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Strong Q320 results, estimates raised

4iG 1 December 2020 Update
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4iG

Strong Q320 results, estimates raised

Q320 update

IT services

1 December 2020

Price

HUF642

Market cap

HUF58.4bn

HUF355/€

Net debt (HUFbn) at 30 September 2020

1.2

Shares in issue

91.0m

Free float

36.1%

Code

4iG

Primary exchange

Budapest

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

18.5

(1.9)

(27.8)

Rel (local)

(1.4)

(11.8)

(18.6)

52-week high/low

HUF978.0

HUF296.0

Business description

4iG is one of the leading IT services and systems integrators in Hungary, working with public sector clients, large corporates and SMEs. Management is focused on becoming the market leader in Hungary by FY22 as well as targeting expansion in Central and Eastern Europe.

Next events

Summary FY20 results

February 2021

Full FY20 results

April 2021

AGM

April 2021

Analysts

Richard Williamson

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

4iG is a research client of Edison Investment Research Limited

In its Q320 update, 4iG reported nine-month (9m) net revenues of HUF33.5bn, a 34% y-o-y increase. EBITDA increased 13% to HUF2.8bn, with EBITDA margins climbing to 10.8% in Q320 from 6.7% in H120. Net income for the 9m rose 11% y-o-y to HUF1.9bn. 4iG reported a continuing robust operational performance, with a limited effect from COVID-19, announcing two acquisitions and a satellite joint venture during the period and a third acquisition after period-end. Management reiterated its confidence in achieving its 20% revenue growth guidance for FY20 ahead of its seasonally strongest quarter, with a HUF18.2bn order book for 2020 (19 November) on top of 9M20 revenues of HUF33.5bn (total HUF51.7bn). We have raised our revenue estimate for FY20 by 10% and FY21 by 5%.

Year end

Revenue
(HUFbn)

PBT*
(HUFbn)

Adjusted EPS* (HUF)

DPS
(HUF)

P/E
(x)

Yield
(%)

12/18

14.0

0.2

1.1

0.0

N/A

N/A

12/19

41.1

3.3

31.1

22.0

20.6

3.4

12/20e

54.0

3.6

33.3

24.0

19.3

3.7

12/21e

62.1

4.7

43.2

31.0

14.9

4.8

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

Q320: Acquisitions support continued momentum

4iG has weathered COVID-19 well and delivered strong 9M20 results, with y-o-y revenue growth of 34% and y-o-y EBITDA growth of 13%. EBITDA margins have picked up from 6.7% for H120 to 8.4% for 9M20, versus management’s medium-term target of 8–10% and our prior estimates for FY20 of 8.5%. Including the acquisitions of TRC and INNObyte, the company has continued to increase headcount, reaching 735 staff by November. Software development and outsourcing have continued to be the drivers of group revenue growth, with 9M20 revenues ex reselling growing 143% y-o-y.

FY20 revenue estimate raised by 10%

With reported 9M20 revenue and the latest identified FY20 order book together exceeding our prior FY20 revenue estimate and the blended YTD EBITDA margin approaching our prior FY20 estimate, we believe it is appropriate to revise our FY20 estimates upwards. We have increased our FY20 revenue estimate by 10% to HUF54.0bn and raised our EBITDA forecast by 6% to HUF4.4bn, implying an FY20 EBITDA margin of 8.1%. As a result of the higher base revenues, we have also raised our FY21 revenue estimate by 5%. Our model does not currently reflect an estimated c HUF5bn of revenues/HUF0.5bn EBITDA from FY20 M&A, as we await more details on these acquisitions.

Valuation: FY21 discount to peers, 4.8% yield

Our new estimates reflect FY20e revenue growth above 30%, with management guidance of 10%+ revenue growth in the medium term as 4iG consolidates market leadership in Hungary. Our estimates indicate an FY21 P/E of 14.9x and an attractive 4.8% dividend yield. The stock remains at a meaningful discount to its European and regional peers with further upside potential.

Q320 results update

Operational momentum continues

The momentum that 4iG demonstrated in its H120 results continued in Q320. In its Q320 results, 4iG reported net revenues of HUF33.5bn for the first 9m of 2020, representing growth of 34% y-o-y (Q1 to Q319: HUF25.0bn). EBITDA rose 13% to HUF2.8bn (Q1 to Q319: HUF2.5bn), with EBITDA margins climbing to 10.8% in Q320 from 6.7% in H120 meaning the blended margin for Q1 to Q320 rose to 8.4% (4iG’s medium-term target of 8–10%). Net income grew 11% y-o-y to HUF1.9bn (Q1 to Q319: HUF1.7bn). Net debt rose to HUF1.2bn at end-Q320, from HUF0.0bn at end-H120.

