Q3 organic revenue growth was c 80%

SNP Schneider-Neureither & Partner 9 November 2015 Update

SNP Schneider-Neureither & Partner

Q3 organic revenue growth was c 80%

Q3 results

Software & comp services

6 November 2015

Price

€19.50

Market cap

€72m

Net debt (€m) at 30 September 2015

1.1

Shares in issue

3.7m

Free float

58.4%

Code

SHF

Primary exchange

Frankfurt

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

39.2

22.8

60.3

Rel (local)

25.5

31.2

37.2

52-week high/low

€19.72

€12.00

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

Deutsches Eigenkapitalforum

23-25 November 2015

Q4 results

29 January 2016

Annual report

30 March 2016

Analysts

Richard Jeans

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

Activity at SNP Schneider remains extremely busy with Q3 organic growth of around 80%, which was even higher than the 68% achieved in Q2. However, we expect this will be the peak growth rate in this cycle as the comparatives become more challenging. Nevertheless, demand remains very strong and utilisation rates remain exceptionally high, supported by an order backlog up 92% at €20.0m. We have adjusted our forecasts and our earnings forecasts move up modestly in FY16 and FY17. Hence, the shares continue to look attractive on c 14x our FY17e earnings.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/13

23.5

(2.8)

(64.7)

8.0

N/A

0.4

12/14

30.5

(0.1)

(13.9)

13.0

N/A

0.7

12/15e

53.5

3.0

55.7

20.0

35.0

1.0

12/16e

62.6

5.5

102.1

30.0

19.1

1.5

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

Investment case: Huge transformation opportunities

SNP’s T-B is the only off-the-shelf software solution that automates the process of combining, upgrading, or carving out data from ERP systems. The global ERP market was valued at $25.4bn in 2013 (Gartner), and is growing in the mid-to-high single digits, which provides a huge opportunity for IT landscape transformations. Further, M&A activity is clearly an important driver in ERP transformation and global M&A activity has been buoyant, with $2.87tn of deals in 9M15 (Mergermarket), though M&A deal numbers in October were subdued after the recent strong activity.

Q3 results: 9M15 organic revenue growth was 54%

Q3 revenue jumped by 109% to €14.5m, reflecting 80% organic growth and a full-period contribution from RSP, the consulting business that SNP acquired in late January. For 9M15, revenues rose 84% (including 54% organic) to €41.4m, while new orders rose by 70% year-on-year to €46.3m, giving a ‘book-to-bill’ ratio of 1.12. The 9M15 adjusted operating margin rose to 8.3%, from a loss in 9M14. The group finished the period with net debt of €1.1m and €2.8m of acquisition liabilities.

Forecasts: EPS goes up 19% in FY15 and 4% in FY16

SNP has maintained the guidance it upgraded in early October. We have lifted our FY15 revenue forecast by 9% to just above the guidance range, which we believe is conservative, while FY16 and FY17 each rise by 2%. Our EPS forecasts rise by 19% in FY15, 4% in FY16 and 1% in FY17.

Valuation: Strong growth play in the ERP space

The stock trades on c 35x our FY15e EPS, falling to c 19x in FY16e, which looks attractive given the forecast strong growth and margin recovery potential. Our DCF (WACC of 11%) values the shares at €24.39 (previously €23.34), 25% above the current share price.

Q3 results: Strong organic growth and surging backlog

Q3 revenue jumped by 109% to €14.5m, reflecting 80% organic growth and a full-period contribution from RSP, the consulting business that SNP acquired in late January. For 9M15, revenues rose 84% (including 54% organic) to €41.4m, while new orders in the period were up by 70% year-on-year at €46.3m, giving a ‘book-to-bill’ ratio of 1.12. The 9M15 adjusted operating margin rose to 8.3%, from a loss in 9M14.

The total cost for the RSP deal/acquisition consists of fixed and variable components, with the latter dependent on performance. The variable component has been adjusted downwards by €356k to c €1.461m, and this €356k reduction in liability was reflected in other operating income under IFRS accounting rules. We have treated this as an exceptional item. Q3 cash flow was strong, with net debt falling from €4.7m to €1.1m over the quarter. The outstanding RSP acquisition liabilities of €2.8m (which include a fixed component of €1.382m) take the adjusted net debt to €4.0m.

