Polish SAP consulting bolt-on

SNP Schneider-Neureither & Partner 12 May 2017 Update
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SNP Schneider-Neureither & Partner

Polish SAP consulting bolt-on

Acquisition

Software & comp services

12 May 2017

Price

€39.42

Market cap

€196m

Net cash (€m) at 31 March 2017

12.2

Shares in issue

4.98m

Free float

65.9%

Code

SHF

Primary exchange

Frankfurt (Xetra)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.3

(17.6)

25.2

Rel (local)

(2.3)

(24.4)

(1.8)

52-week high/low

€49.09

€26.06

Business description

SNP Schneider-Neureither & Partner (SNP) 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 product called SNP Transformation Backbone with SAP Landscape Transformation software (T-B).

Next events

AGM

31 May 2017

Q2 results

28 July 2017

Q3 results

27 October 2017

Analysts

Richard Jeans

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

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

SNP is acquiring BCC, one of the largest SAP partners in Central and Eastern Europe, for an undisclosed price. The deal broadens the group’s customer base, widens its expertise in the areas of SAP service and cloud provisioning and brings onboard c 250 SAP and IT consultants who can be cross-trained in transformation projects. On our estimates, the deal is value creating and earnings enhancing, with our FY18e and FY19e EPS rising by c 19%. However, we have cut our FY17 EBIT forecast, which implies a 7.3% margin, or 9.7% before the €2.65m one-off items outlined in the Q1 results. Given SNP’s strong market position in software-based transformation projects and assuming a sustained high level of activity, we believe the shares remain attractive on c 18x our FY19e earnings.

Year end

Revenue
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/15

56.2

3.4

58.8

34.0

67.0

0.9

12/16

80.7

5.7

94.4

39.0

41.8

1.0

12/17e

110.0

7.2

96.3

45.0

40.9

1.1

12/18e

135.1

13.6

185.6

52.0

21.2

1.3

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

Acquisition of BCC

SNP is acquiring 100% of the shares in the Polish BCC Group from its management for an undisclosed price. In our view, BCC provides an excellent geographic fit with SNP, since BCC is one of the largest SAP partners in Eastern Europe. Additionally, Polish talent is cheaper than in other markets, and BCC offers the potential for nearshoring/offshoring. Despite having over 400 customers in 40 countries, BCC was subscale and had limited capital to expand. BCC generated revenue of PLN95.4m in FY16 (c €21.6m) with profit margins in mid-single digits.

Acquisition of Innoplexia

Separately, SNP has increased its stake in Innoplexia from 20% to 80%. SNP paid €0.4m for the initial 20% in April 2016, so we assume it has paid €1.2m for the additional 60%. Innoplexia operates out of the same offices as SNP in Heidelberg. Innoplexia’s flagship product – Innoplexia Virtual Industry – collects, processes and analyses digital market data from search engines and comparison portals.

Forecasts: FY17 cut while FY18 EPS rises by c 19%

We have increased our FY17 revenues in line with the new guidance of €110m and have conservatively ignored Innoplexia. We have cut FY17 operating profit by €1.8m to €8.0m. We increase group revenue by €24.6m in FY18 and €26.9m in FY19, while EPS rise by 19% in each year. Noting that SNP seeks to acquire businesses at c 0.6-1.2x sales, we have assumed a €20m purchase price for BCC.

Valuation: Strong growth play in the ERP space

The stock trades on c 41x our FY17e EPS, which falls to c 21x in FY18e and to c 18x in FY19e. Our discounted cash flow (DCF) valuation rises to €47.75/sh from €46.00, which is c 21% above the current share price. However, our model is based on conservative assumptions and takes no account of any additional acquisitions.

