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Resilience and a growing pipeline

1Spatial 30 September 2020 Update
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1Spatial

Resilience and a growing pipeline

Interim results

Software & comp services

30 September 2020

Price

31p

Market cap

£35m

Net cash (£m) at end H121

3.4

Diluted shares in issue

113m

Free float

93%

Code

SPA

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.6

37.8

(8.8)

Rel (local)

3.2

44.0

12.8

52-week high/low

34.5p

13.5p

Business description

1Spatial’s core technology validates, rectifies and enhances customers’ geospatial data. The combination of its software and advisory services reduces the need for costly manual checking and correcting of data.

Next events

Trading statement

February 2020

Analysts

Dan Gardiner

+44 (0) 20 3077 5700

Dan Ridsdale

+44 (0) 20 3077 5729

1Spatial is a research client of Edison Investment Research Limited

Amid an unprecedented economic downturn, 1Spatial performed resiliently during H1. Sales rose y-o-y, EBITDA grew and the company generated FCF. At company level, rising recurring revenue and a growing order book of contracted sales is improving visibility. However, the broader economic backdrop remains uncertain and could affect deal closure. Reflecting this wider uncertainty, we reinstate forecasts at a conservative level.

Year end

Revenue (£m)

EBITDA* (£m)

EBIT*
(£m)

EPS*
(p)

EV/Sales
(x)

EV/EBIT*
(x)

P/E*
(x)

01/19

17.6

1.2

(0.3)

(0.6)

1.7

N/A

N/A

01/20

23.4

3.2

1.0

0.6

1.3

220.0

51.7

01/21e

23.4

2.8

(0.4)

(0.4)

1.4

N/A

N/A

01/22e

25.1

3.6

0.4

0.2

1.3

77.8

N/A

Note: *EBITDA, EBIT and EPS exclude amortisation of acquired intangibles, exceptional items and share-based payments.

A resilient performance in H1

Headline sales growth of 8% y-o-y reflected a strong performance in the existing solutions business (57% of total sales), which rose 4% y-o-y, plus an extra three months of Geomap-Imagis (GI). As flagged previously, GI was affected by COVID-19 and non-core GIS sales continued to decline, but good cost control resulted in EBITDA of £1.7m (up 1% y-o-y). An uptick in non-cash charges reduced adjusted EBIT, but for the second period in a row (and the first time in the first half), 1Spatial generated FCF (pre-lease payments).

Growing pipeline despite COVID-19

With the share of recurring revenue nudging up to 44% in H1 and a growing order book of contracted revenue, visibility is improving. Activity levels in GI have recovered and the company recently signed a $2.6m contract with the US State of Michigan and a deal with USGS. 1Spatial recognises that the full economic impact of COVID-19 has yet to be felt and decision making is likely to remain protracted in the near term. Nevertheless, it is increasingly confident that it can weather any further COVID-19 impacts and has reinstated guidance.

Reinstating FY21 forecasts, introducing FY22

Our reinstated FY21 forecasts conservatively assume no sequential sales growth in H2 despite it being typically a seasonally stronger period. Good cost control partially offsets the impact of lower sales on EBITDA (£2.8m vs £3.7m previously) and we see FCF (pre-lease payments) of £1.7m. In FY22, we assume 7% sales growth as an 11% rise in solutions revenue is partially offset by an 18% decline in GIS. This growth plus cost control enables margin expansion, a return to underlying profitability and FCF (pre-lease payments) of £2.5m.

Valuation: Scope for outperformance?

At 31p, 1Spatial’s share price has underperformed AIM over the last year (down 10% versus AIM, which is up 10%). Our revised estimates make it hard to argue that the shares are undervalued on near-term profit metrics. However, growth and cost control should see multiples fall in outer years and a growing pipeline provides scope for numbers to beat our conservative forecasts, even in a tough macro environment. A £1m beat to FY22e FCF would put the stock on a 7% FCF yield.

