Value-enhancing deal at a modest 0.8x sales

StatPro Group 11 April 2017 Update
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StatPro Group

Value-enhancing deal at a modest 0.8x sales

Acquisition

Software & comp services

11 April 2017

Price

105.5p

Market cap

£68m

Net debt (£m) at 31 December 2016

10.1

Shares in issue

64.7m

Free float

82%

Code

SOG

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

22.0

1.4

42.6

Rel (local)

21.5

(0.2)

21.0

52-week high/low

113p

73.5p

Business description

StatPro Group provides cloud-based portfolio analytics solutions to the global investment community.

Next events

AGM

May 2017

H1 trading update

July 2017

Interim results

September 2017

Analysts

Richard Jeans

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

StatPro Group is a research client of Edison Investment Research Limited

StatPro is acquiring UBS Delta, a portfolio analysis and risk management system, from UBS for €13.05m. The acquisition significantly scales up StatPro’s business, boosting FY18 revenues by c 33% and EBITDA by c 40%. While the deal looks very cheap at less than 0.8x revenues, compared with 7.3x sales that FactSet recently paid for BISAM, a key competitor of StatPro, UBS Delta’s technology needs to be refreshed and to achieve this, its functionality, along with the customer base, will be transitioned to StatPro Revolution. If StatPro can successfully integrate UBS Delta, we believe there is strong upside potential in the shares, given the significant valuation disparity with its US-listed financial software peers.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/15

30.2

2.6

2.6

2.9

40.2

2.7

12/16

37.5

2.7

3.5

2.9

30.2

2.7

12/17e

48.9

4.2

5.0

2.9

21.2

2.7

12/18e

57.3

6.1

7.2

2.9

14.7

2.7

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

Acquisition of UBS Delta

UBS Delta, launched in 1998, is an early-generation private cloud application used by front offices of institutional investors for portfolio management and marketing purposes. Delta has gained a strong reputation in the fixed income markets and has c 115 clients including insurance companies, asset managers and pension funds, mainly in the UK, France and Switzerland. StatPro’s traditional market is the middle office, although its Revolution cloud service has extended the market to the front office as well. As its technology is nearly 20 years old, UBS Delta is in need of a major upgrade and StatPro offers an attractive route to upgrade by transitioning the functionality to its own cloud platform. Until StatPro has fully integrated UBS Delta’s functionality in Revolution, UBS will continue to operate and support UBS Delta for its clients. However, the revenues and costs will accrue to StatPro.

Forecasts: EPS jumps 22% in FY17 and 40% in FY18

We have added UBS Delta into our forecasts for seven-and-a-half months in FY17. This boosts revenues by 22% in FY17, while FY18 revenues rise by 33%. Adjusted EBITDA rises by 20% and 40% in the respective years, and adjusted EPS goes up by 22% and by 40%. We forecast the group to end FY17 with net debt of £19.7m (previous forecast was £12.8m) falling to £17.7m a year later (previously £12.1m). There are also £3.6m of outstanding Delta acquisition liabilities, payable in FY19 and FY20.

Valuation: Highly scalable cloud computing upside

StatPro’s stock trades on c 21x our FY17e EPS, which falls to c 15x in FY18e. Alternatively, the shares trade on c 1.6x FY18e EV/sales, around one-third of the level of StatPro’s larger US peers and US-based pure SaaS companies. Our DCF model, when incorporating 10-year organic revenue growth of 4.4%, a terminal growth of 2%, a long-term margin target of 24.5% and a WACC of 9%, would value the shares at 212p, more than double the current share price.

Acquisition of UBS Delta

StatPro is acquiring UBS Delta from UBS for €13.05m in cash, spread over three years. The deal is expected to complete in mid-May. StatPro will pay an initial €8.70m on closing, with further payments of €1.74m in two years and €2.61m in three years. The attractive price reflects the fact that the software needs to be upgraded. It also reflects the fact that its owner is not a software house, and that software applications are increasingly difficult for non-software businesses to maintain.

UBS Delta is a portfolio analysis and risk management system that enables clients to measure risk and performance across fixed income, commodities, equities and FX. UBS Delta is used by front offices of institutional investors for portfolio management and marketing purposes, while StatPro’s traditional market is the middle office, largely used for internal management functions and client reporting. UBS Delta’s roots are in fixed income and consequently it has established a special focus on fixed income attribution and risk. It is reputed to have the best fixed income analytics in the European market. UBS Delta has 115 clients of which c 100 are new to StatPro, including UBS. This will take StatPro’s total client base to c 550, including 105 of the world’s top 500 asset managers.

