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In H119, strong organic growth from PlanetArt and Avanquest combined with recent acquisitions resulted in 55% group revenue growth year-on-year. Over the same period EBITDA increased 283% to generate a 7.8% margin, and the group reported positive net income for the first time in several years. Management unveiled ambitious five-year growth targets and is focused on achieving these through a combination of geographic expansion, innovative new products and services and targeted M&A.
Claranova |
Confident outlook |
H119 results |
Software & comp services |
11 April 2019 |
Share price performance
Business description
Next events
Analyst
Claranova is a research client of Edison Investment Research Limited |
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In H119, strong organic growth from PlanetArt and Avanquest combined with recent acquisitions resulted in 55% group revenue growth year-on-year. Over the same period EBITDA increased 283% to generate a 7.8% margin, and the group reported positive net income for the first time in several years. Management unveiled ambitious five-year growth targets and is focused on achieving these through a combination of geographic expansion, innovative new products and services and targeted M&A.
Year end |
Revenue (€m) |
EBITDA |
PBT* |
EPS* |
DPS |
P/E |
06/17 |
130.2 |
(5.0) |
(6.6) |
(0.02) |
0.0 |
N/A |
06/18 |
161.5 |
3.9 |
3.1 |
0.01 |
0.0 |
131.6 |
06/19e |
248.9 |
18.0 |
14.6 |
0.03 |
0.0 |
28.8 |
06/20e |
306.8 |
29.8 |
26.5 |
0.05 |
0.0 |
17.0 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Good performance across all divisions in H119
Organic revenue growth of 35% for H119 was driven by 41% growth for PlanetArt, 11% for the original Avanquest business and 75% growth for myDevices. In addition, the Canadian businesses acquired in July 2018 contributed a further 20% of growth. Despite strong investment in marketing during H1, the higher margin acquisitions and strong organic growth resulted in EBITDA growing 283% y-o-y and the EBITDA margin increasing from 3.2% to 7.8% y-o-y. On a normalised basis, operating profit increased from €2.5m (2.8% margin) to €10.6m (7.6% margin). We have revised our forecasts for FY19 and FY20 to reflect stronger revenues for PlanetArt and Avanquest and a small increase in EBITDA in both years.
Innovation at the heart of growth
PlanetArt continues to expand geographically while introducing new higher-margin products. Avanquest is developing new ways to monetise internet traffic and is about to launch a new secure payment service called Payaware. myDevices is expanding the number of channel and technology partners it works with to accelerate adoption of its solutions. Combining organic growth with selected acquisitions by Avanquest, management believes the group can grow revenues by more than 30% per annum to reach revenues of €600m by FY23.
Valuation: Better growth boosts valuation
Reflecting the different business models and minority interests for each division, we use a sum-of-the-parts approach to valuation. Based purely on peer group averages per division, we calculate a fair value of €1.08 per share. However, once multiples are adjusted to reflect our views on the growth and profitability of each division, this increases to €1.28 per share (up from €1.11, mainly driven by higher estimates). Milestones that could provide upside to our forecasts include: successful adoption of FreePrints in India; growth of the acquired Adaware business; and distributors reselling the myDevices platform in the US and China.
Review of H119 results
Exhibit 1: Claranova H119 results highlights
€m |
H119 |
H118 |
Revenues |
139.6 |
89.9 |
EBITDA |
10.9 |
2.8 |
D&A |
(0.3) |
(0.3) |
Normalised EBIT |
10.6 |
2.5 |
Share-based payments |
0.3 |
(1.2) |
Exceptional items |
(4.2) |
(1.1) |
Acquired amortisation |
(0.1) |
0.0 |
Reported EBIT |
6.6 |
0.2 |
Net finance cost |
(2.4) |
0.0 |
Reported PBT |
4.2 |
0.2 |
Tax |
(2.7) |
(0.8) |
Profit after tax |
1.5 |
(0.6) |
Minority interest (MI) |
0.1 |
0.3 |
Net income after MI |
1.6 |
(0.3) |
Net cash/(debt) |
42.8 |
43.2 |
Source: Claranova, Edison Investment Research
Claranova reported strong revenue growth of 55% year-on-year for H119 (54% in constant currency). Excluding the acquisitions made in July 2018, the group saw 35% organic revenue growth. This resulted in growth in EBITDA from €2.8m in H118 to €10.9m in H119 and EBITDA margins expanding from 3.2% to 7.8% over the same period.