Acquisition of BCC

SNP is acquiring 100% of the shares in the Poznan-based BCC Group from its three senior managers for an undisclosed price. Founded in 1995, BCC has c 300 employees and therefore this acquisition will take SNP’s total headcount to more than 1,000. BCC has one of the biggest SAP teams in Central and Eastern Europe, with over 200 SAP specialists along with a further c 50 IT experts. As an authorised SAP partner, BCC has competencies in all major SAP products and technologies and offers a wide range of solutions extending from standard SAP to complementary solutions. In addition to SAP services, BCC offers IT outsourcing activities, including cloud computing and managed hosting, operating from two twinned data centres at different locations. SNP intends to maintain these data centre activities, which will strengthen its service offering and enable it to match some of its larger competitors. Additionally, BCC offers customised software development through the BCC Software Factory, which will offer synergies with SNPs own software activities.

BCC has over 400 customers in 40 countries and has implemented more than 1,000 projects. It had a strategy in place called BCC + international, which ran until 2017. The plan was to drive revenues above PLN140m, with at least 60% of the revenues coming from projects carried out outside Poland. However, this plan appears to have been behind target. BCC generated revenue of PLN95.4m in FY16 (c €21.6m) with profit margins in mid-single digits.

The purchase is funded from the group’s existing cash resources. As SNP had cash resources of €53.9m at the end of March (ie net cash of €12.2m after taking into account €41.7m of debt of which €39.6m is long term), based on our assumptions this will reduce to a pro forma €32.7m after the acquisitions of BCC and Innoplexia. This would leave the group with c €25-30m of headroom for acquisitions before additional financing is needed.

Acquisition of Innoplexia

SNP has increased its stake in Innoplexia from 20% to 80%. Innoplexia operates out of the same offices as SNP in Heidelberg. Innoplexia’s flagship product – Innoplexia Virtual Industry – collects, processes and analyses digital market data from search engines and comparison portals. SNP has got to know the Innoplexia business well, and it plans to utilise Innoplexia’s skills in it its future transformation software to generate automated recommended actions in transformation projects using artificial intelligence and software algorithms.

Founded in 2010, Innoplexia has 24 employees and generated revenue of c €1m FY16. In the future, SNP and Innoplexia will further extend and grow their collaboration, particularly in the areas of software development and sales. Innoplexia will be able to use the established distribution networks of SNP and will also seek separate routes to international markets. The company founders and managing directors hold the remaining 20% of Innoplexia shares. A unilateral purchase option has additionally been arranged for these shares.

Management guidance

Following the BCC acquisition, and prior to the Innoplexia deal, SNP’s management increased its FY17 revenue guidance to €110m from €96-100m previously. This implies c €22m in annualised revenue from BCC based on seven months in FY17. With the Q1 results, management’s FY17 EBIT margin guidance was 9-11%, or 7-12% after any acquisitions.

Forecasts: FY18 & FY19 revenues rise by c 22% while EPS goes up by c 19%

We have included BCC for a seven-month period in FY17, taking our FY17 revenues to match management’s new guidance of €110m. We have conservatively eased our FY17 operating profit forecast by €1.8m to €8.0m (vs €6.9m in 2016) to reflect additional one-off costs going into the business, as outlined in the Q1 results. This translates to an operating margin of 7.3%, or 9.7% after adding back the one-off costs. We increase group revenue by €24.6m in FY18 and €26.9m in FY19, with incremental margins of 8.6% and 9.3% to take synergies into account. We have treated this as professional services revenue for simplicity. We have conservatively ignored Innoplexia given its small size. We have maintained our interest charge forecasts, since the financing is already in place and there is no interest on cash balances. We have maintained our tax charge assumptions at 30% going forward.

Given that SNP seeks to acquire businesses at around 0.6-1.2x sales, we have assumed a €20m purchase price for BCC. We have ignored any earnout or other deferred payment structure. As SNP paid €0.4m for the initial 20% of Innoplexia in April 2016, we have assumed that SNP has paid €1.2m for the additional 60%.