A resilient performance in H1

Revenue of £11.7m and headline sales growth of 8% y-o-y partially reflected the additional three months of the GI acquisition. Adjusting for this effect, total sales fell 8% y-o-y (vs a 1% y-o-y organic decline in H220), entirely driven by the decline in the non-core GIS business. Overall solutions sales rose 1% y-o-y. Exhibit 1 highlights the three main components of the overall change in sales:

Growth in the non-GI solutions busines (57% of total sales) was 4% y-o-y (down from 15% in H220 and 6.5% for FY20). Amid an unprecedented downturn, the company experienced a modest slowdown in activity levels across most geographies. However, sales in the US and Australia still grew at 12% and 8% respectively.

GI sales (30% of the total) declined 10% y-o-y organically as COVID-19 affected French local government activities. By the end of H1, activity had recovered to pre-COVID-19 levels and has held up well since.

Non-core GIS sales (14% of the total) declined 36% y-o-y. As 1Spatial is discontinuing investment in this platform, a decline in this business is expected over the long term. However, the pace of decline in H1 was exacerbated by COVID-19. The company did maintain a large proportion of the recurring revenue in the business and has begun migrating GIS customers onto its solutions platform.

Recurring revenue increased by 15% y-o-y and now accounts for 44% of total revenues, up from 41% in FY20. The proportion of perpetual licence sales fell to just 9% as the company continues to focus on shifting to a SaaS model over time.

Gross margins of 51.8% held up well, but included £0.3m of grants from overseas governments to maintain business levels. Good cost control, predominantly reflecting synergies achieved with GI in H220, saw cash operating costs fall by £0.6m sequentially and resulted in EBITDA of £1.7m. An uptick in non-cash charges saw adjusted operating profit fall to just £0.1m but, for the second period in a row (and the first time in H1), 1Spatial generated FCF pre-lease payments. Net cash fell £0.5m to £3.4m due to payments for leases and the final deferred consideration for GI (£0.6m).

Exhibit 1: Revenue and growth by segment, H121 and revised forecasts

H120*

H220

FY20

H121

H221e

FY21e

FY22e

Revenue (£m)

Spatial Solutions

6.4

6.7

13.1

6.6

6.7

13.3

14.7

Geomap-Imagis (GI)

1.9

3.9

5.8

3.5

3.7

7.1

7.9

Total solutions

8.3

10.6

18.9

10.1

10.4

20.5

22.7

GIS

2.5

2.0

4.5

1.6

1.3

2.9

2.4

Total

10.9

12.6

23.4

11.7

11.7

23.4

25.1

Growth (%)

Spatial Solutions

8.3

15.9

6.5

3.8

0.0

1.8

10.5

Geomap-Imagis (GI)

-

-

-

78.9

(5.0)

23.1

11.0

Total solutions

41.2

82.5

53.7

21.2

(1.8)

8.3

10.7

GIS

(13.7)

(34.3)

(15.5)

(35.6)

(34.0)

(34.9)

(18.1)

Total

22.9

42.6

32.8

8.0

(6.9)

0.0

7.1

Source: 1Spatial, Edison Investment Research forecasts. Note: *H120 Includes only three months of Geomap-Imagis (GI) acquisition.

Growing pipeline despite COVID-19

With the share of recurring revenue rising and a growing order book of contracted revenue, visibility is improving. Activity levels in France (GI) returned to pre-COVID levels before the end of H1 and have held up well subsequently. Trading in H2 so far is in line with management expectations.

In June, the company signed a $2.6m contract with the US State of Michigan (a proportion of which should be recognised in H221) and has now announced a further deal with US Geological Survey (USGS). These are significant wins that should meaningfully boost its US business (annual revenues of £2.3m in FY20).

1Spatial has started migrating some customers on its Elyx software to an ESRI-based platform. This should ensure they remain long term solution customers of 1Spatial and mitigate the impact of the revenue headwind in its GIS business.

The company also formally launched its 1Data Gateway product and refreshed its core 1Integrate platform during H1. A refreshed product line-up, recent customer wins and greater visibility on the impact of the migration in GIS has given the company increasing confidence in its commercial prospects and has led it to reinstate guidance.

Nevertheless, 1Spatial recognises that the broader macro environment is uncertain currently. The full economic impact of the first wave of COVID-19 has yet to be felt and core markets such as France and the UK appear on the verge of imposing new lockdown restrictions. In this environment decision making is likely to remain protracted and, reflecting this, 1Spatial remains cautious about how quickly its growing pipeline will convert into sales.

