4iG — Robust H120, set for continued growth in H220

4iG (BSE: 4IG)

Last close As at 22/05/2024

HUF815.00

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Research: TMT

4iG — Robust H120, set for continued growth in H220

In its H120 results, 4iG reported net revenues of HUF20.2bn, an increase of 39% on H119. EBITDA increased 35% to HUF1.4bn, with EBITDA margins falling slightly from 6.9% to 6.7%. H120 net income rose 34% from H119 to HUF0.8bn, with EPS of HUF8.5 (H119: HUF6.3). As well as the impact of COVID-19, the weaker margins in H120 also reflect increased personnel costs, which almost doubled to HUF3.9bn (H119: HUF2.0bn), with headcount increasing to 644 (FY19: 594). 4iG’s H120 revenues, together with an FY20 order book of HUF20.8bn, mean management continues to hold its 20% revenue growth guidance for FY20 ahead of the seasonally stronger H2. We maintain our estimates.

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TMT

4iG

Robust H120, set for continued growth in H220

H120 results

IT services

2 September 2020

Price

HUF608

Market cap

HUF55.4bn

HUF355/€

Net debt (HUFbn) at end H120

0.0

Shares in issue

91.1m

Free float

36.1%

Code

4iG

Primary exchange

Budapest

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.3

(12.3)

(32.8)

Rel (local)

1.7

(8.8)

(22.7)

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

TBC trading update

Dec 2020

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 H120 results, 4iG reported net revenues of HUF20.2bn, an increase of 39% on H119. EBITDA increased 35% to HUF1.4bn, with EBITDA margins falling slightly from 6.9% to 6.7%. H120 net income rose 34% from H119 to HUF0.8bn, with EPS of HUF8.5 (H119: HUF6.3). As well as the impact of COVID-19, the weaker margins in H120 also reflect increased personnel costs, which almost doubled to HUF3.9bn (H119: HUF2.0bn), with headcount increasing to 644 (FY19: 594). 4iG’s H120 revenues, together with an FY20 order book of HUF20.8bn, mean management continues to hold its 20% revenue growth guidance for FY20 ahead of the seasonally stronger H2. We maintain our estimates.

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/M

N/A

12/19

41.1

3.3

31.1

22.0

19.6

3.6

12/20e

49.1

3.4

31.1

22.0

19.6

3.6

12/21e

58.9

4.8

43.9

31.0

13.9

5.1

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

H120: Robust performance despite COVID-19

4iG’s net revenues of HUF20.2bn represent organic growth of 39% on H119 (HUF14.5bn). Gross profits increased 74% to HUF6.2bn (H119: HUF3.6bn), with increased gross margins of 30% (H119: 24%) reflecting a greater balance of IT Services (notably outsourcing and development) in the revenue mix. EBITDA rose 35% to HUF1.4bn (H119: HUF1.0bn), with EBITDA margins falling slightly from 6.9% to 6.7% (below 4iG’s medium-term target of 8–10%). H120 net income was HUF0.8bn vs HUF0.6bn in H119, up 34%, with EPS of HUF8.5 (H119: HUF6.3). Net cash fell to zero from HUF1.3bn at Q120. 4iG reported an FY20 contracted order book of HUF20.8bn.

Outlook: Set for continuing growth

4iG has weathered the initial onset of COVID-19 and delivered a solid set of H120 results, with like-for-like revenue growth of 39% and EBITDA growth of 35%. The company has continued to increase headcount and has invested in new IT and CRM systems to deliver further group efficiencies. Encouragingly, recurring revenues have increased from 10% in FY19 to 16% in H120. Gross profit margins have held up well, but due to personnel costs, EBITDA margins are below target at 6.7% against our estimates for FY20 of 8.5% and management’s medium-term target of 8–10%.

Valuation: FY21 discount to peers, 3.6% yield

Management anticipates revenue growth of c 20% in FY20, and 10% FY21-22, as 4iG consolidates its market leadership in Hungary. Looking at 4iG’s FY21 P/E of 13.9x and given the stock remains at a meaningful discount to its European and regional peers, in our view, 4iG’s valuation does not reflect the growth prospects for the business. The shares are also offer an attractive 3.6% dividend yield.