UBS Delta is an early generation private cloud application, developed on a Sybase platform. As such, it is multi-tenant, meaning that all its users share the same instance of the software, in the same way that we use Google, for example. However, it is nearly 20 years old and therefore needs either a major upgrade or to be transitioned to a new platform. StatPro is ideally positioned to offer the latter option, as it has its own multi-tenant cloud platform, StatPro Revolution, to which UBS Delta can be transitioned. UBS Delta has 24 full-time employees, including 4-5 in sales, and c 30 contractors.

UBS Delta’s functionality will be incorporated into StatPro Revolution, with the help of UBS Delta’s developers, and its customer base transitioned to Revolution within three to five years. Once transitioned, the customers will benefit from a modern cloud platform and greater functionality. StatPro Revolution will benefit from the additional fixed income and risk functionality that can be offered to its existing clients, creating cross-selling opportunities. In the meantime, UBS Delta’s clients will continue to be offered support for five years.

UBS Delta has c £14.5m in recurring revenues, growing gently. StatPro expects these revenues to remain broadly unchanged in FY17 and this will take StatPro’s annualised recurring revenue run-rate to c £53m. StatPro says adjusted EBITDA from the acquisition is expected to be £2.0m to £2.5m in the first 12 months of ownership. UBS Delta’s revenue model is based on number of users, and this will transition to StatPro’s model, which is based on number of portfolios.

Competing solutions include Barclays Point (legacy of Lehman Brothers and recently sold to Bloomberg), Yield Book (owned by Citi) and BondEdge (acquired by ICE when it purchased Interactive Data).

In order to finance the deal, StatPro has increased its debt facilities with Wells Fargo by £15.9m to £41.1m, of which £33.6m is committed.

Forecasts: FY18 sales up 33%, EBITDA & EPS up 40%

We have incorporated UBS Delta into our forecasts, conservatively assuming a revenue run-rate of £14m in FY17 (£8.8m in seven-and-a-half months), rising by 2% in FY18. We have maintained all our operating assumptions for the rest of the business. Our adjusted EBITDA forecasts rise by £1.2m in FY17 (ie, £1.9m annualised) and by £2.5m in FY18. We note that there will not be any additional costs in transitioning UBS Delta to StatPro Revolution, as UBS Delta’s developers will shift their focus on to this task, and once the process is completed, the group R&D in relation to sales is expected to decline.

We have also significantly increased the interest charge in both years, to reflect the higher debt levels, and we have eased our tax charge forecasts from 23% to 21%, given the favourable corporate tax environment. In all, group revenue rises by 22% in FY17 and by 33% in FY18, while adjusted EBITDA rises by 20% and 40% in the respective years, and adjusted EPS goes up by 22% and 40% respectively. We now forecast the group to end FY17 with net debt of £19.7m (previous forecast was £12.8m) falling to £17.7m a year later (previously £12.1m). There are also £3.6m of outstanding UBS Delta acquisition liabilities, payable in FY19 and FY20.

We have assumed that costs relating to the transaction are included in the adjusted EBITDA. We have also ignored amortisation of acquired intangibles, which have no impact on cash flows.

Exhibit 1: Forecast changes

Old

New

Change

Old

New

Change

 

2017e

2017e

(%)

2018e

2018e

(%)

Revenues (£'000s)

 

 

 

 

Traditional software rental

16,920

16,920

0.0

14,920

14,920

0.0

StatPro Revolution

16,449

25,199

53.2

21,139

35,419

67.6

Data

4,039

4,039

0.0

4,119

4,119

0.0

Professional services

2,790

2,790

0.0

2,846

2,846

0.0

Group Revenue

40,198

48,948

21.8

43,024

57,304

33.2

Growth (%)

7.1

30.4

7.0

17.1

Gross Profit

40,198

48,948

21.8

43,024

57,304

33.2

Opex (before devt costs depn)

(34,801)

(42,362)

21.7

(37,103)

(48,977)

32.0

Capitalisation of dev costs (net)

444

444

0.0

459

588

28.0

Adjusted EBITDA

5,841

7,030

20.4

6,381

8,916

39.7

Depreciation

(1,704)

(1,800)

5.6

(1,410)

(1,800)

27.6

Adjusted operating profit

4,136

5,230

26.4

4,970

7,116

43.2

Operating margin (%)