As the CEO and CFO decided not to take the 18.185m bonus shares allocated to them in November 2018, a €2.9m credit reflecting this reversal offset the €2.6m charge for the period, resulting in a €0.3m credit for share-based payments. Instead they were awarded special bonuses totalling €2.7m accounted for in shareholders’ equity. Exceptional items mainly consisted of costs relating to the acquisitions in July. Net finance cost also included acquisition-related costs as well as costs relating to the ORNANEs issued in June 2018.
For the first time in many years, the group reported a profit at the net income level.
In H119, the company paid out €9.2m (net of cash acquired) for the three Canadian businesses. Net cash was essentially flat year-on-year.
Divisional focus
Exhibit 2: Divisional revenues and EBITDA
€m |
Revenues |
EBITDA |
EBITDA margin |
|||
H119 |
H118 |
H119 |
H118 |
H119 |
H118 |
|
PlanetArt |
97.8 |
69.2 |
6.6 |
3.7 |
6.8% |
5.4% |
Avanquest |
40.1 |
19.7 |
6.1 |
1.2 |
15.3% |
6.0% |
myDevices |
1.7 |
1.0 |
(1.9) |
(2.1) |
N/A |
N/A |
Total |
139.6 |
89.9 |
10.9 |
2.8 |
7.8% |
3.2% |
Source: Claranova
PlanetArt – European growth accelerating
PlanetArt saw 41% year-on-year revenue growth in H119 and EBITDA of €6.6m with a 6.8% margin, up from €3.7m and a 5.4% margin in H118. During H119, PlanetArt launched the FreePrints service in India. This has had limited impact on revenues to date, but the app has been downloaded more than 500,000 times, signifying strong interest in the service. The business also widened its product offering with the launch of Photo Tiles in June 2018 (already downloaded 1.2m times), and we expect further new high-margin product offerings to come.
The company noted that marketing spend increased 62% y-o-y in H119, with a particular focus on Europe. The company gave a split by geography, noting that revenues from Europe had increased to 40% of the total from 34% a year ago, which equates to 66% growth in European revenues (see Exhibit 3). In Q319, PlanetArt launched FreePrints in the Netherlands and Belgium. In Belgium, the app was developed to work in both French and Flemish. FreePrints is now available in 10 countries on three continents.
While growth in the US was lower than in Europe, this was against a backdrop of a highly competitive market in the US. In the US, the largest competitor to PlanetArt, Shutterfly, has struggled to grow its consumer photo printing business, and in Q4 only 27% of Shutterfly-branded revenues were generated via mobile. It has been slow to develop the mobile side of the business leaving room for FreePrints to gain significant market share. To try to regain some of this lost ground, Shutterfly ramped up advertising spend in Q418. Despite this, PlanetArt grew 28% y-o-y in the US in H119. We note also that Shutterfly’s CEO recently left and the company is in the midst of a strategic review.
Exhibit 3: Geographic revenue split
PlanetArt revenues €m |
H119 |
H118 |
Growth |
US |
58.7 |
45.7 |
28% |
Europe |
39.1 |
23.5 |
66% |
US |
60% |
66% |
|
Europe |
40% |
34% |
Source: Claranova (geo split), Edison Investment Research (revenue estimates)
Avanquest – acquisitions boost profitability
The division saw 104% revenue growth year-on-year, of which 11% was organic growth. The performance of the original Avanquest business was better than we expected, as the division had seen revenue declines for the last three years. EBITDA for the original business was €1.7m with a 7.8% margin, up from a 6.0% margin a year ago. The acquired businesses contributed revenues of €18.2m, EBITDA of €4.4m with a 24% margin and saw organic growth of 23% y-o-y. With the benefit of the higher-margin acquisitions, divisional EBITDA margins increased to 15.3% from 6.0% a year ago. On an annual basis, we expect the acquisitions to take the Avanquest business from EBITDA margins in the low single-digit percentages to margins in the mid-teens.