SNP has now completed a ‘carve-out’ assignment with a blue chip US IT and computer company that demerged in early November. The contract, worth more than $5m, involved dividing (carving out) the customer’s SAP system landscape to enable the company to split into two separate entities. The project was mostly handled remotely by consultants from Germany. However, the group has set up a new subsidiary in the US, SNP Labs, as SNP plans to grow the headcount in the US to handle other US transformation projects directly from the US, rather than remotely from Germany. SNP will offer a training programme in the US to develop its skills base.

The Professional services segment generated revenues of €12.2m in Q3 (up 126%, or 89% organically) and €34.6m in 9M15 (up 104%, or 66% organically). Software licence revenues jumped by 55% to €2.0m, helped by a significant SNP Transformation Backbone licence sale to HELIOS, which is part of Fresenius, the Germany-based healthcare giant. HELIOS is one of the largest providers of inpatient and outpatient care in Germany, with revenues of c €5.2bn in FY14.

Employee numbers rose to 374 at the end of September, from c 360 at the end of June 2015 and 280 prior to the acquisition of RSP at 31 December 2014. The market remains very tight in Europe for appropriately-skilled consultants and SNP began a rolling quarterly in-house training scheme early in the year to help address this problem. It is now has its third intake of trainees on the scheme, with 26 having graduated over Q1 and Q2.

Exhibit 1: Quarterly analysis

€000s

Q114

Q214

Q314

Q414

FY14

Q115

Q215

Q315

Q415e

FY15e

Professional services

5,516

6,061

5,393

5,773

22,743

9,495

12,909

12,200

9,824

44,428

Licences

2,101

1,129

1,263

1,908

6,401

1,820

1,406

1,957

1,858

7,041

Maintenance

385

323

298

330

1,336

863

368

350

419

2,000

Total revenue

8,002

7,513

6,954

8,011

30,480

12,178

14,683

14,507

12,101

53,469

Other operating income*

56

17

47

487

607

638

(95)

(25)

 

 

Cost of materials

(295)

(425)

(377)

(261)

(1,358)

(1,428)

(1,929)

(1,652)

 

 

Personnel costs

(5,021)

(5,045)

(5,057)

(5,391)

(20,514)

(7,257)

(7,887)

(7,834)

 

 

Other operating expenses

(1,825)

(2,008)

(1,989)

(2,494)

(8,316)

(2,855)

(3,344)

(3,355)

 

 

Other taxes

(7)

(6)

(11)

(13)

(37)

(13)

(13)

(14)

 

 

Op costs (before depreciation)

(7,092)

(7,467)

(7,387)

(7,672)

(29,618)

(10,915)

(13,268)

(12,880)

(11,519)

(48,582)

Adjusted EBITDA

910

46

(433)

339

862

1,263

1,415

1,627

581

4,886

Depreciation

(205)

(211)

(200)

(312)

(928)

(249)

(334)

(280)

(252)

(1,115)

Adjusted operating profit

705

(165)

(633)

27

(66)

1,014

1,081

1,347

329

3,771

Operating Margin

8.8%

(2.2%)

(6.8%)

17.4%

(0.2%)

8.3%

7.4%

9.3%

2.7%

7.1%

Net interest

(22)

(14)

(17)

(13)

(66)

(109)

(204)

(271)

(212)

(796)

Edison profit before tax (norm)

683

(179)

(650)

14

(132)

905

877

1,076

117

2,975

Exceptionals - earnout adjustments*

0

0

700

805

1,505

0

0

356

0

356

Profit before tax (FRS 3)

683

(179)

50

819

1,373

905

877

1,432

117

3,331

Source: SNP (historicals), Edison Investment Research (forecasts). Note: *Purchase price adjustment estimated split in Q3/Q414 and €356k in Q315.

Financial position

SNP raised €10m via a bond issue during Q1, which enhances the group’s financial flexibility and gives SNP the ability to execute complementary acquisitions efficiently. An additional loan of €4.5m was also established in Q1. Any acquisitions are most likely to be used to strengthen the consulting headcount in regions where the group is currently under-resourced.