H120 interim results

Robust performance despite COVID-19 headwind

In its H120 results, 4iG reported net revenues of HUF20.2bn, representing organic growth of 39% on H119 (HUF14.5bn). Gross profits increased 74% to HUF6.2bn (H119: HUF3.6bn), with increased gross margins of 30% (H119: 24%) reflecting a greater balance of IT Services (notably outsourcing and development) in the revenue mix. EBITDA rose 35% to HUF1.4bn (H119: HUF1.0bn), with EBITDA margins falling slightly from 6.9% to 6.7% (below 4iG’s medium-term target of 8–10%). As well as the impact of COVID-19, which impacted the growth of hardware and software reselling in Q220, the weaker margins in H120 (also seen in the Q120 results) reflected increased personnel costs, which almost doubled to HUF3.9bn (H119: HUF2.0bn) as headcount increased to 644 (FY19: 594). H120 net income was HUF0.8bn vs HUF0.6bn in H119, up 34%, with EPS of HUF8.5 (H119: HUF6.3).

In terms of cash flow, the group reported a net outflow from operating activities of HUF3.0bn (H119: net inflow of HUF4.1bn) with a large swing in trade creditors as the principal reason for the change (H120: HUF4.6bn outflow vs H119: HUF7.7bn inflow). The group reported a reduction in net cash from HUF1.3bn to HUF0.0bn. In April, the board approved an FY19 dividend payment of HUF22 per share (a yield of 3.6%), payable in September 2020.

Exhibit 1: Key financials

HUFbn

FY19

H119

H120

FY20e

Gross revenues*

IT Services

11.1

2.6

8.3

12.8

– y-o-y growth

73%

2%

217%

15%

Commerce

29.9

11.9

11.9

36.2

– y-o-y growth

292%

211%

0%

21%

Other

0.5

0.2

0.1

0.5

– y-o-y growth

8%

92%

(44)%

10%

Total

41.5

14.7

20.3

49.5

Gross profits

IT Services

7.1

1.6

4.2

8.3

Commerce

3.9

1.9

2.0

6.3

Other

0.0

0.0

0.0

0.2

Total

11.0

3.6

6.2

14.8

Gross margins

IT Services

63.9%

62.6%

50.7%

64.7%

Commerce

13.0%

16.1%

16.9%

17.5%

Other

1.6%

0.4%

(45.8)%

32.4%

Total

26.5%

24.2%

30.4%

29.8%

EBITDA

4.1

1.0

1.4

4.2

% margin

9.9%

6.9%

6.7%

8.5%

Normalised operating profit

3.4

0.7

1.0

3.4

% margin

8.2%

4.9%

4.9%

6.9%

% effective tax rate (normalised basis)

15%

18%

22%

13%

EPS – basic normalised (HUF)

31.9

6.3

8.5

31.8

– y-o-y growth

2,763%

N/A

35%

0%

Source: 4iG, Edison Investment Research. Note: *Revenues on a gross basis including value of goods resold.

Operational developments

After a period of significant growth, with profits almost tripling in FY19 to HUF4.1bn, 4iG completed a small reorganisation of the business, the benefits of which are expected to be seen in the full year results. As well as investment in personnel and a structural reorganisation, this included an upgrade of the group’s CRM and project management system to a cloud-based platform, ServiceNow. 4iG also established a dedicated automation group to focus on automation of technical and operational support tasks.

4iG’s strategic goals remain to develop its presence in software driven IT segments, such as industry 4.0, fintech, blockchain, artificial intelligence, data communication, as well as other bespoke solutions.

Key developments: M&A, JV and reassuring EU budget

As we have previously reported, in July 2020 Gellért Jászai (chairman and CEO) acquired the shares held by Lőrinc Mészáros, a related party, taking his stake to 63.9% of the equity (ex treasury shares), underlining his commitment to the company. The free float remains at 36.1%.

In July, as part of its ongoing buy-and-build strategy, 4iG acquired TR Consult (TRC) (consideration undisclosed), a specialist IT consultancy focused on the cybersecurity sector, with revenues of c €2m (HUF0.7bn). In August, 4iG announced the formation of CarpathiaSat Hungarian Space Telecommunications Corporation, a JV formed between 4iG (51%), Antenna Hungária (44%) and New Space Industries (4%) to launch and operate Hungary's first geostationary satellite for a period of 20 years from 2024, for commercial, government and scientific research purposes.

