Prelims – onwards and upwards

Sopheon has again delivered strong prelims, reporting EBITDA of $9.4m for FY18 from original estimates of $7.4m, having been upgraded at the end of 3Q18 (to $8.0m) as well as post year end (to $9.0m). The strong 4Q performance of previous years began to manifest in 3Q this year, with 4Q still providing strong momentum. The perpetual enterprise licence model continues to attract new customers, often delivered on a hosted basis, contributing to a growing base of recurring revenue at a $15m run rate including green shoots of demand for the SaaS version. Recruitment has proved a challenge, restraining costs to the benefit of EBITDA; however, the recruitment logjam now seems to have been solved into FY19 – this inward investment delivers a fillip to growth in maiden forecasts for FY20, with EBITDA growth of 17%. We lift our target price to 1500p (1400p), with a strong balance sheet ($16.7m net cash) offering all strategic options, including the 30% uplift in dividend from 2.5p per share in FY17 to 3.25p.

New products deliver FY 2018 earnings beat

The multi-national construction software and digital visualisation developer and supplier has defied Brexit fears to deliver another strong year, showing both organic and acquired growth. FX fluctuation meant its overseas sales were slightly below our forecast, but stronger margins from operational gearing led to a comfortable beat on the earnings front. The cash conversion remains excellent and the solid 0.7p dividend is in line with our forecast. The H2 acquisitions left £2.1m net debt at the YE; however, given the reliable FCF we expect that to be paid up quickly with no dividend impact. Operationally, the additions of ShireSystems and ActiveOnline extend the portfolio along a building’s lifecycle from planning and construction into facilities management and further into interior design. ELCO offers a ‘BIM’ software suite to bring together the many different stakeholders in a construction. BIM processes are being widely adopted in the UK (mandatory for government construction) and globally. ELCO is well positioned to ride this wave of adoption, benefiting from cross selling into regional markets where it is already established with excellent brands. We take the opportunity to reiterate our FY 2019 and introduce FY 2020 forecasts; we also lift our TP to 93p on the back of these strong results and expect a re-rating.

Full-year results – eye-catching dividend pay-out

Results were slightly above recently upgraded expectations, with a stronger than expected H2. Strong sales growth was gained in the US, with ongoing demand in its construction customer base. New products provided a boost to sales, while the recently launched SkyScreed®25 will accelerate sales prospects in the medium term. A strong cash performance supports the exceptionally strong underlying and supplemental dividend growth. No change to 2019 PBT forecasts, with the year having started well, a higher tax charge results in a 2.6% EPS reduction to 40.8ȼ giving YoY growth of 8.1%. We introduce conservative 2020 forecasts pointing to YoY EPS growth of 5.6%. Our 465p price target continues to offer good upside, with an eye-catching 6.6% forecast dividend yield.

Payments industry M&A thoughts

There have been a few developments with Mastercard this month. Having lost out to its rival, Visa, in the auction for Earthport, Mastercard has unexpectedly signed an agreement to purchase Transfast, another cross border account-to-account network. Like HomeSend (ESG’s JV with Mastercard), the Transfast network also supports the Mastercard Send service. HS has much wider reach across multiple markets and channels, already fully integrated with transactions flowing. However Mastercard seeks to address a huge global market and Transfast will add much needed capacity.

Morning Note – 25 March 2019