Exhibit 2: Financial position

€m

30-Dec-13

30-Jun-14

30-Sep-14

31-Dec-14

31-Mar-15

30-Jun-15

30-Sep-15

Cash

(6.4)

(6.1)

(6.4)

(5.7)

(13.0)

(10.9)

(14.2)

ST debt

0.6

0.6

0.6

0.6

2.1

2.1

2.1

LT debt

2.3

2.0

1.8

1.7

13.9

13.6

13.2

Net debt/(cash)

(3.5)

(3.5)

(4.0)

(3.4)

3.0

4.7

1.1

GL earnout

1.6

1.6

1.1

1.1

0.0

0.0

0.0

RSP acquisition liabilities

6.0

3.2

3.2

2.8

Adjusted net debt/(cash)

(1.9)

(1.9)

(2.9)

3.7

6.2

7.9

4.0

Source: SNP

Forecasts upgraded again

Due to the strong 9M15 results and order book, the board increased the FY15 revenue forecast to €51-53m (previously €47-49m) while retaining its FY15 earnings guidance and “continues to expect an operating EBIT margin of at least 6%”.

We have raised our forecasts for the Professional services division while reducing Software maintenance revenues, but maintaining Software licence revenues. We believe the alliance with SAP should help to drive revenue growth over the medium term, both from professional services and software. We have increased our depreciation forecasts and edged higher interest expense in FY15e.

Our revenue forecast for FY15 rises by 9% to €53.5m. We have also lifted our FY16 and FY17 revenue forecasts by 2% to €62.6m and €71.6m respectively. Our adjusted operating profit forecasts rise by 16%, 3% and 1% over FY15-17 to €4.1m, €6.2m and €8.4m respectively, for operating margins of 7.1%, 9.9% and 11.8% (previously 6.6%, 9.8% and 11.8%).

While we have upgraded our revenue and profit forecasts, we still anticipate lower Q4 profitability, partly due to the Transformation World customer conference in October, along with the formation of SNP Labs and the related education programme in the US.

Exhibit 3: Forecasts

Old

New

Old

New

Old

New

(€000s)

2015e

2015e

2016e

2016e

2017e

2017e

Revenue

 

 

 

 

 

 

Professional services

39,000

44,428

50,304

52,047

58,512

59,774

Software licences

7,041

7,041

7,745

7,745

8,365

8,365

Software maintenance

3,000

2,000

3,300

2,800

3,564

3,500

Software

10,041

9,041

11,045

10,545

11,929

11,865

Group revenue

49,041

53,469

61,349

62,593

70,440

71,639

Growth (%)

60.9

75.4

25.1

17.1

14.8

14.5

Professional services contribution

3,120

3,998

4,653

5,075

6,144

6,276

Software contribution

3,514

3,164

4,970

4,745

5,964

5,932

Non-segment-related expenses

(4,033)

(4,033)

(4,275)

(4,275)

(4,506)

(4,506)

Other operating income & other taxes

641

641

680

680

716

716

Operating expenses

(45,799)

(49,698)

(55,321)

(56,368)

(62,122)

(63,220)

Adjusted operating profit

3,243

3,771

6,028

6,225

8,319

8,419

Operating profit margin (%)

6.6

7.1

9.8

9.9

11.8

11.8

Growth (%)

(4,989.6)

(5,786.5)

85.9

65.1

38.0

35.3

Net interest

(746)

(796)

(775)

(775)

(775)

(775)

Profit before tax norm

2,497

2,975

5,253

5,450

7,544

7,644

Exceptional items

0

356

0

0

0

0

Profit before tax

2,497

3,331

5,253

5,450

7,544

7,644

Taxation

(749)

(893)

(1,576)

(1,635)

(2,263)

(2,293)

FRS 3 net income

1,748

2,439

3,677

3,815

5,281

5,351

Adjusted EPS (c)

46.8

55.7

98.4

102.1

141.3

143.1

P/E - Adjusted EPS

35.0

19.1

13.6

Source: SNP (historicals), Edison Investment Research (forecasts)

Valuation: Software-led growth and margin recovery

SNP has a strong track record of profitability, growth and cash generation. Margins surpassed 20% in 2008 and stayed above 20% for three years. While there was a dip into the red in FY13 as the group restructured its sales team, SNP is now back on track, expanding into the US, and its new emphasis on software could potentially drive margins back above 20%. If SNP can successfully develop T-B into the industry standard, with the ability to handle any-to-any transformations, the stock should command a leadership valuation, in our view.

We highlight the following points on the group’s valuation:

Traditional valuation measures. In traditional valuation terms, the stock trades on 35.0x our EPS forecasts in FY15, falling to 19.1x in FY16 and to 13.6x in FY17.