In Q120, 4iG was awarded ‘ICT company of the year 2019’ at the IT Business & Technology conference. 4iG also received recognition from its strategic partners, Dell (Premier Partner) and Hewlett Packard Enterprise (Central European ‘As-a-Service Partner of the Year 2020’).

In July 2020, EU leaders agreed the next long-term EU budget cycle for 2021–27, worth €1.1tn over the period. The budget supports investment in the digital and green transitions and, among other aims, provides continuity to the current EU funding package supporting Hungary’s ongoing digital transformation, to the benefit of the Hungarian ITC ecosystem. The Hungarian market is a relative digital laggard in Europe and has therefore attracted EU funds over the past five years to help transition the economy online.

Segmental analysis: Strength in outsourcing and development

Although absolute revenues were broadly flat for hardware and software sales collectively (IT reselling - Commerce segment in Exhibit 1) compared to H119 (HUF11.9bn), as a proportion of total revenues reselling fell from 73% of FY19 revenues to 58% of H120 revenues. Altogether sales in the segment were more heavily weighted towards Q120 (breakdown not disclosed) as companies provided employees with equipment and infrastructure for effective remote working with the onset of COVID-19. Thereafter companies postponed further hardware and software investment, affecting Q2 growth in reselling.

Software development showed the strongest growth in H120, rising from HUF0.9bn in H119 to HUF4.0bn in H120, largely unaffected by the pandemic, with development projects delivered remotely through online delivery and collaboration tools. 4iG also secured a number of long-term outsourcing contracts in FY19, leading to H120 outsourcing revenues climbing from HUF1.1bn in H119 to HUF2.1bn in H120. Other revenue also increased from HUF0.6bn in H119 to HUF2.1bn in H120, driven by significant FY19 customer wins in support services, infrastructure development and consultancy work.

Importantly, revenue visibility continues to improve, with the proportion of recurring revenues continuing to grow from 10% in FY19 to 16% in H120.

Exhibit 2: Breakdown by service line

Exhibit 3: Recurring revenues

Source: 4iG

Source: 4iG

Exhibit 2: Breakdown by service line

Source: 4iG

Exhibit 3: Recurring revenues

Source: 4iG

Falling global IT sector growth forecasts

The COVID-19 pandemic has led to revised growth forecasts for global IT spending. Latest Statista forecasts show the global IT industry declining by 5.1% in 2020 compared to 2019, reflecting an increasing decline as the pandemic has progressed. An important point to note is that at the start of the year, the industry was expecting growth of 5.1% and is now anticipating a 5.1% slowdown, a negative swing of 10.2%

Exhibit 4: Year-on-year FY20 IT industry growth forecasts – the impact of COVID-19

Source: Statista.com – 28 August 2020

Outlook: Prospects underpinned by strong growth

4iG has weathered the initial onset of COVID-19 and delivered a solid set of H120 results, with like-for-like revenue growth of 39% and EBITDA growth of 35%. The company has continued to increase headcount and has invested in new IT and CRM systems to deliver further group efficiencies. Reselling slowed in Q220, but the breadth of the group has meant that software development and outsourcing have continued as the drivers of group revenue growth. Encouragingly, recurring revenues have increased from 10% in FY19 to 16% in H120. Gross profit margins have held up well, but investment in personnel and the upgrading of IT and CRM systems has meant that EBITDA margins have remained below target at 6.7%, versus management’s medium-term target of 8–10% and our estimates for FY20 of 8.5%.

Revenues remain significantly H2-weighted (typically c 60%) and in 2019, H2 EBITDA represented c 75% of FY19 EBITDA. Quarterly EBITDA in FY20 continues to track ahead of FY19 comparators.

Exhibit 5: Quarterly EBITDA breakdown – FY20 vs FY19

Source: 4iG

Management reported an FY20 contracted order book of HUF20.8bn at the middle of August 2020, which, together with H120 revenues of HUF20.2bn, means the business remains well placed to achieve its FY20 revenue target. In this context, management continues to hold its revenue growth guidance of 20% for FY20, with management also targeting EBITDA margins of 8–10% in the medium term. Given the H2 weighting of the business, we believe there is a solid basis for continuing growth for 4iG in H220 and beyond and we continue to hold our FY20 estimates.

