Store Electronic Systems — Update 10 December 2015

Store Electronic Systems — Update 10 December 2015

Store Electronic Systems

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Store Electronic Systems

Record €98m order for non-food retailer

Tech hardware & equipment

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11 December 2015

Price

€14.79

Market cap

€172m

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Share details

Code

SESL

Listing

Euronext Paris

Shares in issue

11.6m

Business description

Store Electronic Systems is the leading provider of electronic shelf labels (ESLs) for large-scale food and non-food retailers. Its labels allow automated price changes, thereby reducing labelling costs and pricing errors.

Bull

The group’s international expansion and the spread of ESL use to non-food applications provide strong revenue growth prospects. The latest €98m order shows the success of its new product strategy.

Margins should grow as revenues expand due to the scalability of new products.

Strong cash-positive balance sheet.

Bear

New-generation products are currently margin dilutive as a result of their smaller production runs and high input costs.

High level of US$ production inputs makes the company margins vulnerable to US$ strength.

The company has many aspects of a start-up with the strong growth potential of its new-generation products.

Analysts

Anna Bossong

+44 (0)20 3077 5737

Dan Ridsdale

+44 (0)20 3077 5729

Store Electronics Systems (SES) has announced that it has won the largest ESL order in the history of the market. The €98m order from a leading electronic retailer headquartered in Germany follows on from a €35m order from the same customer, which is currently being executed. The order will see SES’s subsidiary Imagotag install its ESL systems in 1,000 stores across 14 countries, with a concentration of high-spec colour and NFC-enabled e-graphic labels. The contract will commence in Q116 and we assume that it will run over the next two years with a strongly positive impact on 2016 revenues.

New order a strong endorsement of SES products

SES has reported that its German retail client undertook pilot trials with all the leading ESL manufacturers before choosing Imagotag, which is clearly a strong endorsement of SES’s products. The colour e-graphic labels, and most particularly the larger-sized format, are particularly favoured by electrical retailers for their paper-like look, high resolution and strong visual impact.

Order is likely to boost demand from other retailers

This order shows the success of new-generation labels in applications beyond the food retailing industry and we agree with SES that this order is likely to prompt other retailers in the electronics sector to follow suit.

Consensus estimates now look conservative

With the addition of this order, a 2016 consensus revenue expectation for SES of €143m looks set to be very comfortably exceeded. With regard to earnings, SES warned in its Q3 revenue release that the high concentration of new-generation labels in the €35m order from this retailer would have a negative margin impact. Nevertheless, we see it as realistic to expect SES to achieve a higher margin on this order as the products will be more mature in 2016 with higher production runs.

Valuation: Boosted by order, sensitive to margins

SES trades on a 2015e EV/EBITDA of 17.7x, which is a 9% premium to listed peer Pricer’s 16.3x multiple, based on its 12-month results to September 2015 (as consensus forecasts are lacking). We expect the market to take a strong interest in SES’s Q315 earnings given the above-mentioned warning and its relevance to the new order. Barring a negative surprise, the stock should be supported given SES’s strong order book.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(c)

DPS
(c)

EV/EBITDA
(x)

Yield
(%)

12/14

81.2

6.3

32.7

0.0

18.5

N/A

12/15e

105.7

4.1

20.7

0.0

17.7

N/A

12/16e

143.0

8.8

52.7

0.0

11.6

N/A

12/17e

163.3

14.2

83.3

0.0

8.0

N/A

Source: Bloomberg

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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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: TMT

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