Building technology businesses is a bit like designing Formula 1 racing cars. Deciding which parts to create in-house, which to ‘buy & build’, and then importantly fitting them all together to accelerate top line growth and generate synergies. Well, after the Shire Systems and Active Online acquisitions last year, we believe Elecosoft, a specialist developer of BuildTech software, is on track to achieve all three. Indeed, in this morning’s trading update the company said it had made an “encouraging” start to 2019, with Q1 revenues up 20% (22% constant currency).
This is higher than our FY19 estimates of +18.8% YoY (LFL 5%), and more so given we’d expected a H2 bias - reflecting tougher H1’18 comparisons (7% LFL vs 3% H2), the time required for sales initiatives to take root, and Q2 product launches. In fact, in April there was an important new version (#15) of the group’s flagship PowerProject released, which may have caused a few customers to defer purchases.
Therefore, considering these mini headwinds we are actually more than pleased with progress - and estimate that in constant currencies Q1’19 turnover might have actually been over 5% LFL, vs our base case of 3%. In turn, pushing Q1 PBT above LY, and “in line with FY expectations” – which allied to strong cash generation (+£1.2m), meant March net debt fell to £0.9m from £2.1m in December.
Nonetheless, given the ongoing macro uncertainties, we have decided to conservatively hold our forecasts and 115p/share valuation, but suspect there may be scope for upgrades in due course. Equally, if the business can achieve double digit LFLs in the years ahead, then we think there should be no reason why the stock can’t command a sector rating of 5.2x EV/sales vs 2.5x today (see below); equivalent to >160p/share.
