Vectron Systems — Funded to cope with lower demand

Vectron Systems (DB: V3S)

Last close As at 18/05/2024

4.61

−0.05 (−1.07%)

Market capitalisation

37m

More on this equity

Research: TMT

Vectron Systems — Funded to cope with lower demand

Despite regulatory tailwinds as Vectron entered FY20, COVID-19 restrictions have materially suppressed demand in the short term. The company is focused on developing and promoting digital services to its large installed base, reflecting the increasing digitalisation of the sector and representing a growing source of recurring revenues. The recent fund raise provides support for Vectron during this period of lower demand.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Vectron Systems

Funded to cope with lower demand

Technology

Scale research report - Update

6 May 2020

Price

€8.16

Market cap

€65m

Share price graph

Share details

Code

V3S

Listing

Deutsche Börse Scale

Shares in issue

8.0m

Net cash at end FY19

€0.9m

Business description

Vectron Systems produces high-end, proprietary point of sale (POS) systems for the hospitality sector. It is diversifying into providing systems designed for online marketing services, which have been given impetus recently through partnerships with DeutschlandCard and Metro.

Bull

Flexible, comprehensive POS systems.

Strong position in DACH hospitality market.

Partnership with DeutschlandCard.

Bear

Dependent on the German economy.

Management owns more than 50% of Vectron.

Low level of recurring revenues.

Analyst

Katherine Thompson

+44 203 077 5730

Despite regulatory tailwinds as Vectron entered FY20, COVID-19 restrictions have materially suppressed demand in the short term. The company is focused on developing and promoting digital services to its large installed base, reflecting the increasing digitalisation of the sector and representing a growing source of recurring revenues. The recent fund raise provides support for Vectron during this period of lower demand.

FY19: Small revenue recovery; good cost control

Vectron reported a 1% increase in revenues in FY19, with H2 stronger than H1 and Q4 significantly higher than Q3. At the same time, the company managed to reduce the cost base by 8%, resulting in a reduction in the underlying EBIT loss from €4.2m to €1.8m. Helped by a €5m fund raise in February 2019, Vectron closed the year with a net cash position of €0.9m. Through FY19, the company continued to invest in the development of its digital offering and by year end had closed several hundred contracts for Duratec Digital World.

Well funded to cope with reduced demand

With regulatory requirements finally confirmed, Vectron saw a noticeable pick-up in demand in Q419 followed by a strong first two months of FY20. Understandably, demand has dropped since COVID-19 restrictions came into effect and it is likely to be some time until catering establishments are back to normal operation. The company has withdrawn guidance and notes that revenues are likely to be H2 weighted. Vectron raised net funds of €10.6m in February 2020 that, combined with the year-end net cash position, mean it should have sufficient funding to cope with a period of suppressed demand. We estimate the company has sufficient cash to cover at least two quarters with no sales, although we do not expect the decline in demand to be that severe.

Valuation: Reflects concern around FY21 rebound

Consensus forecasts have been cut to reflect lower demand in FY20, with a rebound in revenues and profitability anticipated in FY21. The stock is currently trading at a discount to peers on FY21 multiples, suggesting a lack of confidence in the forecast rebound. Evidence that Vectron’s customer base is starting to place orders again and increasing penetration of digital services will be key to closing this discount.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

24.8

(5.5)

(0.59)

0.00

N/A

N/A

12/19

25.2

(2.0)

(0.19)

0.00

N/A

N/A

12/20e

28.9

(2.5)

(0.23)

0.05

N/A

0.6

12/21e

58.7

9.7

0.82

0.15

10.0

1.8

Source: Vectron Systems, Refinitiv

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Review of FY19 results

Exhibit 1: Vectron Systems results highlights

€m

2018

2019

Revenues

24.83

25.17

Rev growth

(23.3%)

1.4%

EBITDA

(3.77)

(1.39)

EBITDA margin

(15.2%)

(5.5%)

EBIT

(5.45)

(1.78)

EBIT margin

(22.0%)

(7.1%)

PAT

(3.88)

(1.39)

EPS (€)

(0.59)

(0.19)

Net cash/(debt)

(1.2)

0.9

Source: Vectron Systems

After a decline in revenues in FY18 of 23.3%, Vectron saw a small recovery in revenues in FY19 (+1.4%). The table below shows how revenues developed on a half-year basis. H218 appears to have been the trough period, with revenues recovering by 9.8% h-o-h in H119 and a further 9.6% in H219. The company noted that revenues picked up again in Q4, in H219 revenues were split as €5.5m in Q3 (+3% y-o-y) and €7.7m in Q4 (+37% y-o-y).