In all, our revenue forecasts rise by 13% in FY17, and 22% in each of FY18 and FY19. EBIT falls by 18% in FY17, and rises by 17% in FY18 and FY19, while EPS falls by 21% in FY17 and rises 19% in FY18 and FY19. We forecast the group to end FY17 with net cash of €0.3m, which moves to net debt of €2.2m at end-FY18 (after making the deferred payments for previous acquisitions) and then moves to €6.1m net cash a year later.

Exhibit 1: Forecast changes

Old

New

Change

Old

New

Change

Old

New

Change

(€'000s)

2017e

2017e

%

2018e

2018e

%

2019e

2019e

%

Revenue

 

 

 

 

 

 

Professional services

80,500

92,991

15.5

91,652

116,292

26.9

100,104

127,025

26.9

Software licences

14,000

14,000

0.0

15,000

15,000

0.0

16,425

16,425

0.0

Software maintenance

3,000

3,000

0.0

3,850

3,850

0.0

4,216

4,216

0.0

Total software

17,000

17,000

0.0

18,850

18,850

0.0

20,641

20,641

0.0

Group revenue

97,500

109,991

12.8

110,502

135,142

22.3

120,745

147,665

22.3

Growth (%)

20.8

36.3

 

13.3

22.9

 

9.3

9.3

 

Professional services contribution

7,889

6,650

(15.7)

9,394

11,513

22.6

10,511

13,020

23.9

Software contribution

4,590

4,250

(7.4)

5,655

5,655

(0.0)

6,915

6,915

0.0

Non-segment-related expenses

(3,200)

(3,400)

6.3

(3,350)

(3,350)

0.0

(3,417)

(3,417)

0.0

Other operating income & other taxes

500

500

0.0

510

510

0.0

520

520

0.0

Operating expenses

(87,721)

(101,991)

16.3

(98,293)

(120,814)

22.9

(106,216)

(130,627)

23.0

Adjusted operating profit (EBIT)

9,779

8,000

(18.2)

12,209

14,328

17.4

14,529

17,038

17.3

Operating profit margin (%)

10.0

7.3

 

11.0

10.6

 

12.0

11.5

 

Growth (%)

42.6

16.7

 

24.9

79.1

 

19.0

18.9

 

Net interest

(800)

(800)

0.0

(750)

(750)

0.0

(700)

(700)

0.0

Profit before tax norm

8,979

7,200

(19.8)

11,459

13,578

18.5

13,829

16,338

18.1

Profit before tax

8,979

7,200

(19.8)

11,459

13,578

18.5

13,829

16,338

18.1

Taxation

(2,694)

(2,160)

(19.8)

(3,438)

(4,073)

18.5

(4,149)

(4,901)

18.1

Non-controlling interests

(248)

(248)

0.0

(267)

(267)

0.0

(289)

(289)

0.0

FRS 3 net income

6,038

4,792

(20.6)

7,754

9,237

19.1

9,391

11,148

18.7

Adjusted EPS (c)

121.3

96.3

(20.6)

155.8

185.6

19.1

188.7

224.0

18.7

P/E - Adjusted EPS

 

40.9

 

21.2

 

17.6

Source: Edison Investment Research


Exhibit 2: Financial summary

€'000s

2014

2015

2016

2017e

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

30,480

56,236

80,685

109,991

135,142

147,665

Cost of sales

0

0

0

0

0

0

Gross Profit

30,480

56,236

80,685

109,991

135,142

147,665

EBITDA

 

 

862

5,484

8,524

10,077

16,804

19,823

Adjusted Operating Profit

 

 

(66)

4,222

6,857

8,000

14,328

17,038

Amortisation of acquired intangibles

0

0

0

0

0

0

Exceptionals

1,505

356

0

0

0

0

Associates

0

(3)

8

0

0

0

Operating Profit

1,439

4,575

6,865

8,000

14,328

17,038

Net Interest

(66)

(828)

(1,137)

(800)

(750)

(700)

Profit Before Tax (norm)

 

 

(132)

3,394

5,720

7,200

13,578

16,338

Profit Before Tax (FRS 3)

