Strong Q320 results, estimates raised

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.

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.

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.

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.

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.

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.

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.

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.