Elecosoft plc

www.elecosoft.com TICKER: ELCO     EXCHANGE: AIM

Elecosoft is a developer of on-premise and Cloud/SaaS software for the Architectural, Engineering, Construction and Operator (AECO) and digital marketing industries. Its award winning 6D solutions (>100,000 users) cover project planning, estimating, design/CAD, visualisation, site operations and Building Information Management (BIM).

LATEST REPORTS

 
Strong H1’19 and in line with FY19 expectations
Published: Aug 07 2019

Almost every organization on the planet is busily trying to digitalize, automate and ‘smart-enable’ its operations. Not only to communicate/understand their customers & employees better, but also transform their businesses, become more efficient and vastly improve the quality of products & services.
The construction & property maintenance industry is no different, yet it has traditionally been slow to embrace this new ‘paradigm’. However things are changing… and fast. 
Here BuildTech software developer Elecosoft said today that trading is “in line FY 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.
What’s more, 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. 
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.
 
Promising start to the year
Published: May 09 2019

Great companies achieve great things. Take Elecosoft, a specialist developer of BuildTech, asset maintenance and visualisation software. Solutions that deliver substantial benefits for construction firms, architects, contractors and landlords alike - across the entire property lifecycle, particularly in terms of quality, project management, cost, efficiency and time.
This morning 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.
However 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.
 
2019 sales set to jump 19% after record year
Published: Mar 19 2019

Elecosoft is a BuildTech, asset/property maintenance & visualisation software specialist for the Architectural, Engineering, Construction and Operator (AECO) and digital marketing industries. Its award winning 6D solutions (>100,000 users) cover project planning, estimating, design/CAD, visualisation, site operations/maintenance and Building Information Management (BIM). 
This morning the firm posted another record set of numbers, characterised by a 11.1% jump in sales to £22.2m (+5% LFL, constant currency - CC), expanding EBIT margins (17.6% vs 13.9% LY; split 18.4% H2 & 16.6% H1), better than expected PBT (+39% to £3.7m) and robust cash generation (101% conversion, OCF +7% to £4.5m). What’s more, 57% of turnover (+14% to £12.6m) came from recurring maintenance, support and SaaS activities (vs 55% LY; split 58% H2 & 55% H1) – importantly, providing healthy forward visibility, alongside a durable ‘economic moat’ and resilient business model.
Looking forward, we’ve prudently forecast 2019 turnover to climb 18.8% to £26.4m , on the back of mid-single digit organic growth, augmented by the natural flow-through of last year’s M&A. Investors should however be aware that our projections are conservative in light of the buoyant demand for BuildTech - a $6.6bn sector which is predicted to ramp at an annualised 11.3% to 2021 – ably supported too by the $14.5bn asset/property maintenance (8.7% pa) and $4.9bn visualisation (9.5%) verticals. 
The good news for investors is that at 72p, most (if not all) of this upside appears to be in the share price for free. Moreover due to ELCO’s scalability, 90%+ retention rates, favourable operating leverage, attractive EBITDA drop-through rates and international footprint (63% outside the UK) - 2018 adjusted EPS and closing net debt both came in slightly ahead of expectations at 3.9p (+34%) and £2.1m respectively. The latter representing a comfortable 0.45x EBITDA and enabling the dividend (0.9% yield) to be lifted 13% to 0.68p (5.7x covered) and be paid on 31st May, with a script alternative (conversion price 74.72p) available and an ex-div date of 28th March.
Consequently bearing all this mind, we reiterate our adjusted EBIT forecasts for this year (+15.8%) and next (+14.8%) of £4.5m and £5.2m, together with the 115p/share valuation. 
 
Disrupting the $10 trillion construction sector
Published: Jan 25 2019

In light of the fears over Brexit, US/China trade tensions and slowing Eurozone growth, it’s not surprising that even the highest quality stocks have been ‘thrown out with the bathwater’ during the recent correction. However, for risk-tolerant investors, volatility creates opportunity, particularly for those top notch businesses enjoying wide ‘economic moats’, long term tailwinds and priced at attractive levels.
Take Elecosoft, whose award winning software is ‘disrupting’ the $10 trillion global construction market. This morning in a positive RNS the firm said that - despite macro uncertainties & adverse forex moves (re weaker SEK vs £) - its 2018 results are set “to be significantly higher than 2017, and comfortably in line with expectations”.
These record numbers being driven by new customer wins, alongside a service-centric approach, delivering high renewal rates and excellent end-user training/support. Moreover, we estimate that recurring revenues (incl SaaS) now account for >55% of the group - providing robust visibility for 2019 & beyond.
Looking ahead, we retain our forecasts (adj 2018 PBT of £3.5m on £22.3m sales) & 115p/share valuation – whilst are also encouraged to hear that the Shire Systems (Jul’18) and Active Online (Nov’18) acquisitions are bedding down nicely and hitting targets. Plus, at 72p the stock (down c.15% over past 4 months) appears cheap vs BuildTech peers across all major benchmarks.  
 
