Mensch2

Proprietary software drives profit growth

Mensch und Maschine Software 13 March 2019 Update
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Mensch und Maschine Software

Proprietary software drives profit growth

Software

Scale research report - Update

13 March 2019

Price

€28.3

Market cap

€476m

Share price graph

Share details

Code

MUM

Listing

Deutsche Börse Scale

Shares in issue

16.8m

Last reported net debt at end FY18

€11.2m

Business description

Mensch und Maschine Software (M+M) sells proprietary and Autodesk CAD/CAM software. It reports across two business lines: M+M Software (30% of FY18 revenues) and VAR (70% of FY18 revenues). 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.

Analyst

Katherine Thompson

+44 203 077 5730

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.

Mensch und Maschine (M+M) reported strong revenue and profit growth in FY18. Its proprietary software business generated another year of growth and expanded operating margins above 23% for the first time. The VAR business saw a rebound in revenues (+17.5%) and, despite a lower gross margin, managed to grow its operating margin 1.6pp y-o-y. The recent increased investment in SOFiSTiK boosts the company’s construction software offering and adds high-margin proprietary software revenues.

Revenue and operating margin growth in FY18

M+M reported strong FY18 revenue growth of 15.3%. The Software business continued on its upward trajectory, growing 10.4% in FY18 and at a CAGR of 9.7% since 2013. The VAR business rebounded strongly, up 17.5% in FY18, after an 8.6% decline in FY17 as Autodesk shifted to subscription licensing. This resulted in growth in group EBITDA (+26.1%), group EBIT (+29.2%, reported double-digit EBIT margin for the first time) and EPS (+36.1%). The company has proposed a dividend of €0.65 for the year (+30% y-o-y).

FY19 outlook: Double-digit organic growth boosted by increased stake in SOFiSTiK

Management expects to achieve revenues of €215–220m in FY19 (+16–19%
y-o-y), of which we estimate c 5% is from the first-time consolidation of SOFiSTiK. Operating profitability is expected to continue to improve, helped by the growing contribution of proprietary software from the SOFiSTiK deal.

Valuation: Reflects growth and strong execution

The stock has gained 20% over the last 12 months, but continues to trade at a discount to peers on all valuation metrics, although we note that it generates lower margins than the peer group. With the main impact of the Autodesk licensing transition in the past and the VAR business back on a growth trajectory, we see potential for VAR to improve profitability and drive up group margins. In addition, the recent acquisition of a majority stake in SOFiSTiK adds high-margin software revenues. The stock is supported by a dividend yield approaching 3% in FY19e.

Consensus estimates

Year
end

Revenue
(€m)

PBT

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/17

160.9

13.6

0.53

0.50

53.9

1.8

12/18

185.4

18.2

0.71

0.65

39.9

2.3

12/19e

218.0

24.5

0.91

0.81

31.2

2.9

12/20e

239.3

28.8

1.06

0.96

26.6

3.4

Source: Analyst estimates as provided on Mensch und Maschine’s investor relations site

FY18 results review

Exhibit 1: FY18 results highlights

€m

FY17

FY18

y-o-y

Revenues

160.85

185.40

15.3%

Gross profit

94.82

103.91

9.6%

EBITDA

18.04

22.75

26.1%

Operating profit

15.21

19.66

29.2%

Net income after minority interest

8.55

11.69

36.7%

EPS (€)

0.525

0.715

36.1%

DPS (€)