Exhibit 2: Half-yearly revenues by product and geography

€m

y-o-y change

H118

H218

FY18

H119

H219

FY19

H119

H219

FY19

POS systems

8.29

6.26

14.55

7.29

7.52

14.81

(12.1%)

20.1%

1.8%

Germany

6.12

4.53

10.65

5.47

5.98

11.45

(10.6%)

31.9%

7.5%

Other EU

2.06

1.62

3.68

1.77

1.38

3.15

(14.0%)

(15.2%)

(14.5%)

International

0.10

0.12

0.22

0.04

0.17

0.21

(59.0%)

40.8%

(4.5%)

Software

1.16

0.89

2.05

1.09

0.97

2.06

(6.4%)

9.9%

0.7%

Germany

0.77

0.64

1.41

0.79

0.76

1.55

1.8%

19.7%

9.9%

Other EU

0.36

0.23

0.58

0.29

0.19

0.48

(19.4%)

(14.6%)

(17.5%)

International

0.04

0.02

0.06

0.01

0.02

0.03

(63.9%)

0.0%

(41.8%)

Goods for resale/service

4.43

3.80

8.23

3.63

4.67

8.30

(18.0%)

23.0%

0.9%

Germany

3.44

2.81

6.25

2.84

3.91

6.74

(17.6%)

39.0%

7.9%

Other EU

0.96

0.95

1.92

0.78

0.71

1.49

(19.0%)

(25.9%)

(22.4%)

International

0.03

0.03

0.06

0.02

0.05

0.07

(40.0%)

80.0%

20.0%

Total revenues

13.88

10.94

24.83

12.01

13.16

25.17

(13.5%)

20.3%

1.4%

Source: Vectron Systems

The company reported a reduction in the EBITDA loss, from €3.8m in FY18 to €1.4m in FY19. Costs were reduced in each area: material costs were 9% lower, staff costs were also 9% lower and other costs were 6% lower. The difference at the EBIT level on a reported basis was more pronounced. However, excluding the one-off €1.2m write down of capitalised development costs in FY18, the EBIT loss reduced from €4.2m to €1.8m. The company incurred an effective FY19 tax rate of 29%, compared to 31% in FY18.

The company moved from a net debt position of €1.2m at the end of FY18 to a net cash position of €0.9m at the end of FY19, helped by the €5m fund raise in February 2019.

Post year-end, the company raised gross proceeds of €11m from the issue of 727,319 shares at €15.1 per share on 3 February 2020; net proceeds were €10.6m.

The company does not yet consolidate two subsidiaries:

bonVito: this is the business that runs Vectron’s online services platform. During 2019, it increased the number of customers using its service from 4,972 to 5,576 and reached break-even in H119.

posmatic: this business provides software that enables Apple iPads and mobile phones to be used as POS systems. Vectron acquired the remaining 25% of this business for €250k at the start of 2019. The company noted that it was loss making in FY18 and this loss is likely to have increased in FY19 due to restructuring efforts.

Business update

Update on regulations relating to cash registers

Regulation is being introduced in many countries to reduce the incidence of tax fraud arising from the under-reporting of sales made via electronic cash registers (known as fiscalisation). In Germany, from the start of 2017 new GoBD1/GDPdU2 legislation imposed rules on the production and storage of financial materials such as electronic receipts and ensures verifiability of all the documents that are produced. At the end of 2016, the law on the protection against manipulation of digital background recordings (Gesetz zum Schutz vor Manipulationen an digitalen Grundaufzeichnungen) came into force. This prescribes that all cash registers must be fitted with a certified technical security device (TSE) from 1 January 2020. Under transitional arrangements, those systems that were acquired after 25 November 2010 and before 1 January 2020 that meet the GoBD but cannot be retrofitted with a TSE may be used until the end of 2022.

  GoBD: Grundsätze zur ordnungsmässigen Führung und Aufbewahrung von Büchern, Aufzeichnungen und Unterlagen in elektronischer Form sowie zum Datenzugriff (Principles for the proper management and retention of books, records and records in electronic form and for data access)

  GDPdU: Grundsätze zum Datenzugriff und zur Prüfbarkeit digitaler Unterlagen (Principles of data access and the auditability of digital documents)

Detailed technical requirements for this law were in draft format for some time, with the final version only published in August 2019. This meant TSE manufacturers were not able to finalise the design and certification of their devices until late 2019, preventing customers from being able to upgrade to newer systems. In November 2019, the Federal Ministry of Finance published the final timetable for the implementation of the Kassensicherungsverordnung (KassenSichV – regulations for the approval of technical requirements for electrical recording and safety systems in business dealings) confirming the 1 January 2020 start date and a grace period until 30 September 2020, after when fines of €25k could be imposed. By the end of 2019, Vectron had delivered 3,000 TSEs to its distributors.

