Order book boosted by numerous large orders

DATAGROUP 31 May 2019 Update
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DATAGROUP

Order book boosted by numerous large orders

IT services

Scale research report - Update

31 May 2019

Price

€44.10

Market cap

€368m

Share price graph

Share details

Code

D6H

Listing

Deutsche Börse Scale

Shares in issue

8.349m

Last reported net debt at 31 March 2019

€35.8m

Business description

DATAGROUP is a full IT outsourcing provider, focused on the German Mittelstand market. The company offers the full range of IT services on a modular basis, through its CORBOX ‘cloud-enabling platform’. Services include service desk, end-user services, data centre services, application management and SAP services.

Bull

A compelling growth strategy, scaling the business across the Mittelstand sector.

Cloud services business model gives it a clear advantage over competitors.

Centralised SLA-based approach with a focus on customer satisfaction puts company in a strong position to consolidate a fragmented market.

Bear

Highly exposed to the German economy.

Acquisitions bring risks, but DATAGROUP has a proven track record in integrating acquisitions.

Increased debt levels, but the group is still well within its covenants.

Analyst

Richard Jeans

+44 (0)20 3077 5700

DATAGROUP recorded a strong H1, with revenue growth of 7.2% (pre IFRS 15 and 16 for comparison purposes), the bulk of which was organic, while the EBITDA margin expanded by 30bp to 12.0%. Adoption of the new accounting standards has made significant changes to the P&L. Notably, the company says that numerous large-scale orders have led to a positive order situation, particularly in the financial services sector – the order book stands at more than €200m in financial services alone. The group announced its 22nd post-IPO acquisition after the period end, which boosts its relatively weak position in the Rhine-Main region and adds competencies in containerised software solutions. While the shares have jumped by c 55% from their late December lows, the c 20x rating looks fair value given the bulging order book and attractive growth opportunities.

H119 results: Top-line growth was 7.2%

H119 group revenue grew by 7.2% to €143.1m (pre-IFRS 15 and 16), while EBITDA rose 10.5% to €17.2m as the margin expanded by 30bp to 12.0%. After including the new accounting standards, revenue was €138.7m, EBITDA €20.4m. Operating cash flow was affected by a c €9m investment in hardware for the new NRW Bank transition project. Net debt was hit by the first-time adoption of IFRS 16, which added €18.6m from lease liabilities, and the group ended the period with net debt of €35.8m, up from €12.1m at end-September and €14.5m a year earlier.

Acquisition of UBL Informationssysteme

In April, the group announced the acquisition of UBL Informationssysteme, a multi-cloud and managed service provider, for an undisclosed amount. UBL develops and operates IT infrastructures and platforms for larger Mittelstand companies. This is the group’s 22nd acquisition since DATAGROUP came to the market in 2006. UBL, which is based near Frankfurt/Main, generated revenues of more than €20m in 2018, with double-digit EBITDA margins, and has more c 70 employees.

Valuation: Increasingly attractive after the drift back

DATAGROUP has a strong track record, high recurring revenues, a clear focus on the huge German Mittelstand sector and a rising number of key differentiators. The shares look fairly valued trading on c 20.1x FY20e EPS and c 7x EBITDA, given an outlook underpinned by a favourable business model supported by attractive business drivers, which also provide a compelling case for acquisitions.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

09/17

223.1

27.0

1.41

0.45

31.3

1.0

09/18

272.1

34.5

1.55

0.60

28.5

1.4

09/19e

291.9

43.3

1.87

0.66

23.6

1.5

09/20e

312.9

46.9

2.19

0.77

20.1

1.7

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.

H119 results: Accounting changes give additional boost to EBITDA

H119 group revenue grew by 7.2% to €143.1m (pre-IFRS 15 and 16), the bulk of which was organic apart from a small impact from Almato, which contributed for the full period having been consolidated from January 2018. EBITDA (pre-IFRS 15 & 16) lifted by 10.5% to €17.2m as the margin expanded by 30bp to 12.0%. The adoption of IFRS 16 has reduced operating costs and increased depreciation and, to a smaller extent, the financial costs, as operating leases are now treated as a financial item. After applying the new accounting standards, revenue was €4.4m lower at €138.7m, as the standards have an impact on the date when revenue from a project, which has a transition and subsequent operating phase, can be recognised. For instance, no revenue is shown for large-scale projects that are still in the transition phase, even though a considerable amount of services is provided. EBITDA was €3.2m higher at €20.4m, boosting the margin by 270bp to 14.7%, primarily as operating costs switch to depreciation, which rose by €3.2m to €8.3m.