Reinstating FY21 forecasts, introducing FY22

Our reinstated estimates reflect this cautious outlook. Our FY21 sales forecast of £23.4m (down from £25.6m previously – see Exhibit 2) conservatively assumes no overall growth over FY20. It implies no sequential sales growth in H2 (despite it typically being a seasonally stronger period) and an organic y-o-y decline in H2 of 7% (similar to the 8% decline experienced in H1, which was affected by strict lockdown measures).

We assume the company continues to exert tight control of costs to mitigate the impact of lower sales on profits. Our revised EBITDA forecast of £2.8m (vs £3.7m previously) assumes just a £0.2m sequential increase in cash operating costs. We expect FY21 non-cash operating costs of £3.2m, implying that costs here are flat sequentially in H2.

Working capital has led to H2 being the seasonally stronger period for cash flow for 1Spatial historically. Therefore, despite our lower profit estimate in H2 (vs H1), we forecast rising FCF in H2 and FY21 FCF (pre-lease payments) of £1.7m. With no deferred consideration due in FY22 either, H2 should see the company begin to grow its cash balance.

In FY22, we assume 7% overall sales growth driven by an acceleration in solutions growth to 11%, which is only partially offset by an 18% decline in GIS. This growth, plus unchanged gross margins and cost control, expands EBITDA margins to 14% and sees a return to underlying profitability. We forecast FCF (pre-lease payments) rising to £2.5m.

Exhibit 2: Changes to headline FY21 forecasts and new FY22

FY20

FY21e

Change

FY22e (new)

 

Old

New

Abs

%

 

Revenue

23.4

25.6

23.4

(2.2)

(8.7)

25.1

Implied growth (%)

32.7

9.6

0.1

7.1

Gross profit

12.3

13.3

11.8

(1.5)

(11.2)

12.8

Gross margin (%)

52.4

51.9

50.5

51.0

Opex

(9.0)

(9.6)

(9.0)

0.6

(9.2)

EBITDA

3.2

3.7

2.8

(0.9)

(24.4)

3.6

EBITDA margin (%)

13.8

14.5

12.0

14.3

Non-cash charges*

(2.2)

(2.3)

(3.2)

(0.9)

(3.2)

Adjusted EBIT

1.0

1.5

(0.4)

(1.8)

(124.1)

0.4

EBIT margin (%)

4.3

5.7

(1.5)

1.6

Reported EBIT**

(1.5)

0.1

(1.9)

(2.0)

(2,000.4)

(1.1)

EBIT margin (%)

(6.6)

0.4

(8.2)

(4.2)

Adjusted diluted EPS (p)

0.6

1.0

(0.4)

(1.4)

(134.3)

0.2

Reported diluted EPS (p)

0.0

0.1

0.0

0.0

Operating cash flow

0.7

5.3

3.3

3.7

Investment

(2.3)

(3.1)

(2.6)

(2.4)

FCF

(1.6)

3.0

1.7

(1.3)

(43.2)

2.5

Repayment of leases

(0.8)

(0.8)

(1.1)

(1.1)

Source: 1Spatial, Edison Investment Research forecasts. Note: *Non-cash charges include depreciation, amortisation of capitalised development costs and leased assets. **Reported EBIT includes share-based payments, impairments of intangibles, amortisation of acquired intangibles and exceptionals.

Valuation: Scope for outperformance?

At 31p, 1Spatial’s share price has underperformed AIM over the last year (down 10% versus AIM, which is up 10%). Our revised forecasts, which assume the company returns to underlying net profit in FY22, make it hard to argue that the shares are undervalued on conventional profit metrics. However, growth combined with cost control should see multiples fall quickly in outer years and a strengthening pipeline provides scope for numbers to outperform these forecasts, even in a challenging macro environment. Given marginal profitability, modest outperformance could deliver a large uplift to profit and cash flow estimates, substantially reducing the current implied valuation multiples. For example, a £1m beat to FY22e FCF would put the stock on a 7% FCF yield.

Exhibit 3: Financial summary

£000s

2018

2019

2020

2021e

2022e

Year end 31 January

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

16,938

17,624

23,385

23,407

25,060

Delivery costs

(7,994)

(8,449)

(11,123)

(11,586)

(12,280)

Gross Profit

8,944

9,175

12,262

11,821

12,781

Adjusted EBITDA

 

 

403

1,188

3,226

2,821

3,581

Operating Profit (before amort. and except.)