The Austrian government approved similar measures as of 2016; it requires all taxable businesses to issue customers with a receipt and maintain a data collection log of all transactions. Furthermore, since April 2017 all POS systems must be protected against manipulation by a tamperproof security device.

All new Vectron POS products are fully compliant with both sets of regulations. Many older Vectron systems can be made compliant via a software upgrade. Those customers using particularly old Vectron machines may need to upgrade to new machines (we note that Vectron systems have a typical life of seven to 10 years). The first phase of upgrades was seen in 2016 and 2017 to meet the GoBD/GDPdU regulations, with demand reverting back to previous levels in 2018 and H119. To meet the 2020 regulations, all customers in Germany will need to either retrofit or replace their systems. With a grace period to the end of September this year, the company expects that demand is likely to pick up closer to that date, as it has experienced similar behaviour in Austria when its new regulations came into force. It is possible that due to COVID-19 issues, customers may take the risk of incurring fines over spending money to upgrade. It is therefore likely that demand will continue into FY21, before the second deadline in FY22 prompts another wave of upgrades.

The same regulations also stipulate that customers must be given a receipt. To reduce the amount of paper required to produce receipts, Vectron has developed a paperless receipt – a QR code generated by the POS display that the customer’s mobile phone scans to receive the data digitally.

Building a digital solution

Through 2019, Vectron made good progress in developing its digital offering. The company’s view is that customers are looking for a cost-effective, comprehensive solution that combines physical POS systems with digital services such as table reservations, online orders and loyalty. Currently, restaurants have to contract individually with the providers of each service, which is costly and time consuming and services are not always integrated into the POS system and may require additional devices.

In 2019, Vectron partnered with resmio for table reservations, Restablo.de for food ordering and epay for alternative payment methods. It had already signed a contract to work with Deutschlandcard for loyalty. These online services, along with Vectron’s own voucher solution, have been integrated into Vectron’s POS systems to create the Duratec Digital World solution, which was marketed during Q120. This solution comprises a three-year contract during which the customer has free use of a Duratec POS system as long as it is willing to provide Vectron with the data generated and revenues are generated solely through digital services on a per-transaction basis (eg for each table reserved, voucher bought or order placed online). By the end of FY19, several hundred contracts had been signed for Duratec Digital World.

The company also offers a service called myVectron, which provides back-office functions such as reporting in real-time, an archive service for fiscal data and software upgrades.

By adding recurring revenue streams (digital services) to the one-off hardware purchase, Vectron should be able to generate more predictable revenue streams and be less tied to hardware replacement cycles. In the longer term, the company believes the transaction data generated by customers should be of value across the whole catering supply chain. The company noted that it spent €3.4m developing its digital solutions in FY19.

Managing through COVID-19 disruption

As a supplier to the catering industry, Vectron’s new business is likely to be negatively affected for the time that bakeries, bars, cafes and restaurants are unable to open. Lockdown restrictions are gradually being eased across Europe, but the full opening of restaurants and bars is likely to be one of the last things to happen. Even once restrictions are lifted, these businesses may delay new investment due to lack of funds. The company believes that its new combined digital/hardware offering should be of interest after the lockdown is relaxed, as it provides a more cost-effective way to adapt to the digitalisation of the industry. In fact, during the lockdown the prevalence of online ordering has only increased for those establishments that continue to provide takeaway/delivery only services and is likely to remain popular as restrictions are gradually lifted.

In the short term, the company has reduced working hours for employees in some units by c 26%. Staff working on development and digital business models are still working full time as they are focused on products and services that should be ready for launch within the next three months and could therefore contribute to FY20 performance.

With net cash of €0.9m at the end of FY19 (€11.3m cash, €10.4m in bank debt due by the end of 2020) and the €11m raised in February, the company is well funded to manage through this disruption. It also has the option of taking out a KfW loan.

Outlook and changes to estimates

In November 2019, the company had published its medium-term growth assumptions where it expected revenues to double in FY20 to c €50m with a double-digit EBIT margin, growing to more than €100m revenues in FY22 with an EBIT margin in the mid-double digit range. In March 2020, it withdrew these guidelines in the light of COVID-19.

The company saw good demand in January and February 2020, which then dropped off as COVID-19 restrictions took effect. Q120 revenues of €7.5m were 27% higher y-o-y. Including €412k in costs relating to the fund raise, loss before tax was €0.8m (versus €1.0m in Q119); excluding the fundraising costs, the loss was €0.4m. The company noted that it spent €1.3m developing the new digital business model in Q1, which implies the core business was profitable.

