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Research: TMT
Organic growth has accelerated through H118 and, combined with a slightly more favourable currency position and strong order intake, leads us to upgrade our forecasts for FY18 and FY19. We have increased our revenue forecasts by 1.7% in FY18 and 3.8% in FY19. Factoring in increased investment in headcount, this translates into normalised EPS upgrades of 8.2% in FY18 and 4.0% in FY19.
Esker |
Upgrading on strong Q2 performance |
Q2 revenue update |
Software & comp services |
27 July 2018 |
Share price performance
Business description
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Esker is a research client of Edison Investment Research Limited |
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Organic growth has accelerated through H118 and, combined with a slightly more favourable currency position and strong order intake, leads us to upgrade our forecasts for FY18 and FY19. We have increased our revenue forecasts by 1.7% in FY18 and 3.8% in FY19. Factoring in increased investment in headcount, this translates into normalised EPS upgrades of 8.2% in FY18 and 4.0% in FY19.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16 |
66.0 |
9.9 |
1.22 |
0.30 |
48.9 |
0.5 |
12/17 |
76.1 |
10.7 |
1.32 |
0.32 |
45.3 |
0.5 |
12/18e |
85.4 |
13.5 |
1.68 |
0.36 |
35.5 |
0.6 |
12/19e |
95.5 |
15.8 |
1.93 |
0.39 |
30.9 |
0.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Positive Q2 performance
Esker reported Q218 revenues of €22.0m, equating to y-o-y revenue growth of 16% and constant currency growth of 18%. For H118, the company reported 13% growth (17% in constant currency). Q218 SaaS-related revenues grew 21% y-o-y to make up 87% of revenues. In H118, the company received orders worth 54% more than in the same period a year ago, providing good revenue visibility. At the end of H118, the company had cash of €22m and net cash of €12m. Esker recently announced a partnership with systems integrator Viveris in France, part of its strategy to shift some of the implementation work to partners to accelerate higher-margin software sales. It is still early days for this strategy, but successful progress could lead to acceleration in both revenue growth and margin expansion.
Upgrading forecasts on better growth assumptions
Management has maintained its expectations for double-digit organic revenue growth in FY18. We estimate growth of c 12% for H218 and have upgraded FY18 revenues accordingly. We now factor in revenue growth of 12.2% for FY18 and 11.9% for FY19 (up from 10.3% and 9.6% respectively). Assuming the company increases headcount investment to support and drive growth, this results in an upgrade to our normalised EPS forecasts of 8.2% in FY18 and 4.0% in FY19.
Valuation: Reflects growth potential and SaaS model
Esker trades at a premium to other DPA software providers and small-cap French software suppliers, although we highlight it is showing stronger revenue growth and profitability than both groups and has a high level of recurring revenues. Compared to US SaaS companies, which have faster growth but lower profitability, Esker is trading at a discount. Continued evidence of strong organic growth combined with margin expansion would be the key triggers for upside from this point.
Upgrading estimates
Increasing revenue growth assumptions
Esker continues to target double-digit organic revenue growth in FY18. Based on the strong constant currency revenue growth and slight weakening in the euro versus the dollar in recent weeks, we are upgrading our estimates for FY18 and FY19. The table below shows the revenue growth achieved by Esker since the beginning of 2017. Note that in FY17, reported revenues benefited from the addition of e-integration from the start of the year. Organic growth has accelerated since Q117; combined with strong order intake in H118, we have revised up our growth assumptions for H218 and FY19.
Exhibit 1: Quarterly revenue growth and exchange rates
Y-o-y revenue growth |
Q117 |
Q217 |
Q317 |
Q417 |
Q118 |
Q218 |
Reported revenue |
15% |
13% |
17% |
16% |
10% |
16% |
Organic, constant currency |
8% |
9% |
14% |
14% |
16% |
18% |
€/$ rate |
1.07 |
1.10 |
1.18 |
1.18 |
1.23 |
1.19 |
Source: Esker, Bloomberg
Revising currency assumptions
The euro strengthened against the dollar through the course of Q317-Q118 before starting to weaken in Q218. Roughly 40% of Esker’s revenues are generated in North America, so movements in this rate will have an impact on reported revenues; a smaller proportion of costs are dollar denominated so this will also have an impact at the earnings level. The spot rate now sits at €/$1.17. The company noted that if the rate remains at this level through the remainder of 2018, it will have a positive impact on reported revenue growth for H218. We have revised our currency assumptions from €/$1.22 for FY18 and FY19 to €/$1.20 in FY18 and €/$1.17 in FY19.