Exhibit 1: Key H1 figures

€000s

H118

H119

Change %

H119

Without
IFRS 15&16

Including IFRS 15&16

Revenues

133,513

143,076

7.2

138,722

Services & maintenance

109,115

119,029

9.1

114,674

Trade

24,335

23,977

(1.5)

23,977

Other

63

70

11.1

71

Own work capitalised

350

302

(13.7)

302

Total revenues

133,863

143,378

7.1

139,024

Material expenses/purchased services

(39,260)

(42,956)

9.4

(39,184)

Gross profit

94,603

100,422

6.2

99,840

Personnel expenses

(66,193)

(71,099)

7.4

(70,577)

Other income

1,867

2,630

40.9

2,630

Other expenses

(14,707)

(14,745)

0.3

(11,478)

EBITDA

15,570

17,208

10.5

20,415

Depreciation from PPA

(1,975)

(1,852)

(6.2)

(1,852)

Other depreciation

(4,949)

(5,144)

3.9

(8,335)

EBIT

8,646

10,212

18.1

10,228

Financial result

(1,353)

(970)

(28.3)

(1,122)

EBT

7,293

9,242

26.7

9,106

Taxation

(2,277)

(2,989)

31.3

(2,946)

Net income

5,016

6,253

24.7

6,160

Average number of shares (000's)

8,331

8,331

0.0

8,331

EPS (€)

0.60

0.75

24.7

0.74

Source: DATAGROUP

Notably, DATAGROUP says that numerous large-scale orders have led to positive order situation, particularly in the financial services sector. Since the beginning of FY19, the group has signed multi-year contracts with companies across a range of industries which have volumes in the mid-single to double-digit million euros range. It says that demand in the financial services sector has been particularly strong. Having won the tenders for the full-service outsourcing of IKB Deutsche Industriebank and for the operation of the IT infrastructure services of BayernInvest, a five-year contract was signed with Bankhaus Lampe. This contract has a volume in the double-digit million euros. As a result, the order book amounts to over €200m in the financial services sector alone.

Outside financial services, DATAGROUP won the public tender for the reallocation of service desk and onsite services of the ARD broadcasting stations. The framework contract agreed with the German regional public broadcasting agencies, Deutsche Welle and Deutschlandradio has a term of at least four years and a volume in the double-digit million euros. With effect from 1 March 2019, DATAGROUP is responsible for the operation of the entire SAP environment as a managed service for a well-known German automotive manufacturer. The range of services includes the operation of some 160 SAP instances on the customer infrastructure, including critical production systems. The contract also covers consulting services on SAP S/4HANA and innovative topics such as SAP Cloud Platform.

During H1, the number of the group’s CORBOX contracts increased by 20 to 165. In addition, 23 existing contracts have been extended and the range of services for nine customers has been expanded. CORBOX is the group’s core IT services offering – a flexible, all-in-one-solution for carefree IT operations. CORBOX is a cloud-enabling platform, in which DATAGROUP integrates third-party cloud solutions such as Microsoft and Amazon Web Services, enriches them with additional services and combines them with its own cloud and outsourcing services.

Operating cash flow was affected by a c €9m investment in hardware for the transition project of the new landmark NRW Bank contract. This investment was reflected in working capital, but will reverse out in H2 as it moves from inventories to financial assets at the end of the transition phase of the contract.

Net debt was hit by the first-time adoption of IFRS 16, which added €18.6m from lease liabilities, and the group ended the period with net debt of €35.8m, up from €12.1m at end-September and €14.5m a year earlier.

Due to the positive developments in H1 and the acquisition of UBL, management now expects FY19 revenue of more than €300m and EBITDA of over €38.5m (prior to adoption of IFRS 15 and 16). After application of IFRS 15 and 16, management expects revenue of more than €295m and EBITDA of more than €45m.


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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.

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.

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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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

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.

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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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