Peer comparison

Following the recent rally, the stock now trades at a small premium to its peer group, based on year two (FY16) data of categories 1 and 2, (EV/EBITDA and P/E), as shown in Exhibit 4. Though the data are widely distributed, we continue to believe the stock looks undervalued on the comparatives if management can sustain the growth momentum.

Exhibit 4: Peer analysis

Market cap

EV/sales (x)

EV/EBITDA (x)

PE (x)

Price

Local curr m's

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

SNP

19.50

73

1.35

1.15

14.7

9.8

35.0

19.1

1) Specialist SAP transformation consultants in Germany

All for One Steeb

68.80

343

1.44

1.34

14.0

12.7

33.4

30.4

KPS

6.55

223

N/A

N/A

N/A

N/A

N/A

N/A

Realtech

1.26

7

0.24

0.23

7.6

3.0

N/A

6.8

2) Small consulting companies / VARs with a significant own software strategy

Cenit (€)

18.47

155

1.0

0.9

9.8

9.1

21.7

19.9

First Derivatives (£)

1472.50

346

3.4

3.0

17.3

15.0

29.5

25.6

K3 (£)

350.00

111

1.4

1.3

9.2

7.9

14.2

11.8

Prodware (€)

7.00

57

0.6

0.5

3.3

3.0

4.9

4.3

Medians (categories 1 & 2 above)

1.17

1.11

9.5

8.5

21.7

15.9

3) Major ERP providers

SAP (€)

72.74

89361

4.6

4.4

13.2

12.8

19.6

18.0

Oracle ($)

40.35

172078

4.2

4.1

8.8

8.7

15.4

14.0

Sage (£)

545.50

5885

4.5

4.3

15.2

14.4

21.9

20.6

Microsoft ($)

54.38

434383

4.1

3.8

11.0

10.3

19.7

17.5

Medians

4.37

4.20

12.1

11.5

19.7

17.8

4) Large systems integrators

Accenture ($)

106.09

69712

2.05

1.92

12.2

11.3

20.3

18.6

Atos (€)

76.48

7898

0.72

0.67

6.5

5.8

13.8

12.0

Cap Gemini (€)

81.95

14110

1.08

0.98

9.0

7.6

19.1

15.8

CGI group ($)

53.23

16451

1.79

1.74

9.8

9.3

17.2

15.5

Cognizant ($)

67.17

40844

3.04

2.66

14.7

12.8

22.1

19.3

CSC (C$)

67.00

9268

0.88

0.86

5.1

4.8

13.6

12.7

Hewlett-Packard ($)*

14.05

26386

0.40

0.47

2.7

2.8

4.8

5.5

IBM ($)

139.89

135709

2.03

2.07

7.7

7.6

9.3

9.2

Medians

1.43

1.36

8.4

7.6

15.5

14.1

Source: SNP calculated by Edison Investment Research, others are Bloomberg data. Note: Priced on morning of 6 November 2015. *HP data does not appear to be updated for the HPE demerger.

FCF yield. SNP generated free cash flow of €0.7m in FY14, (which represents a FCF yield of 1.3%). We forecast FCF to rise to c €2.3m in FY15, rising to €3.5m in FY16 and €4.8m in FY17.These numbers translate to FCF yields of c 3% in FY15, c 5% in FY16 and c 7% in FY17.

Discounted cash flow valuation. Based on our forecasts and a conservative 14.7% long-term operating margin target (which eases from 14.8% at the time of our last note, due to the rise in professional services revenues), a weighted average cost of capital (WACC) of 11%, and a 2% terminal growth rate, our DCF model values the shares at €24.39, or 25% above the current price (€23.34 in our previous note). A 1% rise in the WACC would reduce the valuation to €21.56, while a 1% cut in the WACC would lift the valuation to €27.95 (which is still c 3% below the 2010 peak in the share price). Discounting back from our forecasts implies that the market is attributing a break-even WACC of 12.9% to the stock.