In Q419, total costs before depreciation and amortisation were €7.46m. We do not have the breakdown of costs in Q120, but we estimate total costs including depreciation and amortisation were c €7.86m. In FY19, material costs totalled €10.7m, making up 42% of revenues. Assuming a similar percentage in Q419 and Q120 puts the run rate for other costs (excluding depreciation and amortisation) at c €4.2m per quarter. The company has sufficient cash to cover at least two quarters with no revenues, although we do not expect the business reduction to be so extreme.

Consensus estimates factor in revenue growth of 14% in FY20 followed by a doubling of revenues in FY21, with another year of losses at the EBIT and net income level, before a return to profitability in FY21. This essentially pushes out the company’s previous guidance by one year. The dividend forecast consists of only one estimate, unchanged since FY19 results were published, so may not be reliable. We believe there could be scope for a further downgrade to FY20 forecasts (and potentially for FY21), as the current consensus revenue estimate equates to around four times Q120 revenues, which may not be achievable while COVID-19 restrictions are in place.

Exhibit 3: Consensus estimates

€m

FY20e

FY21e

Revenues

28.9

58.7

EBITDA

(1.2)

11.2

EBIT

(2.3)

9.9

EPS (€)

(0.23)

0.82

DPS (€)

0.05

0.15

Revenue growth

14%

103%

EBITDA margin

-4.0%

19.1%

EBIT margin

-8.0%

16.8%

Source: Refinitiv. Note: At 5 May 2020.

Valuation

Exhibit 4: Peer group multiples

Company

Quoted ccy

Share price

Market Cap

EV (rep. ccy)

EV/Sales

EV/EBITDA

P/E

Div yield

EBITDA margin

m

m

CY

NY

CY

NY

CY

NY

CY

NY

CY

NY

Vectron Systems

EUR

8.16

65

54

1.9

0.9

-46.9

4.8

-36.3

10.0

0.6%

1.8%

-4.0%

19.1%

Ingenico Group

EUR

114.7

7253

9000

3.0

2.8

15.1

13.7

24.3

21.3

1.1%

1.2%

19.7%

20.2%

NCR Corp

USD

18.0

2303

5811

0.9

0.9

6.5

5.6

10.0

7.3

N/A

N/A

14.2%

15.6%

Aures Technologies

EUR

17.5

69

81

0.7

0.8

7.0

9.5

15.2

24.2

2.8%

2.5%

10.0%

8.2%

PayPoint

GBp

685.0

468

447

3.7

4.0

6.9

7.9

10.6

12.8

9.8%

8.5%

53.7%

51.0%

Square

USD

63.0

27675

26819

11.2

8.5

76.3

45.3

117.7

64.2

0.0%

0.0%

14.7%

18.7%

GrubHub

USD

45.5

4181

4249

3.0

2.6

55.0

28.9

N/A

203.9

0.0%

0.0%

5.4%

8.8%

Just Eat Takeaway.com

EUR

93.0

13831

13948

7.3

5.7

62.2

38.2

129.2

75.4

0.0%

0.0%

11.8%

15.1%

Eagle Eye

GBp

138.5

36

38

1.8

1.5

17.2

9.7

N/A

74.9

0.0%

0.0%

10.6%

15.7%

Delivery Hero

EUR

77.0

15229

14605

6.5

4.0

-24.4

-56.1

N/A

N/A

0.0%

0.1%

-26.6%

-7.2%

Average

4.2

3.4

24.6

11.4

51.2

60.5

1.7%

1.5%

12.6%

16.2%

Median

3.0

2.8

15.1

9.7

19.8

44.2

0.0%

0.0%

11.8%

15.6%

Source: Refinitiv. Note: Priced at 4 May.

The Vectron share price reached a peak of €19.6 in January 2020, before declining to a low of €5.7 on 23 March. It is now trading 34% higher than the trough. On all metrics, it is trading at a discount to its peer group in FY21, implying a lack of confidence in consensus expectations for a rebound in revenues and profitability. Confidence in the company’s ability to grow revenues once the worst of the lockdown restrictions are lifted will be key to reducing this discount.


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Cantargia — Great equity story underpins large share issue

In February 2020, Cantargia raised SEK410m gross. This is an impressive amount of capital for a pure-play European biotech with assets in early- to mid-stage development, and is underpinned by the successful progression of its R&D pipeline. In recent months, the company reported positive interim data from the ongoing Phase IIa trial with lead asset CAN04, an anti-IL1RAP antibody, announced the first clinical trial in the US (IND accepted) and introduced CAN10, a preclinical project in inflammation (Phase I study start likely in 2022). Tailwinds in the industry include Novartis initiating multiple Phase I–III trials with its canakinumab (anti-IL-1beta) in oncology after a surprising discovery in a large cardiovascular outcomes study and deals involving assets targeting the IL-1 pathway (in cancer and inflammation). Our valuation post the share issue is SEK3.48bn or SEK38.2 per share.

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