The company went into much more detail on how it expects to generate revenues in this division now that it has the benefit of the recent acquisitions. As a re-cap, the division generates revenues in four different ways:
■
Paid-for products. For the existing Avanquest business, most software is sold on a one-off licence basis. The business is looking to move to a subscription model for some products, eg OneSafe PC Cleaner, where the customer is likely to need to use the software on an ongoing basis. Other products, such Architect 3D are more suited to a one-off purchase as they tend to be linked to one-off projects. Soda PDF was based on a one-off licence fee, but is now being converted to a subscription licence model.
■
Freemium products/services. The original Avanquest business offered a few freemium products, including Photo Editor by InPixio and InstaCards. Adaware offers its anti-virus software on a freemium basis; the paid version of the software is subscription-based.
■
Advertising/traffic-based. Adaware’s Web Companion tool is a browser add-in for secure browsing, ad-blocking and identifying phishing sites. As the software diverts browsers such as Firefox to search services provided by Google or Bing, Web Companion earns a revenue share based on the searches pushed to these search providers. Adaware’s software installer tool is used by websites that offer software downloads. When a consumer decides to download software, they first download a small file onto their PC. Once clicked on, an executable file runs to fully download the software. In the process, the user is prompted to accept and install other complementary software products. If the user accepts any of these additional software products, Adaware will earn a commission from the third-party software provider.
■
Transaction-based. Upclick sells its services on a business-to-business basis. Merchants sign up to use the platform on a per-transaction basis.
The company presented this in a slightly different way, providing examples of how traffic to its sites can be monetised. Where originally Avanquest would only earn revenues in the first category, it has developed multiple ways to earn revenues from internet traffic, particularly in light of consumers’ increasing reluctance to pay directly for software or services. So where it would previously earn on average $1 from each visitor to its sites, it can now earn more like $2.63 per visitor. Bearing in mind the cost of acquiring this traffic, Avanquest can now make more profit, or pay more to acquire additional traffic.
Exhibit 4: Traffic monetisation methods
Direct sales |
Indirect sales of products, services & advertising |
Customer targeting |
Renewals |
|
Monetisation method |
Convert 2% of visitors to buy own IP or third-party software with average value of $50 |
Convert free software customers to paid products; earn search fees from Adaware; earn referral fees for third-party software installation |
$3.00 lifetime value (LTV) per email address |
Re-target existing customers to renew or upgrade software products, or download free products |
Revenue per visit |
$1 |
$0.85 |
$0.15 |
$0.63 |
Source: Claranova
New secure payments service developed
The company announced that it has developed a new service for Adaware called Payaware. This is designed to provide a secure and private way to make purchases online. The user registers with Payaware and provides details of a debit or credit card. Using the Payaware browser, when a user wants to pay for an item online, they press the Payaware button. This provides a one-time use card number that auto-fills in the payment page. By providing the one-time use number, even if it is intercepted it cannot be used again for another transaction. The transaction will show up on the user’s credit card statement as a Payaware transaction. Via a separate dashboard, the user can log in and view all transactions made in this way.
In terms of monetisation, the service is free to the user; Payaware acts as the card issuer and therefore earns the issuer fee from the merchant. The transactions use the traditional card networks so Visa/Mastercard continue to earn their transaction fees. The merchant does not see any difference in the process. This service will initially be launched in the US.
myDevices – continues to add partners
myDevices saw a 75% revenue increase year-on-year and a reduction in EBITDA losses from €2.1m to €1.9m. During H119, it continued to sign up partners to sell and distribute its technology. In September 2018, it signed up Alibaba Cloud and Ingram Micro. In October 2018, ARM and myDevices partnered to combine the myDevices IoT in a Box with ARM’s Pelion IoT platform. In February, myDevices announced that it was working with Microsoft so that LoRaWAN sensors could connect and send data to Microsoft Azure, enabling advanced analytics and business intelligence.
During January and February, myDevices carried out another investment round: Claranova invested $3m and Semtech $3m, taking the Claranova ownership of myDevices from 68.6% to 62.26%.