Exhibit 5: Financial summary

€'000s

2012

2013

2014

2015e

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

27,157

23,536

30,480

53,469

62,593

71,639

Cost of sales

0

0

0

0

0

0

Gross Profit

27,157

23,536

30,480

53,469

62,593

71,639

EBITDA

 

 

3,714

(1,972)

862

4,886

7,341

9,526

Adjusted Operating Profit

 

 

2,951

(2,714)

(66)

3,771

6,225

8,419

Amortisation of acquired intangibles

0

0

0

0

0

0

Exceptionals

0

0

1,505

356

0

0

Associates

(107)

0

0

0

0

0

Operating Profit

2,845

(2,714)

1,439

4,127

6,225

8,419

Net Interest

20

(85)

(66)

(796)

(775)

(775)

Profit Before Tax (norm)

 

 

2,972

(2,799)

(132)

2,975

5,450

7,644

Profit Before Tax (FRS 3)

 

 

2,865

(2,799)

1,373

3,331

5,450

7,644

Tax

(947)

477

(344)

(893)

(1,635)

(2,293)

Profit After Tax (norm)

2,025

(2,322)

(477)

2,083

3,815

5,351

Profit After Tax (FRS 3)

1,918

(2,322)

1,028

2,439

3,815

5,351

Minority interest

(127)

(84)

(40)

0

0

0

Adjustments for normalised earnings

0

0

0

0

0

0

Net income (norm)

1,897

(2,405)

(517)

2,083

3,815

5,351

Net income (FRS 3)

1,791

(2,405)

988

2,439

3,815

5,351

Average No of Shares Outstanding (m)

3.4

3.7

3.7

3.7

3.7

3.7

EPS - normalised (c)

 

 

55.7

(64.7)

(13.9)

55.7

102.1

143.1

EPS - normalised & fully diluted (c)

 

 

55.7

(64.7)

(13.9)

55.7

102.1

143.1

EPS - FRS 3 (c)

 

 

52.5

(64.7)

26.6

65.2

102.1

143.1

Dividend per share (c)

24.00

8.00

13.00

20.00

30.00

40.00

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

13.7

-8.4

2.8

9.1

11.7

13.3

Adjusted Operating Margin (%)

10.9

-11.5

-0.2

7.1

9.9

11.8

BALANCE SHEET

Fixed Assets

 

 

4,236

7,759

8,291

14,206

14,341

14,667

Intangible Assets

2,327

5,194

5,190

11,151

11,151

11,151

Tangible Assets

1,486

1,070

1,231

1,185

1,320

1,645

Other

422

1,496

1,871

1,871

1,871

1,871

Current Assets

 

 

18,316

16,145

17,882

34,984

41,091

48,140

Stocks

0

0

0

0

0

0

Debtors

7,309

9,105

11,286

19,798

23,177

26,526

Cash

10,152

6,355

5,681

14,272

17,000

20,699

Current Liabilities

 

 

(4,781)

(5,804)

(9,782)

(18,888)

(22,296)

(25,626)

Creditors

(4,781)

(5,204)

(9,182)

(18,288)

(21,696)

(25,026)

Short term borrowings

0

(600)

(600)

(600)

(600)

(600)

Long Term Liabilities

 

 

(772)

(4,338)

(2,501)

(12,501)

(12,501)

(12,501)

Long term borrowings

0

(2,250)

(1,650)

(11,650)

(11,650)

(11,650)

Other long term liabilities

(772)

(2,088)

(851)

(851)

(851)

(851)

Net Assets

 

 

16,998

13,762

13,890

17,802

20,636

24,680

CASH FLOW

Operating Cash Flow

 

 

3,022

(2,110)

2,579

4,975

7,029

9,169

Net Interest

42

4

(66)

(796)

(775)

(775)

Tax

(1,826)

(1,062)

(1,102)

(833)

(1,526)

(2,140)

Capex

(465)

(230)

(701)

(1,069)

(1,252)

(1,433)

Acquisitions/disposals

(107)

(2,267)

(500)

(3,203)

0

0

Shares issued

4,839

(35)

0

0

0

0

Dividends

(2,048)

(937)

(335)

(483)

(748)

(1,121)

Net Cash Flow

3,457

(6,638)

(124)

(1,409)

2,729

3,699

Opening net debt/(cash)

 

 

(6,695)

(10,152)

(3,505)

(3,431)

(2,022)

(4,750)

HP finance leases initiated

0

0

0

0

0

0

Other

0

(10)

51

0

0

()

Closing net debt/(cash)

 

 

(10,152)

(3,505)

(3,431)

(2,022)

(4,750)

(8,449)

Source: SNP (historicals), Edison Investment Research (forecasts)

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