Changes to forecasts
The table below summarises the changes we have made to forecasts. Management typically targets operating margins in the region of 15%, and in the past has used revenue upside as an opportunity to invest more in sales and marketing and R&D rather than to expand the margin. We expect this will continue and have factored in additional headcount, particularly sales, to maintain the strong growth rates.
We have also updated our model to reflect the €0.32 dividend approved at the June AGM (we had forecast €0.33). As in the previous year, Esker paid a loyalty discount to shareholders who had held the stock for at least two years – we estimate this was roughly 25% of shareholders, implying a weighted average dividend of €0.328.
Exhibit 2: Changes to forecasts
€m |
FY18e old |
FY18e new |
change |
y-o-y |
FY19e old |
FY19e new |
change |
y-o-y |
Revenues |
83.9 |
85.4 |
1.7% |
12.2% |
92.0 |
95.5 |
3.8% |
11.9% |
EBITDA |
18.6 |
19.6 |
5.3% |
19.2% |
21.5 |
22.1 |
2.7% |
13.2% |
EBITDA margin |
22.1% |
22.9% |
0.8% |
1.3% |
23.4% |
23.2% |
-0.3% |
0.3% |
Normalised EBIT |
12.2 |
13.2 |
8.2% |
24.7% |
14.8 |
15.4 |
3.9% |
17.3% |
Normalised EBIT margin |
14.5% |
15.4% |
0.9% |
1.5% |
16.1% |
16.2% |
0.0% |
0.7% |
Reported EBIT |
11.9 |
12.9 |
8.4% |
31.2% |
14.5 |
15.1 |
4.0% |
17.7% |
Reported EBIT margin |
14.1% |
15.1% |
0.9% |
2.2% |
15.8% |
15.8% |
0.0% |
0.8% |
Normalised PBT |
12.5 |
13.5 |
7.9% |
26.4% |
15.2 |
15.8 |
3.8% |
16.9% |
Normalised net income |
9.0 |
9.7 |
7.9% |
33.3% |
10.9 |
11.3 |
3.8% |
16.9% |
Normalised dil. EPS (€) |
1.55 |
1.68 |
8.2% |
27.5% |
1.85 |
1.93 |
4.0% |
14.9% |
Reported basic EPS (€) |
1.63 |
1.76 |
8.4% |
38.0% |
1.95 |
2.03 |
4.1% |
15.1% |
Net cash |
15.4 |
16.0 |
3.9% |
59.4% |
22.6 |
23.4 |
3.5% |
46.7% |
DPS (€) |
0.36 |
0.36 |
0.0% |
12.5% |
0.39 |
0.39 |
0.0% |
8.3% |
Source: Edison Investment Research
Exhibit 3: Financial summary
€'000s |
2014 |
2015 |
2016 |
2017 |
2018e |
2019e |
||
Year end 31 December |
French GAAP |
French GAAP |
French GAAP |
French GAAP |
French GAAP |
French GAAP |
||
PROFIT & LOSS |
||||||||
Revenue |
|
|
46,061 |
58,457 |
65,990 |
76,064 |
85,364 |
95,502 |
EBITDA |
|
|
8,979 |
13,405 |
14,871 |
16,399 |
19,550 |
22,125 |
Operating Profit (before amort and except) |
|
|
5,700 |
9,257 |
9,934 |
10,547 |
13,150 |
15,425 |
Amortisation of acquired intangibles |
0 |
(302) |
(200) |
(300) |
(300) |
(300) |
||
Exceptionals and other income |
53 |
(245) |
(474) |
(456) |
0 |
0 |
||
Other income |
0 |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
5,753 |
8,710 |
9,260 |
9,791 |
12,850 |
15,125 |
||
Net Interest |
220 |
(6) |
(108) |
(110) |
100 |
100 |
||
Profit Before Tax (norm) |
|
|
5,920 |
9,312 |
9,949 |
10,669 |
13,482 |
15,757 |
Profit Before Tax (FRS 3) |
|
|
5,973 |
8,765 |
9,275 |
9,913 |
13,182 |
15,457 |
Tax |
(1,323) |
(2,292) |
(2,950) |
(3,148) |
(3,691) |
(4,328) |
||
Profit After Tax (norm) |
4,609 |
6,877 |
6,785 |
7,281 |
9,707 |
11,345 |