 

 

(967)

(306)

1,000

(353)

407

Acquired Intangible Amortisation

(335)

(432)

(972)

(1,100)

(1,100)

Exceptionals

(1,041)

(672)

(1,167)

(125)

0

Share based payments

538

(218)

(398)

(350)

(360)

Operating Profit

(1,805)

(1,628)

(1,537)

(1,928)

(1,053)

Net Interest

(151)

(191)

(195)

(144)

(99)

Other

0

0

0

0

0

Profit Before Tax (norm)

 

 

(1,118)

(497)

804

(498)

307

Profit Before Tax (FRS 3)

 

 

(1,956)

(1,819)

(1,732)

(2,072)

(1,152)

Tax

753

389

248

250

10

Profit After Tax (norm)

(1,118)

(497)

643

(399)

246

Profit After Tax (FRS 3)

(1,203)

(1,430)

(1,484)

(1,822)

(1,142)

Average Number of Shares Outstanding (m)

63.3

87.4

110.2

113.5

113.5

EPS - normalised (p)

 

 

(1.77)

(0.57)

0.58

(0.35)

0.22

EPS - normalised fully diluted (p)

 

 

(1.77)

(0.57)

0.58

(0.35)

0.22

EPS - (IFRS) (p)

 

 

(1.90)

(1.64)

(1.35)

(1.61)

(1.01)

Dividend per share (p)

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

52.8

52.1

52.4

50.5

51.0

EBITDA Margin (%)

2.4

6.7

13.8

12.0

14.3

Operating Margin (before GW and except.) (%)

(5.7)

(1.7)

4.3

(1.5)

1.6

BALANCE SHEET

Fixed Assets

 

 

10,873

10,479

19,206

19,306

19,440

Intangible Assets

10,540

10,194

15,560

15,660

15,760

Tangible Assets

333

285

374

374

415

Investments

0

0

3,272

3,272

3,265

Current Assets

 

 

7,050

11,481

14,985

15,884

16,851

Stocks

0

0

0

0

0

Debtors

5,510

4,998

9,644

8,300

7,800

Cash

1,319

6,358

5,108

7,351

8,743

Other

221

125

233

233

308

Current Liabilities

 

 

(10,234)

(8,578)

(12,844)

(14,883)

(17,101)

Creditors & other

(9,183)

(8,578)

(12,709)

(13,616)

(15,834)

Short term borrowings

(1,051)

0

(135)

(1,267)

(1,267)

Long Term Liabilities

 

 

(899)

(192)

(5,892)

(6,675)

(6,701)

Long term borrowings

0

0

(1,086)

(1,869)

(1,869)

Other long-term liabilities

(899)

(192)

(4,806)

(4,806)

(4,832)

Net Assets

 

 

6,790

13,190

15,455

13,632

12,489

CASH FLOW

Operating Cash Flow

 

 

245

(749)

572

4,030

4,781

Net Interest

(167)

(175)

(144)

(144)

(99)

Tax

751

410

313

45

10

Capex

(1,035)

(1,394)

(2,320)

(2,200)

(2,200)

Acquisitions/disposals

115

0

(2,151)

(585)

0

Financing

0

7,996

2,805

0

0

Dividends

0

0

0

0

0

Net Cash Flow

(91)

6,088

(1,179)

46

1,392

Opening net debt/(cash)

 

 

(604)

(268)

(6,358)

(3,886)

(4,215)

HP finance leases initiated

0

0

(1,221)

0

0

Other

(245)

2

(72)

283

0

Closing net debt/(cash)

 

 

(268)

(6,358)

(3,886)

(4,215)

(5,607)

Source: Company data, Edison Investment Research. Note: Forecasts include the acquisition of GI from May 2019.

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This report has been commissioned by 1Spatial and prepared and issued by Edison, in consideration of a fee payable by 1Spatial. 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.

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General disclaimer and copyright

This report has been commissioned by 1Spatial and prepared and issued by Edison, in consideration of a fee payable by 1Spatial. 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.

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Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). 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

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.

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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

1185 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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