Exhibit 5: Financial summary

HUFm

2018

2019

2020e

2021e

2022e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

14,007

41,129

49,083

58,881

68,467

Cost of Sales

(8,938)

(30,126)

(34,322)

(41,183)

(47,625)

Gross Profit

5,070

11,003

14,761

17,699

20,842

EBITDA

 

 

842

4,075

4,152

5,631

7,726

Normalised operating profit

 

 

240

3,362

3,380

4,792

6,811

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

3,380

4,792

6,811

Net Interest

(21)

(18)

(22)

2

31

Joint ventures & associates (post tax)

0

0

0

0

0

Exceptionals

0

0

0

0

0

Profit Before Tax (norm)

 

 

219

3,344

3,358

4,794

6,843

Profit Before Tax (reported)

 

 

219

3,344

3,358

4,794

6,843

Reported tax

(117)

(488)

(437)

(671)

(1,026)

Profit After Tax (norm)

102

2,857

2,921

4,123

5,816

Profit After Tax (reported)

102

2,857

2,921

4,123

5,816

Minority interests

0

66

0

0

0

Discontinued operations

0

0

0

0

0

Net income (normalised)

102

2,922

2,921

4,123

5,816

Net income (reported)

102

2,922

2,921

4,123

5,816

Basic average number of shares outstanding (m)

91.6

91.7

91.8

91.8

91.8

EPS - basic normalised (HUF)

 

 

1.11

31.87

31.84

44.93

63.39

EPS - diluted normalised (HUF)

 

 

1.08

31.09

31.08

43.86

61.87

EPS - basic reported (HUF)

 

 

1.11

31.87

31.84

44.93

63.39

Dividend (HUF)

0.00

22.00

22.00

31.00

44.00

Revenue growth (%)

-17.2

193.6

19.3

20.0

16.3

Gross Margin (%)

36.2

26.8

30.1

30.1

30.4

EBITDA Margin (%)

6.0

9.9

8.5

9.6

11.3

Normalised Operating Margin

1.7

8.2

6.9

8.1

9.9

BALANCE SHEET

Fixed Assets

 

 

1,571

1,948

2,079

2,274

2,527

Intangible Assets

1,221

1,525

1,440

1,375

1,335

Tangible Assets

140

322

539

798

1,092

Investments & other

210

101

101

101

101

Current Assets

 

 

6,824

22,161

23,078

27,389

32,362

Stocks

242

523

686

824

953

Debtors

4,306

12,892

13,498

16,192

18,829

Cash & cash equivalents

176

6,238

6,386

7,865

10,073

Other

2,101

2,508

2,508

2,508

2,508

Current Liabilities

 

 

(5,652)

(17,861)

(18,006)

(20,408)

(22,662)

Creditors

(3,894)

(16,361)

(16,765)

(19,166)

(21,421)

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

7,095

9,199

12,171

Minority interests

0

64

64

64

64

Shareholders' equity

 

 

2,725

6,255

7,158

9,262

12,234

CASH FLOW

Op Cash Flow before WC and tax

842

4,075

4,152

5,631

7,726

Working capital

(1,360)

3,231

(366)

(430)

(510)

Exceptional & other

(26)

(5)

0

0

0

Tax

(117)

(415)

(437)

(671)

(1,026)

Net operating cash flow

 

 

(661)

6,886

3,350

4,530

6,190

Capex

(120)

(1,471)

(903)

(1,034)

(1,168)

Acquisitions/disposals

0

3

0

0

0

Net interest

(11)

(13)

(22)

2

31

Equity financing

0

185

0

0

0

Dividends

0

0

(2,019)

(2,019)

(2,844)

Other

(3)

36

0

0

0

Net Cash Flow

(795)

5,626

406

1,479

2,209

Opening net debt/(cash)

 

 

792

1,587

(4,039)

(4,445)

(5,924)

FX

0

0

0

0

0

Other non-cash movements

0

0

0

0

0

Closing net debt/(cash)

 

 

1,587

(4,039)

(4,445)

(5,924)

(8,133)

Source: 4iG accounts, Edison Investment Research

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This report has been commissioned by 4iG and prepared and issued by Edison, in consideration of a fee payable by 4iG. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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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

1,185 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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