Operationally, COVID-19 has only had a marginal impact, with clients in certain sectors hit hard (eg retail, travel) but technology sales amongst both domestic and international companies has proven to be resilient. The COVID-19 pandemic has also provided a catalyst for increased spending on IT segments, accelerating the digitalisation of businesses and driving growth in SaaS, remote maintenance, blockchain and artificial intelligence, in particular.

The forward order book for FY20 reached HUF18.2bn on 19 November 2020. As an indicator, total revenue including actual Q1–Q320 revenue, together with the identified forward order book, adds up to HUF51.7bn (26% ahead of FY19 revenues), with the potential for additional orders to be received during the remainder of Q4, historically 4iG’s strongest quarter.

Exhibit 1: Quarterly revenues FY20 vs FY19 (Q420 based on forward order book)

Source: 4iG

4iG’s headcount has grown significantly, reaching almost 700 staff by 30 September 2020 (735 in November 2020), including more than 500 technical engineers. Including contractors, the group has almost reached a headcount of 1,000.

M&A: A busy period for acquisitions

In Q320, 4iG announced two acquisitions together with a geostationary satellite joint venture, with a further acquisition completed post period end in November. 4iG is looking to lead market consolidation, targeting smaller players with an attractive client base or sector focus and a proven track record to support the company’s growth and build out its capabilities.

TR Consult (TRC), announced July 2020, a specialist IT consultancy focused on the cybersecurity sector. Based in Budapest, TRC serves a Central Eastern European (CEE) corporate client base, as well as companies in Hungary. 4iG had previously worked with TRC for the last 10 years. In FY18, TRC had revenues of HUF0.7bn (c €2m). The purchase price was not disclosed.

Hungarian Space Telecommunications Corporation (CarpathiaSat), announced August 2020, a joint venture to launch and operate Hungary's first geostationary satellite for commercial, public sector and scientific research. CarpathiaSat will have the right to operate geostationary satellites for a period of 20 years from 2024, following expiry of the current 20-year lease. 4iG owns 51% of CarpathiaSat, with Antenna Hungária, the state-owned telecoms and broadcasting company, owning 44% and New Space Industries, an investment vehicle, holding the remaining 5%. The launch and operation of Hungary’s first satellite for broadcasting, internet and telephone services and data transmission is a strategic initiative that will broaden 4iG’s footprint and progress its strategy to become the leading IT services company in Hungary and CEE.

INNObyte and Innoware Kft (INNObyte Group), announced September 2020, the acquisition of a 70% majority shareholding in INNObyte Group. INNObyte Group’s FY19 turnover was HUF3.3bn (€9.1m) with EBITDA of HUF447m (€1.2m). INNObyte, founded in 2014, with offices in Budapest and Pécs, is a software development company, specialising in contact centre services, business intelligence, test automation, AI development and database solutions, with c 200 employees. The acquisition helps broaden 4iG’s development capabilities, contributing to 4iG’s drive for market leadership in fintech, Industry 4.0, AI development and blockchain. The purchase price was not disclosed.

DTSM, announced November 2020 (completion subject to competition clearance). DTSM operates data centres and provides IT services including the installation, operation and integration of IT and telecoms systems and integration of cloud technologies for private customers. DTSM reported FY19 revenues of HUF1.2bn (€3.4m) and has operated as a supplier to 4iG since it was founded in 2018. The acquisition expands 4iG’s existing capabilities and moves it towards domestic leadership in the operation of outsourced data centres, as well as in service desk operations. On completion, 4iG will have one of the largest outsourcing teams in the Hungarian market, a capability that it expects to expand in the future.

In aggregate, based on the available information, we provisionally estimate that the four acquisitions mentioned above could constitute some HUF5bn+ of revenue and c 0.5bn of EBITDA. However, with limited details on the financials of the acquired businesses and considerations paid by the company, we have not yet explicitly factored these acquisitions into our financial model and await more details from the company.

With the Hungarian market still very fragmented and with not all IT services companies performing as strongly as 4iG, management continue to review M&A opportunities. As such, the signs are that 4iG will continue to acquire opportunistically in FY21.

Segmental analysis: Strength in outsourcing and development

Exhibit 2: Net revenue bridge Q1–Q319 to Q1–Q320

Source: 4iG

The breakdown of revenue by segment remains very similar to H120, with a slight increase in weighting towards the higher margin segments, development and outsourcing. Supported by the acquisitions of INNObyte and DTSM, we would expect these segments to continue to grow strongly in Q420 and beyond. In terms of recurring revenues, there has been no further increase as a percentage of total revenues, with recurring revenues remaining at 16% of overall revenues, as it was in H120.

