GARP investing is all about buying quality secular growth companies at reasonable prices. Hence investors should be able to own them for long periods, and (hopefully) enjoy years of healthy returns thanks to strong EPS and multiple expansion. Enter BuildTech software developer Elecosoft, who said this morning that trading is “in line expectations” - with H1 revenues jumping 22% in constant currency terms (20% reported) to £12.7m (ED est), EBIT margins similar to H1’18 (ie 16.6%) and net debt closing June at a modest £0.6m (or 0.1x EBITDA) vs £2.1m in Dec’18.
This encouraging top line growth is higher than our FY19 forecasts of +18.8% YoY (based on 5% LFL CC), and more so given we’d assumed an H2 bias due to tough comparatives and Q2’19 product launches. In fact, in April there was an important new version (#15) of PowerProject released, which we suspect may have even caused a few customers to defer orders. In fact all things being equal, we estimate that H1’19 turnover climbed approx 7% LFL in constant currency.
Going forward, we reiterate our FY19 EBIT forecast of £4.5m (margin 17.1%) on turnover of £26.4m, and likewise hold the valuation at 115p/share. Nonetheless, if this momentum is maintained, then there is scope for upgrades as the year progresses. Indeed we see no reason why the stock can’t ultimately command a sector rating of 5.2x EV/sales vs 2.5x today (see below); equivalent to c.165p/share.