10.3

10.7

11.6

12.4

Growth (%)

19.5

51.1

20.2

36.1

Net interest

(550)

(998)

81.3

(450)

(1,021)

126.9

Profit before tax norm

3,586

4,232

18.0

4,520

6,095

34.8

Amortisation of acquired intangibles

(1,060)

(1,060)

0.0

(1,060)

(1,060)

0.0

Share based payments

(213)

(213)

0.0

(225)

(225)

0.0

Exceptional items (net of tax)

0

0

N/A

0

0

N/A

Profit before tax

2,313

2,960

27.9

3,235

4,810

48.7

Taxation

(825)

(889)

7.8

(1,040)

(1,280)

23.1

Minority interest

(121)

(121)

0.0

(129)

(129)

0.0

Net income

1,368

1,950

42.6

2,066

3,401

64.6

Adjusted EPS (p)

4.1

5.0

22.1

5.1

7.2

39.8

P/E - Adjusted EPS

 

21.2

 

14.7

Source: Edison Investment Research

Peer analysis

StatPro’s stock trades on c 21x our FY17e EPS, which falls to c 15x in FY18e, putting it at a significant discount to its UK-quoted peers. Alternatively, the shares trade on c 1.6x FY18e EV/sales, less than one-third of the level of StatPro’s larger US peers, which mostly trade above 5x EV/sales, and less than one-third of the level of US-based pure SaaS companies. Additionally, the P/E ratio discounts have increased, despite the share price gains, given the acquisition and falling tax assumptions. We are confident that StatPro will show healthy margin progression as its ARR book continues to grow, which will lead to sharply declining P/S ratios.

Exhibit 2: Peers

Price

Market cap

EV/sales (x)

EV/EBITDA (x)

PE (x)

Local currency

Local currency

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

StatPro

105.5

68

1.9

1.6

13.0

10.3

21.2

14.7

1) US-quoted investment management software peers

MSCI

97.79

8851

8.2

7.6

16.1

14.7

27.4

23.5

FactSet

161.13

6375

5.4

5.0

15.7

14.6

22.0

20.0

SS&C

35.15

7168

5.7

5.4

13.8

12.8

18.2

16.2

DST Systems

121.15

3797

1.7

1.5

9.2

8.3

18.6

16.1

Envestnet

33.75

1466

2.6

2.3

13.5

10.9

27.0

20.9

Medians

5.4

5.0

13.8

12.8

22.0

20.0

2) Investment management software peers quoted in other countries

GBST

2.90

197

2.0

2.0

15.1

11.7

23.0

16.8

Iress

11.55

1964

4.8

4.4

16.1

14.4

23.3

20.8

Linedata

48.82

358

2.1

2.0

7.6

7.3

14.5

13.7

SimCorp

424.10

17600

6.9

6.4

24.7

22.1

32.2

28.5

Medians

3.4

3.2

15.6

13.0

23.2

18.8

3) UK-quoted financial software peers

Fidessa

2594.00

1002

2.6

2.4

11.3

10.7

27.9

25.5

First Derivatives

2700.00

672

4.8

4.3

25.7

23.0

48.1

43.9

Microgen

297.50

181

3.6

3.5

14.9

13.4

23.6

20.8

Brady

74.00

62

1.8

1.8

18.0

9.8

56.9

23.9

Lombard Risk

10.63

43

1.1

0.9

N/A

5.5

N/A

26.6

Medians (excl Lombard)

3.1

2.9

16.5

12.0

38.0

24.7

4) US companies with SaaS business models

Callidus

19.75

1259

4.4

3.7

31.3

24.4

63.3

50.1

Cornerstone OnDemand

37.78

2140

4.3

3.7

37.2

23.6

106.4

50.0

Paycom Software

57.90

3443

8.1

6.5

29.8

22.6

56.9

43.2

Paylocity

38.27

1969

6.4

5.1

44.9

34.2

90.0

67.4

Salesforce

85.00

60138

5.9

4.9

27.1

21.6

67.4

51.9

Ultimate Software

198.09

6124

6.2

5.1

25.7

20.7

49.9

40.2

Workday

82.97

16843

7.6

6.1

71.0

48.3

163.6

112.0

Medians

6.2

5.1

31.3

23.6

67.4

50.1

Source: Bloomberg, Edison Investment Research. Note: Prices as at 7 April 2017.

