CENIT is highly cash-generative and growth in proprietary software, which is currently a small proportion of sales (13% in H115) but growing quickly (26% y-o-y), could provide further margin upside. With a strong balance sheet and cash position, investors could benefit from accretive acquisitions or accelerated dividend payments. The stock continues to trade at a discount to peers on an EV/EBIT and EV/EBITDA basis.
CENIT’s proprietary software has much higher margins than either its consulting services or third-party software sales; therefore, growth in this area is key to margin
expansion and earnings growth. In H115, own-software sales grew by 25.5% y-o-y following strong y-o-y performance in both Q1 and Q2. While growth is unlikely to
continue at this level, it is a positive sign that CENIT’s own software is gaining traction and we forecast it will contribute €3.0m to EBIT in FY15e. Proprietary software accounted for 13% of H115 revenue, up from 10% last year.
Most revenue currently comes from Germany (82% in H115) where revenue fell by 10% y-o-y in H115 but both North America and Japan saw strong growth with a 36% and 124% increase in revenues, respectively. Japan’s growth was from a small base, but it is an encouraging sign that CENIT is gaining ground in a potentially significant market. North America is also potentially significant and has now replaced Switzerland as CENIT’s second most import geography after Germany, accounting for 12% of H115 revenue. Both Japan and North America are at stages of development where winning and completing substantial projects can cause large swings in revenue; however, despite potential volatility, North America has seen five successive halves of growth and Japan three, so the trend is undoubtedly encouraging.
Despite the 50% growth in share price over the last six months, CENIT’s valuation is still undemanding. It is trading at a moderate 8% discount to its peers on FY15e
EV/EBIT, despite a significantly higher dividend yield and the potential for margin expansion through proprietary software sales and long-term growth through geographic expansion. Catalysts for share price upside include continued growth of proprietary software sales or a productive deployment of cash.