Exhibit 3: 9M20 revenues by service line

Exhibit 4: 9M20 revenues by client type

Source: 4iG

Source: 4iG

Exhibit 3: 9M20 revenues by service line

Source: 4iG

Exhibit 4: 9M20 revenues by client type

Source: 4iG

Hardware reselling remains 51% of total sales, with software reselling an 7% of total sales (although as hardware and software are often sold as a package, there can be some ambiguity as to which segment these sales come under). 4iG has found that a number of hardware projects that had been postponed in H120 due to COVID-19 have started in Q320. The company also had concerns in H120 about the impact of the pandemic on its Far Eastern supply chain; however, those concerns are now receding with delayed deliveries being fulfilled in Q320. Despite COVID-19’s impact this year, hardware sales continue to track above 2019, with HUF17.0bn of sales in the first nine months of 2020 versus HUF15.3bn y-o-y in 2019. Software reselling is tracking behind 2019, with HUF2.5bn of sales in the first nine months of 2020 versus HUF3.9bn y-o-y in 2019.

Having established a programme to expand its internal capabilities, 4iG successfully launched a dedicated development unit including 100 programmers, IT architects and testers across 4iG’s three regional offices. This focus, together with its wide geographical footprint, significantly enhanced the segment’s performance, with service delivery unaffected by COVID-19 through the group’s effective use of online delivery and online collaboration tools. Development revenues have increased three-fold, from HUF2.4bn in 9M19 to HUF7.2bn 9M20.

In outsourcing, 4iG secured a number of long-term contracts due to its scalable service structure, that delivered strong revenue growth in the first 9m of 2020. Reassuringly, despite the economic slowdown, demand from 4iG’s customers has not scaled back, with revenues of HUF3.4bn in 9M20 versus HUF2.3bn in 9M19.

4iG also received significant additional customer wins in support services, infrastructure development and IT consultancy, generating incremental revenue of HUF3.5bn in 9M20 versus HUF1.1bn in 9M19.

Upward estimate revision

4iG has weathered COVID-19 well and delivered strong Q320 results, with 9M20 revenue growth of 34% and year-on-year EBITDA growth of 13%. EBITDA margins have picked up from 6.7% for H120 to 8.4% in 9M20, versus management’s medium-term target of 8–10% and our prior estimate for FY20 of 8.5%. The company has continued to increase headcount, reaching 735 staff by November, including the acquisitions of TRC and INNObyte, and the new IT and CRM systems have delivered the sought for efficiencies. Software development and outsourcing have continued to be the drivers of group revenue growth, with 9M20 revenues ex reselling growing 143% y-o-y.

With reported 9M20 revenue together with the identified forward order book to 19 November 2020 now exceeding our prior FY20 revenue estimate and the blended YTD EBITDA margin approaching our prior FY20 estimate, we believe it is appropriate to revise our FY20 estimates upwards. We have increased our FY20 revenue estimate by 10% to HUF54.0bn and raised our EBITDA forecast by 6% to HUF4.4bn, implying an FY20 EBITDA margin of 8.1%. As a result of the higher base revenues, we have also raised our FY21 revenue estimate by 5%, while pulling back our FY21e EBITDA margin to 9.1% from 9.6% previously, although still above the mid-point of management’s guidance of 8–10% EBITDA margins in the medium term.

Exhibit 5: Estimate revisions

HUF'm

2019

2020

2020

2021

2021

Actual

Old

New

Change

Old

New

Change

Revenues

41,129

49,083

53,988

10.0%

58,881

62,076

5.4%

Gross profit

11,003

14,761

16,297

10.4%

17,699

18,907

6.8%

Gross margin

26.8%

30.1%

30.2%

0.1%

30.1%

30.5%

0.4%

EBITDA

4,075

4,152

4,389

5.7%

5,631

5,669

0.7%

EBITDA margin

9.9%

8.5%

8.1%

-3.9%

9.6%

9.1%

-4.5%

Normalised PBT

3,344

3,358

3,594

7.0%

4,794

4,720

-1.5%

Normalised net income

2,922

2,921

3,127

7.0%

4,123

4,059

-1.5%

Normalised basic EPS

31.9

31.8

34.2

7.5%

44.9

44.6

-0.7%

Dividend per share

22.0

22.0

24.0

9.1%

31.0

31.0

0.0%

Net debt/(cash)

(4,039)

(4,445)

1,127

(5,924)

(112)

Source: 4iG (historicals), Edison Investment Research (forecasts)

As we noted in the M&A section, we have not yet explicitly factored 4iG’s acquisitions into our financial model (we estimate at least HUF5bn of revenue and c 0.5bn of EBITDA), which therefore represents additional potential upside to our current forecasts.