Outlook and changes to forecasts
Ambitious five-year outlook
Management unveiled the growth outlook for the group on a longer-term basis, targeting revenues of €600m in five years with an EBITDA margin of 10%. This broadly splits into €200m for Avanquest, at a 15–20% margin, and €400m for PlanetArt. As myDevices is at such an early stage, its revenue has not been included in this target. The table below shows the compound annual growth rates required to hit these targets. The company expects to be able to reach the targets for PlanetArt through organic growth, whereas Avanquest’s target is likely to combine acquisitions and organic growth.
Exhibit 5: Revenue targets – five-year view
€m |
FY18 |
FY19e |
FY23e |
FY18–23 |
FY19–23 |
CAGR |
CAGR |
||||
PlanetArt |
122 |
166 |
400 |
27% |
25% |
Avanquest |
36 |
71 |
200 |
41% |
30% |
Total |
158 |
237 |
600 |
31% |
26% |
Source: Claranova, Edison Investment Research
Corporate changes to broaden appeal
At the upcoming EGM, management proposes to change the company’s legal form to a Societas Europaea and to undertake a reverse stock split to reduce volatility and make the share more attractive to international investors.
Changes to forecasts
We have revised our FY19 and FY20 forecasts to reflect the following:
■
Revenues: we have increased our revenue forecasts for Avanquest and PlanetArt to reflect strong H119 performance. We have forecast a slower growth in myDevices revenues.
■
EBITDA: we have increased costs at a similar rate to revenues, to reflect higher marketing costs. This results in an increase to our EBITDA forecasts of 6.4% in FY19 and 4.6% in FY20.
■
Minority interest: the Avanquest acquisitions have been accounted for in a different way than we had expected based on implementation of IFRS 9. As Claranova only acquired 50.01% of the three Canadian businesses in July, we accounted for this by fully consolidating the businesses and subtracting the 49.99% minority interest in the income statement. The acquisitions have instead been fully consolidated, with the potential amount due to the vendors for the remaining 49.99% treated as a long-term liability of €41.2m. Our revised income statement no longer subtracts the Avanquest minority interest. We have also increased the minority interest due for myDevices from H219.
Exhibit 6: Changes to estimates
€'m |
FY19e |
FY19e |
FY20e |
FY20e |
|||||
Old |
New |
Change |
y-o-y |
Old |
New |
Change |
y-o-y |
||
Revenues |
234.6 |
248.9 |
6.1% |
54.1% |
274.8 |
306.8 |
11.6% |
23.2% |
|
EBITDA |
16.9 |
18.0 |
6.4% |
361.5% |
28.5 |
29.8 |
4.6% |
65.6% |
|
EBITDA margin |
7.2% |
7.2% |
0.3% |
4.8% |
10.4% |
9.7% |
-6.3% |
2.5% |
|
Normalised operating profit |
16.4 |
17.4 |
6.1% |
411.8% |
28.1 |
29.3 |
4.4% |
68.4% |
|
Normalised operating profit margin |
7.0% |
7.0% |
0.0% |
4.9% |
10.2% |
9.6% |
-0.7% |
2.6% |
|
Reported operating profit |
11.0 |
12.3 |
12.1% |
N/A |
26.1 |
27.1 |
3.9% |
120.3% |
|
Reported operating margin |
4.7% |
4.9% |
0.3% |
8.7% |
9.5% |
8.8% |
-0.7% |
3.9% |
|
Normalised PBT |
13.6 |
14.6 |
7.4% |
371.0% |
25.3 |
26.5 |
4.7% |
81.2% |
|
Reported PBT |
8.2 |
9.5 |
16.3% |
N/A |
23.3 |
24.3 |
4.2% |
155.3% |
|
Normalised net income |
8.1 |
11.5 |
42.8% |
338.6% |
15.4 |
19.5 |
26.6% |
69.0% |
|
Reported net income |
3.9 |
7.6 |
95.2% |
N/A |
13.8 |
17.8 |
28.4% |
134.0% |
|
Normalised basic EPS (€) |
0.02 |
0.03 |
42.7% |
340.6% |
0.04 |
0.05 |
26.3% |
68.9% |
|
Normalised diluted EPS (€) |
0.02 |
0.03 |
48.2% |
357.4% |
0.04 |
0.05 |
31.2% |
68.9% |
|
Reported basic EPS (€) |
0.01 |
0.02 |
95.0% |
N/A |
0.04 |
0.05 |
28.2% |
133.9% |
|
Net debt/(cash) |
(21.7) |
(16.6) |
-23.5% |
-55.8% |
(44.9) |
(43.0) |
-4.3% |
159.4% |
Source: Edison Investment Research
Valuation
We have revised our sum-of-the-parts valuation to reflect our new revenue forecasts and the different accounting treatment for the Avanquest minority interests. We have used the same revenue multiples for each division and treat the long-term liability for the acquisitions as equivalent to debt. This results in an increase in our per share valuation from €1.11 to €1.28. Catalysts for the share price to move towards this valuation include revenue contributions to PlanetArt from new geographic areas (eg India, Benelux), continued strong revenue and margin growth in Avanquest, the successful launch of Payaware and customer wins for myDevices.