||
Profit After Tax (FRS 3) |
4,650 |
6,473 |
6,325 |
6,765 |
9,491 |
11,129 |
||
Average No. of Shares Outstanding (m) |
4.8 |
5.0 |
5.3 |
5.3 |
5.4 |
5.5 |
||
EPS - normalised (c) |
|
|
97 |
138 |
128 |
138 |
180 |
207 |
EPS - normalised fully diluted (c) |
|
|
90 |
131 |
122 |
132 |
168 |
193 |
EPS - (GAAP) (c) |
|
|
97 |
130 |
120 |
128 |
176 |
203 |
Dividend per share (c) |
24.00 |
30.00 |
30.00 |
32.00 |
36.00 |
39.00 |
||
EBITDA Margin (%) |
19.5 |
22.9 |
22.5 |
21.6 |
22.9 |
23.2 |
||
Operating Margin (before amort. and except) (%) |
12.4 |
15.8 |
15.1 |
13.9 |
15.4 |
16.2 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
12,552 |
25,184 |
28,324 |
37,912 |
38,620 |
39,134 |
Intangible Assets |
7,709 |
19,603 |
22,381 |
26,673 |
27,681 |
28,595 |
||
Tangible Assets |
4,470 |
4,985 |
5,158 |
7,115 |
6,815 |
6,415 |
||
Other |
373 |
596 |
785 |
4,124 |
4,124 |
4,124 |
||
Current Assets |
|
|
33,894 |
36,110 |
42,024 |
42,823 |
51,974 |
59,762 |
Stocks |
93 |
161 |
101 |
176 |
176 |
176 |
||
Debtors |
15,110 |
18,073 |
19,523 |
21,253 |
23,855 |
26,688 |
||
Cash |
17,559 |
16,295 |
21,338 |
20,632 |
27,180 |
32,135 |
||
Other |
1,132 |
1,581 |
1,062 |
762 |
762 |
762 |
||
Current Liabilities |
|
|
(19,827) |
(24,789) |
(28,299) |
(27,399) |
(29,201) |
(31,165) |
Creditors |
(19,827) |
(24,789) |
(28,299) |
(27,399) |
(29,201) |
(31,165) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(5,113) |
(7,317) |
(7,657) |
(13,716) |
(11,216) |
(8,716) |
Long term borrowings |
(5,113) |
(7,317) |
(7,657) |
(13,716) |
(11,216) |
(8,716) |
||
Other long term liabilities |
0 |
0 |
0 |
0 |
0 |
0 |
||
Net Assets |
|
|
21,506 |
29,188 |
34,392 |
39,620 |
50,177 |
59,015 |
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
9,245 |
14,307 |
15,331 |
17,311 |
18,750 |
21,256 |
Net Interest |
310 |
(27) |
(127) |
(75) |
100 |
100 |
||
Tax |
(1,075) |
(1,165) |
(1,456) |
(2,053) |
(3,691) |
(4,328) |
||
Capex |
(4,028) |
(3,909) |
(7,021) |
(9,304) |
(7,408) |
(7,514) |
||
Acquisitions/disposals |
22 |
(11,700) |
(335) |
(7,551) |
0 |
0 |
||
Financing |
(694) |
1,324 |
480 |
(345) |
0 |
0 |
||
Dividends |
(877) |
(1,208) |
(1,550) |
(1,633) |
(1,798) |
(2,059) |
||
Net Cash Flow |
2,903 |
(2,378) |
5,322 |
(3,650) |
5,953 |
7,455 |
||
Opening net debt/(cash) |
|
|
(11,961) |
(12,446) |
(8,978) |
(13,681) |
(10,011) |
(15,964) |
HP finance leases initiated |
(2,293) |
(1,090) |
(645) |
0 |
0 |
0 |
||
Other |
(125) |
0 |
26 |
(20) |
(0) |
0 |
||
Closing net debt/(cash) |
|
|
(12,446) |
(8,978) |
(13,681) |
(10,011) |
(15,964) |
(23,419) |
Source: Esker, Edison Investment Research
|
|
Research: TMT
Mensch und Maschine (M+M) has reported strong revenue growth for H118, with both divisions reporting double-digit growth on a year-on-year basis. Group EBITDA margins expanded over the same period, with better profitability for both businesses. Management has maintained its growth and profitability guidance for FY18, underpinned by the strong H118 results.