Exhibit 6: Financial summary

HUFm

2018

2019

2020e

2021e

2022e

31-December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

14,007

41,129

53,988

62,076

70,261

Cost of Sales

(8,938)

(30,126)

(37,691)

(43,170)

(48,622)

Gross Profit

5,070

11,003

16,297

18,907

21,638

EBITDA

 

 

842

4,075

4,389

5,669

6,990

Normalised operating profit

 

 

240

3,362

3,616

4,830

6,075

Amortisation of acquired intangibles

0

0

0

0

0

Exceptionals

0

0

0

0

0

Share-based payments

0

0

0

0

0

Reported operating profit

240

3,362

3,616

4,830

6,075

Net Interest

(21)

(18)

(22)

(110)

(85)

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

219

3,344

3,594

4,720

5,990

Profit Before Tax (reported)

 

 

219

3,344

3,594

4,720

5,990

Reported tax

(117)

(488)

(467)

(661)

(898)

Profit After Tax (norm)

102

2,857

3,127

4,059

5,091

Profit After Tax (reported)

102

2,857

3,127

4,059

5,091

Minority interests

0

66

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

102

2,922

3,127

4,059

5,091

Net income (reported)

102

2,922

3,127

4,059

5,091

Basic average number of shares outstanding (m)

91.6

91.7

91.4

91.0

91.0

EPS - basic normalised (HUF)

 

 

1.11

31.87

34.23

44.63

55.97

EPS - diluted normalised (HUF)

 

 

1.08

31.09

33.26

43.18

54.16

EPS - basic reported (HUF)

 

 

1.11

31.87

34.23

44.63

55.97

Dividend (HUF)

0.00

22.00

24.00

31.00

39.00

Revenue growth (%)

(17.2)

193.6

31.3

15.0

13.2

Gross Margin (%)

36.2

26.8

30.2

30.5

30.8

EBITDA Margin (%)

6.0

9.9

8.1

9.1

9.9

Normalised Operating Margin

1.7

8.2

6.7

7.8

8.6

BALANCE SHEET

Fixed Assets

 

 

1,571

1,948

7,620

7,841

8,109

Intangible Assets

1,221

1,525

1,440

1,375

1,335

Tangible Assets

140

322

579

865

1,173

Investments & other

210

101

5,601

5,601

5,601

Current Assets

 

 

6,824

22,161

18,923

22,495

26,407

Stocks

242

523

754

863

972

Debtors

4,306

12,892

14,847

17,071

19,322

Cash & cash equivalents

176

6,238

814

2,053

3,605

Other

2,101

2,508

2,508

2,508

2,508

Current Liabilities

 

 

(5,652)

(17,861)

(19,186)

(21,103)

(23,012)

Creditors

(3,894)

(16,361)

(17,944)

(19,861)

(21,770)

Tax and social security

0

0

0

0

0

Short term borrowings

(1,758)

(1,500)

(1,242)

(1,242)

(1,242)

Other

0

0

0

0

0

Long Term Liabilities

 

 

(18)

(57)

(57)

(57)

(57)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(18)

(57)

(57)

(57)

(57)

Net Assets

 

 

2,725

6,192

7,300

9,176

11,448

Minority interests

0

64

64

64

64

Shareholders' equity

 

 

2,725

6,255

7,364

9,240

11,512

CASH FLOW

Op Cash Flow before WC and tax

842

4,075

4,389

5,669

6,990

Working capital

(1,360)

3,231

(603)

(416)

(451)

Exceptional & other

(26)

(5)

0

0

0

Tax

(117)

(415)

(467)

(661)

(898)

Net operating cash flow

 

 

(661)

6,886

3,319

4,592

5,640

Capex

(120)

(1,471)

(944)

(1,060)

(1,182)

Acquisitions/disposals

0

3

(5,500)

0

0

Net interest

(11)

(13)

(22)

(110)

(85)

Equity financing

0

185

0

0

0

Dividends

0

0

(2,019)

(2,183)

(2,820)

Other

(3)

36

0

0

0

Net Cash Flow

(795)

5,626

(5,166)

1,239

1,552

Opening net debt/(cash)

 

 

792

1,587

(4,039)

1,127

(112)

FX

0

0

0

0

0

Other non-cash movements

0

0

0

0

0

Closing net debt/(cash)

 

 

1,587

(4,039)

1,127

(112)

(1,664)

Source: 4iG accounts, Edison Investment Research

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Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

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.

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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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