 

 

1,373

3,747

5,728

7,200

13,578

16,338

Tax

(344)

(1,195)

(1,517)

(2,160)

(4,073)

(4,901)

Profit After Tax (norm)

(477)

2,198

4,203

5,040

9,505

11,437

Profit After Tax (FRS 3)

1,028

2,552

4,211

5,040

9,505

11,437

Minority interest

(40)

0

(147)

(248)

(267)

(289)

Adjustments for normalised earnings

0

0

0

0

0

0

Net income (norm)

(517)

2,198

4,056

4,792

9,237

11,148

Net income (FRS 3)

988

2,552

4,064

4,792

9,237

11,148

Average Number of Shares Outstanding (m)

3.7

3.7

4.3

5.0

5.0

5.0

EPS - normalised (c)

 

 

(13.9)

58.8

94.4

96.3

185.6

224.0

EPS - normalised & fully diluted (c)

 

 

(13.9)

58.8

94.4

96.3

185.6

224.0

EPS - FRS 3 (c)

 

 

26.6

68.3

94.6

96.3

185.6

224.0

Dividend per share (c)

13.00

34.00

39.00

45.00

52.00

60.00

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

2.8

9.8

10.6

9.2

12.4

13.4

Adjusted Operating Margin (%)

-0.2

7.5

8.5

7.3

10.6

11.5

BALANCE SHEET

Fixed Assets

 

 

8,291

15,243

29,054

50,377

50,603

50,772

Intangible Assets

5,190

11,675

24,179

45,779

45,779

45,779

Tangible Assets

1,231

1,999

3,161

3,284

3,510

3,679

Other

1,871

1,570

1,714

1,314

1,314

1,314

Current Assets

 

 

17,882

29,996

59,478

80,293

86,280

93,771

Stocks

0

0

0

0

0

0

Debtors

11,286

16,084

27,201

37,081

45,560

49,782

Cash

5,681

13,769

31,914

42,849

40,357

43,626

Current Liabilities

 

 

(9,782)

(13,703)

(34,382)

(33,134)

(46,041)

(49,576)

Creditors

(9,182)

(11,101)

(21,583)

(31,034)

(38,941)

(42,476)

Short term borrowings

(600)

(2,602)

(12,799)

(2,100)

(7,100)

(7,100)

Long Term Liabilities

 

 

(2,501)

(15,513)

(5,576)

(45,576)

(36,076)

(26,576)

Long term borrowings

(1,650)

(12,344)

(434)

(40,434)

(35,434)

(30,434)

Other long term liabilities

(851)

(3,169)

(5,141)

(5,141)

(641)

3,859

Net Assets

 

 

13,890

16,024

48,575

51,961

54,767

68,391

CASH FLOW

Operating Cash Flow

 

 

2,579

1,879

1,005

9,526

16,129

19,085

Net Interest

(66)

(167)

53

(800)

(750)

(700)

Tax

(1,102)

(554)

(412)

(2,016)

(3,802)

(4,575)

Capex

(701)

(1,779)

(3,451)

(2,200)

(2,703)

(2,953)

Acquisitions/disposals

(500)

(3,228)

(5,923)

(21,200)

(9,127)

0

Shares issued

0

0

30,129

0

0

0

Dividends

(335)

(483)

(1,264)

(1,676)

(2,240)

(2,588)

Net Cash Flow

(124)

(4,332)

20,137

(18,366)

(2,492)

8,269

Opening net debt/(cash)

 

 

(3,505)

(3,431)

1,176

(18,681)

(315)

2,177

HP finance leases initiated

0

0

0

0

0

0

Other

51

(275)

(281)

0

0

0

Closing net debt/(cash)

 

 

(3,431)

1,176

(18,681)

(315)

2,177

(6,092)

Source: SNP Schneider-Neureither & Partner accounts, Edison Investment Research

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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

245 Park Avenue, 39th Floor

10167, New York

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Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2017 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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