0.50

0.65

30.0%

Net debt

16.32

11.22

-31.2%

Source: Mensch und Maschine

Exhibit 2: Divisional performance

€m

FY17

FY18

y-o-y

Revenues

Software

50.5

55.7

10.4%

VAR

110.4

129.7

17.5%

Total

160.9

185.4

15.3%

Gross profit

Software

48.9

54.4

11.1%

VAR

45.9

49.5

8.0%

Total

94.8

103.9

9.6%

Gross margin

Software

97.0%

97.5%

0.6%

VAR

41.6%

38.2%

-3.4%

Total

59.0%

56.0%

-2.9%

EBITDA

Software

12.7

14.7

15.6%

VAR

5.3

8.1

51.0%

Total

18.0

22.7

26.1%

EBITDA margin

Software

25.2%

26.3%

1.2%

VAR

4.8%

6.2%

1.4%

Total

11.2%

12.3%

1.1%

EBIT

Software

11.5

13.2

15.3%

VAR

3.8

6.5

71.5%

Total

15.2

19.7

29.2%

EBIT margin

Software

22.7%

23.7%

1.0%

VAR

3.4%

5.0%

1.6%

Total

9.5%

10.6%

1.1%

Source: Mensch und Maschine

M+M reported revenue growth of 15.3% for FY18, with 10.4% growth from the Software division (FY17 +9.1%) and 17.5% growth in the VAR division. This marked a recovery in fortunes for the VAR business, which declined 8.6% in FY17 as Autodesk switched over to a subscription licensing model. In fact, VAR revenues in FY18 exceeded the previous peak revenues of €120.8m reported in FY16.

Gross profit grew at a slower rate: while Software gross margin was slightly higher year-on-year, VAR margins fell below 40% as the proportion of Autodesk reselling increased. The company noted that the VAR business generated €17.7m gross profit from reselling Autodesk licences (+10.6% y-o-y) and €31.9m from proprietary software and services (+6.7% y-o-y) and we assume the gross margin associated with reselling Autodesk licences is significantly lower than for proprietary software and services.

EBITDA increased 26.1% y-o-y, with growth of 15.6% for the Software business and 51% for the VAR business. Operating costs increased more slowly in the VAR business than in the Software business, with personnel costs up 4.2% and 10.4% respectively, and other operating expenses down 0.9% and up 7.4% respectively. Lower net financial costs and a lower effective tax rate y-o-y resulted in an increase in EPS of 36.1% y-o-y. Net debt reduced further in the year, with net debt/EBITDA of 0.5x at year-end.

SOFiSTiK acquisition

On 13 December last year, M+M announced it was increasing its stake in SOFiSTiK from 13.3% to 51% on 1 January 2019. SOFiSTiK provides software for the structural analysis and reinforcement of bridge, tunnel and construction design. It was founded more than 30 years ago and its software has been used in thousands of projects including BMW Welt in Munich, the newest Bosphorus bridge in Istanbul and the Brasilia National Stadium. M+M originally invested in the business in 1999; taking a majority stake in the business gives the company access to well-established building information modelling software. The founder and management team of SOFiSTiK will remain with the business and hold the remaining 49% of the company.

The business has been consolidated from the date the stake was increased. The 13.3% stake was revalued at year-end to reflect the price being paid to acquire the 37.7% stake, resulting in a valuation of the entire business of €31.9m. M+M paid for the increased stake through the issue of an estimated 0.47m shares (based on the year-end share price of €25.4), equating to dilution of 2.8% of the 16.683m shares outstanding at year-end. Management quoted a valuation metric of c 3x sales, which implies the business has annual revenues of c €10m. Management also commented that profitability was similar to the M+M Software business and expects the acquisition to be earnings accretive.

Outlook and consensus forecasts

Management has issued new guidance for FY19 and FY20, taking into account the recent acquisition as well as the impact of implementing IFRS16 for the first time in FY19. This moves the focus of profitability from EBITDA to EBIT. Management noted that the capitalisation of leases from the beginning of FY19 is likely to result in c €7.9m additions to tangible fixed assets and financial liabilities and will increase EBITDA by €3–4m, although it will not have a material impact on EBIT.

Based on our assumption that SOFTiSTiK will add c €10m in revenues in FY19, this implies organic revenue growth of 10.6–13.3% in FY19, compared to 15.2% growth in FY18. The EBIT range implies a group EBIT margin of 11.1–11.8%, compared to 10.6% in FY18. We note that Autodesk reported 25% revenue growth (all organic) in FY19 (y/e 31 January 2019) and consensus forecasts are for revenue growth of 27.8% in FY20 and 21.5% in FY21; while some of this growth is driven by acquisitions, the return to organic growth is promising for M+M.