Exhibit 7: Sum-of-parts valuation
FY19e |
FY20e |
EV based on FY19e sales multiple (€m) |
MI |
Value to shareholders (€m) |
||
EV/Sales multiple |
2.2 |
1.8 |
555.8 |
519.9 |
||
PlanetArt |
2.3 |
1.8 |
380.4 |
7.1% |
353.4 |
|
Avanquest |
2.0 |
1.8 |
151.9 |
0.0% |
151.9 |
|
myDevices |
6.0 |
3.2 |
23.4 |
37.7% |
14.6 |
|
EV/EBITDA multiple |
||||||
PlanetArt |
34.8 |
21.9 |
||||
Avanquest |
14.7 |
12.3 |
||||
myDevices |
N/A |
N/A |
||||
€m |
Upside/(downside) |
|||||
Net cash at end H119 |
42.8 |
Equity value (€m) |
503.7 |
|||
Cost of acquisition |
(59.0) |
Per share value (€) |
1.28 |
55% |
||
Adjusted net cash |
(16.2) |
|||||
No. of shares (m) |
392.0075 |
Source: Edison Investment Research
Exhibit 8: Financial summary
€'m |
2015 |
2016 |
2017 |
2018 |
2019e |
2020e |
||
30-June |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||||
Revenue |
|
|
93.1 |
117.4 |
130.2 |
161.5 |
248.9 |
306.8 |
EBITDA |
|
|
(6.8) |
(9.2) |
(5.0) |
3.9 |
18.0 |
29.8 |
Normalised operating profit |
|
|
(11.4) |
(16.0) |
(5.8) |
3.4 |
17.4 |
29.3 |
Amortisation of acquired intangibles |
0.0 |
0.0 |
0.0 |
0.0 |
(0.2) |
(0.2) |
||
Exceptionals |
15.6 |
(10.0) |
0.4 |
(2.4) |
(4.2) |
0.0 |
||
Share-based payments |
(0.0) |
(0.1) |
(4.8) |
(7.1) |
(0.7) |
(2.0) |
||
Reported operating profit |
4.2 |
(26.1) |
(10.1) |
(6.1) |
12.3 |
27.1 |
||
Net Interest |
1.1 |
(1.7) |
(0.9) |
(0.3) |
(2.8) |
(2.8) |
||
Joint ventures & associates (post tax) |
0.0 |
(0.0) |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
(10.3) |
(17.7) |
(6.6) |
3.1 |
14.6 |
26.5 |
Profit Before Tax (reported) |
|
|
5.3 |
(27.8) |
(11.0) |
(6.4) |
9.5 |
24.3 |
Reported tax |
(0.6) |
(0.8) |
(0.4) |
(1.8) |
(2.2) |
(5.6) |
||
Profit After Tax (norm) |
(10.9) |
(18.5) |
(7.0) |
2.4 |
11.2 |
20.4 |
||
Profit After Tax (reported) |
4.7 |
(28.6) |
(11.4) |
(8.2) |
7.3 |
18.7 |
||
Minority interests |
(8.1) |
0.0 |
0.3 |
0.2 |
0.3 |
(0.9) |
||
Discontinued operations |
(3.2) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net income (normalised) |
(18.9) |
(18.5) |
(6.7) |
2.6 |
11.5 |
19.5 |
||
Net income (reported) |
(6.5) |
(28.6) |
(11.0) |
(7.9) |
7.6 |
17.8 |
||
Basic average number of shares outstanding (m) |
58 |
375 |
375 |
394 |
392 |
392 |
||
EPS - basic normalised (€) |
|
|
(0.33) |
(0.05) |
(0.02) |
0.01 |
0.03 |
0.05 |
EPS - diluted normalised (€) |
|
|
(0.33) |
(0.05) |
(0.02) |
0.01 |
0.03 |
0.05 |