Exhibit 3: Financial summary

£'000s

2013

2014

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

32,486

32,018

30,187

37,545

48,948

57,304

Cost of Sales

0

0

0

0

0

0

Gross Profit

32,486

32,018

30,187

37,545

48,948

57,304

EBITDA

 

 

5,463

4,359

4,044

5,104

7,030

8,916

Adjusted Operating Profit

 

 

4,327

2,875

2,852

3,461

5,230

7,116

Amortisation of acquired intangibles

(402)

(188)

(32)

(1,060)

(1,060)

(1,060)

Exceptionals

(347)

0

0

(11,378)

0

0

Share based payments

(192)

(26)

(121)

(361)

(213)

(225)

Operating Profit

3,386

2,661

2,699

(9,338)

3,958

5,831

Net Interest

(273)

(291)

(290)

(786)

(998)

(1,021)

Profit Before Tax (norm)

 

 

4,054

2,584

2,562

2,675

4,232

6,095

Profit Before Tax (FRS 3)

 

 

3,113

2,370

2,409

(10,124)

2,960

4,810

Tax

(1,030)

(774)

(788)

(395)

(889)

(1,280)

Profit After Tax (norm)

3,024

1,810

1,774

2,843

3,344

4,815

Profit After Tax (FRS 3)

2,083

1,596

1,621

(10,519)

2,071

3,530

Minority interests

0

0

0

(94)

(121)

(129)

Net income (norm)

3,024

1,810

1,774

2,280

3,223

4,686

Net income (statutory)

2,083

1,596

1,621

(10,613)

1,950

3,401

Average Number of Shares Outstanding (m)

67.5

67.5

67.6

65.3

64.9

65.2

EPS - normalised (p)

 

 

4.5

2.7

2.6

3.5

5.0

7.2

EPS - FRS 3 (p)

 

 

3.1

2.4

2.4

(16.3)

3.0

5.2

Dividend per share (p)

2.80

2.90

2.90

2.90

2.90

2.90

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

16.8

13.6

13.4

13.6

14.4

15.6

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

13.3

9.0

9.4

9.2

10.7

12.4

BALANCE SHEET

Fixed Assets

 

 

55,992

56,113

51,857

59,088

71,757

72,285

Intangible Assets

53,524

52,546

48,613

55,696

68,452

68,774

Tangible Assets

1,883

2,470

2,233

2,742

2,655

2,861

Other assets

585

1,097

1,011

650

650

650

Current Assets

 

 

10,312

10,441

10,665

19,081

24,018

28,637

Stocks

0

0

0

0

0

0

Debtors

6,167

7,722

8,462

14,725

19,197

22,475

Cash

4,014

2,692

2,203

4,356

4,821

6,162

Current Liabilities

 

 

(18,514)

(20,271)

(19,778)

(35,686)

(42,727)

(47,207)

Creditors

(18,502)

(20,259)

(19,660)

(27,227)

(34,268)

(38,748)

Short term borrowings

(12)

(12)

(118)

(8,459)

(8,459)

(8,459)

Long Term Liabilities

 

 

(882)

(598)

(1,227)

(9,897)

(22,223)

(21,523)

Long term borrowings

0

0

(801)

(5,961)

(16,060)

(15,360)

Other long term liabilities

(882)

(598)

(426)

(3,936)

(6,163)

(6,163)

Net Assets

 

 

46,908

45,685

41,517

32,586

30,826

32,191

CASH FLOW

Operating Cash Flow

 

 

9,403

7,705

6,548

7,454

11,604

14,417

Net Interest

(98)

(10)

(84)

(500)

(998)

(1,021)

Tax

(1,616)

(1,173)

(832)

(1,294)

(1,000)

(846)

Capex

(4,412)

(5,904)

(4,999)

(6,445)

(6,486)

(7,808)

Acquisitions/disposals

(990)

0

0

(4,786)

(10,861)

(820)

Equity financing

0

2

64

(2,079)

0

0

Dividends

(1,856)

(1,889)

(1,960)

(1,877)

(1,893)

(1,881)

Net Cash Flow

431

(1,269)

(1,263)

(9,527)

(9,633)

2,041

Opening net debt/(cash)

 

 

(3,667)

(4,002)

(2,680)

(1,283)

10,065

19,698

Other

(96)

(53)

(134)

(1,821)

()

()

Closing net debt/(cash)

 

 

(4,002)

(2,680)

(1,283)

10,065

19,698

17,657

Source: StatPro Group accounts, Edison Investment Research estimates

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95 Pitt Street, Sydney

NSW 2000, Australia

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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