€3.45m acquisition of VR/AR visualisation expert
Published: Nov 06 2018

Elecosoft is a BuildTech pioneer, developing on-premise and Cloud/SaaS software for the Architectural, Engineering, Construction and Operator (AECO) and digital marketing industries. Its award winning 6D solutions (>100,000 users) cover project planning, estimating, design/CAD, visualisation, site operations/maintenance and Building Information Management (BIM). BIM acts as the oil providing data/info to the various interconnecting modules.
How do the world’s best interior designers create their perfect homes? Talent plays a big factor, however they also use top notch visualisation software to quickly & easily modify a property’s layout, aesthetics and ambiance. Enter ‘Active Online Gmbh’ based in Wesel, NW Germany and employing 29 staff. Its “cutting-edge” software allows consumers & homeowners to do exactly this. Swapping out the furniture, curtains & flooring, alongside changing the décor, wall colours, light fittings, fabrics & windows. All at the touch of a button in rich HD/3D graphics.
Not only can gains be made out of the takeover of Active Online from cost synergies , where we understand ELCO can reduce its 3rd party ‘image scanning’ bills by circa €150k pa, utilising AO’s in-house facilities. But, more importantly, also from integrating the business with its own rival interactive visualisation division ESIGN (10% sales, located 270km away in Hanover) – coupled with cross selling the solutions into each other’s extensive client lists (
All told, to us this looks an attractively priced, earnings accretive (in year 1) and materially value enhancing deal, for a profitable software expert at the forefront of BuildTech visualisation. 
Lastly, this morning’s upbeat announcement reported that the ELCO business “continues to trade in line with its expectations, and its assessment of outlook & the market remains unchanged.” 
Going forward, our 2019 turnover, PBT & EPS estimates have been upgraded to £27.2m, £4.3m & 4.3p respectively vs £24.9m, £4.0m & 4.1p before. Likewise, we have nudged up the valuation from 110p to 115p/share. Or >55% higher than today’s 73p - representing steep discounts vs peers across all key metrics.
 
Shire acquisition is 'amazing'
Published: Sep 12 2018

Elecosoft is a developer of on-premise and Cloud/SaaS software for the Architectural, Engineering, Construction and Operator (AECO) and digital marketing industries.
‘BuildTech’ software is digitising the entire property/infrastructure life cycle (say 75 years). Covering initial design, build and commissioning, right through to maintenance, repair, upgrade and final demolition. Strangely, though, this seems to have been somewhat overlooked by UK investors, despite the sector expanding at a healthy 11% clip and being worth c. $6bn pa.
This apparent indifference however is not shared abroad, where overseas BuildTech stocks trade on EV/turnover multiples of >5x. In our view, correctly reflecting the software’s outstanding value to end-users. It should only be a matter of time before ratings of similar UK listed peers like Elecosoft catch up. Particularly if the company continues to deliver impressive results, as it did once again this morning. 
H1’18 adjusted EBIT and operating cashflow climbed 33.5% (to £1,755k) and 35.8% (£2,287k) respectively on revenues of £10,554k, up 7% LFL (constant currency vs 5.4% reported). Similarly, underlying EPS rose 38% to 1.8p, the dividend was hiked 40% to 0.28p, EBIT margins widened to 16.6% (13.1% LY) and cash conversion came in at a better than expected 107% (LTM).
Additionally, this organic growth will be enhanced going forward by the transformational acquisition of Shire Systems on 4th July for £5.1m (cash/debt free) - equivalent to modest 2018 EV/revenue, EV/EBIT and PE multiples of 2.5x, 6.5x and 8.0x. Executive Chairman John Ketteley, who is usually pretty reserved, saying that Shire is absolutely “amazing”.
Ultimately, the deal could generate synergies many times higher than the £5.1m price. Clearly this won’t happen overnight, albeit by offering total cradle-to-grave solutions, we believe Elecosoft should be able to churn out double digit top line growth, 20%+ adjusted EBIT margins and 90%+ cash conversion across the cycle. 
So what does this mean with regards to the valuation? Well, based on the astute Shire purchase and substantial prospects ahead – not least, cross/up-selling, expansion outside of Europe and entry into adjacent verticals – we calculate the stock is worth 110p/share (vs 90p before) using a range of benchmarks and 12% discount factor.
 
