12,295

10,882

18,343

Depreciation*

(1,010)

(344)

(390)

(493)

(528)

(1,755)

(808)

(2,680)

(3,488)

(4,408)

Adjusted operating profit

7,514

(2,148)

842

(385)

3,204

1,513

(2,221)

9,615

7,394

13,935

Operating Margin

9.3%

(9.9%)

3.2%

(1.2%)

7.8%

1.2%

(7.0%)

8.0%

4.9%

8.4%

Net interest

(1,137)

(577)

(181)

(218)

(351)

(1,327)

(287)

(913)

(1,200)

(1,000)

Edison profit before tax (norm)

6,377

(2,725)

661

(603)

2,853

186

(2,508)

8,702

6,194

12,935

Amortisation of acq'd intangibles*

(657)

(250)

(300)

(350)

(1,121)

(2,021)

(400)

(1,200)

(1,600)

(1,600)

Associates

8

0

(1)

12

(35)

(24)

0

0

0

0

Earnings before tax

5,728

(2,975)

360

(941)

1,697

(1,859)

(2,908)

7,502

4,594

11,335

New orders and backlog

2016

2017

2017

2017

2017

2017

2018

 

 

 

Incoming orders

95,600

24,400

33,200

37,400

35,700

130,700

40,900

 

 

 

Quarterly revenues

80,685

21,598

26,430

33,011

41,304

122,343

31,553

 

 

 

Book-to-bill ratio

1.18

1.13

1.26

1.13

0.86

1.07

1.30

 

 

 

Backlog

 

40,800

48,500

62,200

61,300

 

70,200

 

 

 

Source: Company accounts, Edison Investment Research. *Quarterly amortisation of acquired intangibles is estimated data.

The group maintains healthy cash balances following its capital-raising last year. SNP recently amended the presentation of its accounts, with financial liabilities now including acquisition liabilities (see our previous update note). The Q1 operating cash outflow was €4.7m and, after capex of €1.4m, free cash outflow was €6.1m. The group paid €3.2m in acquisition payments during the quarter. The group’s net debt increased by €5.8m over the quarter to €32.6m. There is also a small pension deficit that we have included in our DCF valuation.

Exhibit 2: Balance sheet position

€m

31-Dec-17

31-Mar-18

Cash

(33.9)

(24.3)

Current financial liabilities

11.2

7.4

Non-current financial liabilities

49.5

49.5

Net debt/(cash)

26.8

32.6

Pension deficit

1.5

1.6

Adjusted net debt/(cash)

28.4

34.2

Source: Company accounts


Exhibit 3: Financial summary

€'000s

2015

2016

2017

2018e

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

56,236

80,685

122,343

151,249

165,297

179,476

Cost of sales

0

0

0

0

0

0

Gross Profit

56,236

80,685

122,343

151,249

165,297

179,476

EBITDA

 

 

5,484

8,524

3,268

10,882

18,343

22,454

Adjusted Operating Profit

 

 

4,222

7,514

1,513

7,394

13,935

17,682

Amortisation of acquired intangibles

0

(657)

(2,021)

(1,600)

(1,600)

(1,600)

Exceptionals

356

0

0

0

0

0

Associates

(3)

8

(24)

0

0

0

Operating Profit

4,575

6,865

(532)

5,794

12,335

16,082

Net Interest

(828)

(1,137)

(1,327)

(1,200)

(1,000)

(800)

Profit Before Tax (norm)

 

 

3,394

6,377

186

6,194

12,935

16,882

Profit Before Tax (FRS 3)

 

 

3,747

5,728

(1,859)

4,594

11,335

15,282

Tax

(1,195)

(1,517)

(807)

(1,858)

(3,880)

(5,065)

Profit After Tax (norm)

2,198

4,860

(620)

4,336

9,054

11,817

Profit After Tax (FRS 3)

2,552

4,211

(2,666)

2,736

7,454

10,217

Minority interest

0

(147)

234

(267)

(289)

(312)

Adjustments for normalised earnings

0

0

0

0

0

0

Net income (norm)

2,198

4,713

(386)

4,069

8,766

11,506

Net income (FRS 3)

2,552

4,064

(2,431)

2,469

7,166

9,906

Average Number of Shares Outstanding (m)

3.7

4.3

5.2

5.5

5.5

5.5

EPS - normalised (c)

 

 

58.8

109.7

(7.4)

74.3

160.1

210.2

EPS - normalised & fully diluted (c)

 

 

58.8

109.7

(7.4)

74.3

160.1

210.2

EPS - FRS 3 (c)

 

 

68.3

94.6

(46.8)

45.1

130.9

180.9

Dividend per share (c)

34.00

39.00

0.00

30.00

40.00

50.00

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

9.8

10.6

2.7

7.2

11.1

12.5

Adjusted Operating Margin (%)

7.5

9.3

1.2

4.9

8.4

9.9

BALANCE SHEET

Fixed Assets

 

 

15,243

30,109

75,171

74,588

73,094

71,176

Intangible Assets

11,675

24,179

67,012

65,380

63,748

62,115

Tangible Assets

1,999

3,161

5,187

6,237

6,375

6,089

Other

1,570

2,769

2,972

2,972

2,972

2,972

Current Assets

 

 

29,996

58,424

78,614

75,032

80,124

89,626

Stocks

0

371

371

459

502

545

Debtors

16,084

25,652

43,781

54,125

59,152

64,226

Cash

13,769

31,914

33,877

19,863

19,885

24,270

Current Liabilities

 

 

(13,703)

(32,631)

(40,531)

(50,324)

(54,623)

(58,900)

Creditors

(11,101)

(14,523)

(29,295)

(39,088)

(43,387)

(47,664)

Short term borrowings

(2,602)

(18,108)

(11,236)

(11,236)

(11,236)

(11,236)

Long Term Liabilities

 

 

(15,513)

(7,327)

(53,157)

(41,083)

(33,509)

(25,935)

Long term borrowings

(12,344)

(5,531)

(49,487)

(44,487)

(39,487)

(34,487)

Other long term liabilities

(3,169)

(1,796)

(3,670)

3,404

5,978

8,552

Net Assets

 

 

16,024

48,575

60,097

58,213

65,085

75,967

CASH FLOW

Operating Cash Flow

 

 

1,879

1,005

(5,316)

10,159

17,548

21,589

Net Interest

(167)

53

(798)

(1,200)

(1,000)

(800)

Tax

(554)

(412)

(1,366)

(1,734)

(3,622)

(4,727)

Capex

(1,779)

(3,451)

(5,234)

(4,537)

(4,546)

(4,487)

Acquisitions/disposals

(3,228)

(5,923)

(28,783)

(11,701)

(1,716)

0

Shares issued

0

30,129

18,293

0

0

0

Dividends

(483)

(1,264)

(1,932)

0

(1,642)

(2,190)

Net Cash Flow

(4,332)

20,137

(25,136)

(9,014)

5,022

9,386

Opening net debt/(cash)

 

 

(3,431)

1,176

(8,275)

26,847

35,861

30,839

HP finance leases initiated

0

0

0

0

0

0

Other

(275)

(10,686)

(9,985)

0

0

()

Closing net debt/(cash)

 

 

1,176

(8,275)

26,847

35,861

30,839

21,453

Source: Company accounts, Edison Investment Research. Note: *Includes exceptional costs in FY17 and FY18. **Includes additional payments for Adepcon in FY18 and FY19, and final payments for RSP, Astrums/Hartung and Harlex in FY18.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SNP Schneider-Neureither & Partner and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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