EPS - basic reported (€) |
|
|
(0.11) |
(0.08) |
(0.03) |
(0.02) |
0.02 |
0.05 |
Dividend (€) |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
0.00 |
||
Revenue growth (%) |
#DIV/0! |
26.1 |
10.9 |
24.0 |
54.1 |
23.2 |
||
EBITDA Margin (%) |
-7.3 |
-7.9 |
-3.8 |
2.4 |
7.2 |
9.7 |
||
Normalised Operating Margin |
-12.3 |
-13.7 |
-4.4 |
2.1 |
7.0 |
9.6 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
15.7 |
3.0 |
2.0 |
1.3 |
74.6 |
74.2 |
Intangible Assets |
12.0 |
1.5 |
0.9 |
0.5 |
73.0 |
72.6 |
||
Tangible Assets |
0.6 |
0.5 |
0.3 |
0.2 |
1.0 |
1.0 |
||
Investments & other |
3.1 |
1.1 |
0.7 |
0.6 |
0.6 |
0.6 |
||
Current Assets |
|
|
48.0 |
25.5 |
28.1 |
79.1 |
64.1 |
94.0 |
Stocks |
5.9 |
5.0 |
3.7 |
3.7 |
6.8 |
8.4 |
||
Debtors |
4.8 |
4.7 |
4.3 |
4.9 |
8.2 |
10.1 |
||
Cash & cash equivalents |
30.5 |
11.1 |
17.1 |
65.7 |
44.3 |
70.7 |
||
Other |
6.9 |
4.7 |
2.9 |
4.8 |
4.8 |
4.8 |
||
Current Liabilities |
|
|
(32.0) |
(25.3) |
(28.1) |
(37.2) |
(46.1) |
(54.9) |
Creditors |
(26.9) |
(24.5) |
(26.6) |
(35.4) |
(44.3) |
(53.1) |
||
Tax and social security |
(0.3) |
(0.0) |
(0.3) |
(1.7) |
(1.7) |
(1.7) |
||
Short term borrowings |
(4.8) |
(0.7) |
(1.1) |
(0.1) |
(0.1) |
(0.1) |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(2.4) |
(1.1) |
(0.7) |
(29.0) |
(69.7) |
(69.7) |
Long term borrowings |
(1.8) |
(0.6) |
0.0 |
(28.1) |
(27.6) |
(27.6) |
||
Other long term liabilities |
(0.7) |
(0.5) |
(0.7) |
(0.9) |
(42.1) |
(42.1) |
||
Net Assets |
|
|
29.3 |
2.1 |
1.3 |
14.2 |
22.9 |
43.6 |
Minority interests |
0.0 |
0.0 |
(0.1) |
(1.8) |
(4.1) |
(5.0) |
||
Shareholders' equity |
|
|
29.3 |
2.1 |
1.2 |
12.5 |
18.8 |
38.6 |
Source: Claranova, Edison Investment Research
|
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StatPro continues to evolve and the new group structure creates opportunities to drive growth. Margins are now on a clear uptrend as the business scales, and there will be additional margin benefits as c £4m of costs drop out as the group’s software platforms are streamlined over the next few years. FY18 numbers were in line with the January trading update and we have maintained our forecasts, albeit with some minor tweaks. In our view, the shares continue to look attractive, given the group’s c £56m recurring revenue book and the declining rating (c 10x FY21e), especially in light of the active M&A backdrop in the financial software sector.