Exhibit 3: Management outlook

FY19e

FY19e

FY20e

FY20e

old

new

old

new

Sales

N/A

€215–220m

+10–12%

EBITDA

+€4–5m

EBIT

€24–26m

+€3.5–5m

Net income

+€3–4m

EPS

+€0.18–0.24

€0.89–0.95 (ie +€0.18–0.24)

>€1

+€0.18–0.24 (ie €1.07–1.19)

Dividend

+€0.15–20

€0.77–0.83 (ie +€0.12–0.18)

+€0.15–0.20 (ie €0.92–1.03)

Source: Mensch und Maschine

Consensus forecasts below are in line with this guidance for FY19 and marginally below for FY20 at the revenue and EPS level.

Exhibit 4: Consensus forecasts

€m

FY19e

FY20e

Revenues

218.0

239.3

Revenue growth

17.6%

9.8%

EBITDA

30.4

34.6

EBITDA margin

13.9%

14.4%

EBIT

25.6

29.6

EBIT margin

11.7%

12.4%

EPS

0.91

1.06

DPS

0.81

0.96

Source: Analyst estimates as provided on Mensch und Maschine’s investor relations site

Valuation

The M+M share price has gained 20% over the past 12 months. In the table below, we compare M+M’s valuation to a group of peers that includes European software companies operating in the CAD/CAM/PLM1 space, as well as larger international companies operating in this market. With a lower EBITDA margin than the group average, M+M continues to trade below the peer group on EV/sales, EV/EBITDA and P/E. We note that M+M’s dividend yield is at the top end of its peer group.

CAD – computer aided design, CAM – computer aided manufacturing, PLM – product lifecycle management

Exhibit 5: Peer group valuation multiples

Company

Quoted ccy

Share price

Market cap

EV (rep. ccy)

EV/Sales (x)

EV/EBITDA (x)

P/E (x)

Dividend yield

EBITDA margin

(m)

(m)

CY

NY

CY

NY

CY

NY

CY

NY

CY

NY

Mensch und Maschine Software

EUR

28.3

476

487

2.2

2.0

16.0

14.1

31.2

26.6

2.9%

3.4%

13.9%

14.4%

Aveva Group PLC

GBP

2,988

4,845

4,738

6.4

6.0

24.2

21.7

35.5

31.1

1.4%

1.5%

26.2%

27.8%

CENIT AG

EUR

14.1

118

101

0.6

0.5

7.2

6.8

14.7

13.6

7.7%

8.0%

Nemetschek SE

EUR

132.4

5,077

5,130

9.5

8.3

35.1

30.5

55.1

47.4

0.7%

0.8%

27.1%

27.4%

RIB Software AG

EUR

12.9

666

424

2.8

2.3

9.9

7.6

35.0

24.4

1.6%

1.8%

28.0%

30.5%

Autodesk Inc

USD

152.4

33,370

33,880

10.3

8.5

37.6

23.9

53.1

31.8

0.0%

0.0%

27.5%

35.5%

Dassault Systemes

EUR

129.5

33,718

32,110

8.3

7.6

23.9

21.3

37.7

33.8

0.6%

0.6%

34.6%

35.8%

Hexagon AB

SEK

465.0

160,941

17,230

4.3

4.1

13.0

12.2

19.5

18.0

1.5%

1.6%

32.8%

33.3%

PTC Inc

USD

88.5

10,494

10,970

8.2

7.3

29.0

22.5

49.6

34.3

0.0%

0.0%

28.4%

32.4%

Average

6.3

5.6

22.5

18.3

35.3

28.9

0.8%

0.9%

26.5%

28.8%

Median

7.3

6.7

24.1

21.5

36.6

31.5

0.7%

0.8%

27.7%

31.5%

Source: Refinitiv. Note: At 11 March.


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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 Edison analyst 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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Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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 (nor will such persons be able to purchase shares in the placing).

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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.

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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