How to profit from the surge in BuildTech
Published: Aug 02 2018

How can an outside investor gauge the quality of a company’s software? Speak to experts, test the product, ask clients and/or review industry awards/journals. Elecosoft scores highly on all of these counts - yet to us what really stands out is its customer base.
All told, ELCO’s software is used by >90% of the UK’s top 100 construction firms & 7/10 biggest retailers; 40 of the top 50 Swedish & 14 of the largest German construction groups; 70% of the EU’s flooring manufacturers and 15% of 400 largest US contractors. Generating retention rates of >90% and almost 60% recurring revenues (Support, maintenance & SaaS).
The good news from this morning’s positive trading update, is that the Board are well on track. H1’18 revenues climbed 7% LFL in constant currency (5% post forex headwind) to circa £10.5m (LY £10.0m) with adjusted PBT jumping 45% to £1.45m (LY £1.0m), on the back of favourable operating leverage and continued tight cost control.
Consequently, we reiterate our FY18 sales and EBIT forecasts of £22m and £3.6m respectively. Albeit, note that these are tilted towards the upside, especially given recent £ weakness vs the €/$. Likewise, H1 cash generation was strong, ending June with net funds of £2.6m compared to £1m at the start of the period – equivalent to cash conversion of >105%. Plus, even after last month’s strategic acquisition of Shire Systems for £5.1m (cash/debt free basis), we expect net debt to close Dec’18 at a modest £2.8m, or 0.62x EBITDA.
Similarly, while our top level 90p/share valuation remains unchanged, we once again emphasise that there is possible upside here too. In fact, despite this year’s re-rating, the stock appears cheap vs peers who trade on higher EV/sales, EV/EBIT and PE multiples.

ARCHIVE

2018
A 'match made in heaven'
Published: Jul 05 2018

Elecosoft is a developer of on-premise and Cloud/SaaS software for the Architectural, Engineering, Construction and Operator (AECO) and digital marketing industries. Its award winning 6D solutions (>100,000 users) cover project planning, estimating, design/CAD, visualisation, site operations and Building Information Management (BIM). BIM acts as the essential lubricant to oil all the connecting parts.
M&A is a bit like ‘panning for gold’. Most prospectors lose money, but the successful ones do the homework, know where to look and crucially understand their markets inside out. Similarly, we think Elecosoft - following its ‘transformational’ £2.4m acquisition of BIM (Building Information Modelling) SaaS provider, ICON back in October 2016 - has done it again. 
Announcing this morning that it has purchased Shire Systems Limited, a leading UK computerised maintenance management software (CMMS) developer based in Southampton, for £5.1m on a cash/debt free basis. Corresponding to modest 2018 EV/sales, EV/EBIT and PE multiples of circa 2.5x, 6.5x and 8.0x respectively - compared to the sector on 3-5x, 15-25x and 20-30x
In our view, today’s acquisition could ultimately generate synergies many multiples higher than the £5.1m price tag. Plus, we understand Shire has an impressive management team, which should assist the integration process, and longer term help shape the future direction of the business as a whole.
Regarding the numbers, Shire delivered normalised PBT of £0.7m in 2017 on turnover of £1.9m – and YTD is tracking at a slightly higher run-rate of £0.4m and £1.0m for Jan-May’18. Consequently, given this and the newly increased debt facility (from £2m to an £8m, 5 year term loan with Barclays Bank), the Board believes the acquisition “will be earnings enhancing in H2’18”. 
As such, we have upgraded our PBT estimates for this year and next to £3.4m (£3.3m before) and £4.0m (£3.8m) – along with lifting our valuation from 85p to 90p/share.
Building a smarter future
Published: May 17 2018

Delivering infrastructure projects on time, to-spec and within budget has proved a mine-field for corporates & politicians alike. Typically, 80% are late and 40% over-spent with little thought on how best to manage the asset once complete - not exactly ideal! Luckily things are changing...and fast. Technologies such as data analytics, IoT, VR/AR, robotics & artificial intelligence, are transforming the $8 trillion global construction market. In turn helping to drive strong demand at Elecosoft (ELCO), a leading BIM (Building Information Modelling) software developer.

Nor has M&A been too far behind either, with many deep pocketed rivals (eg JLG Technology, Bentley, Nemetschek, RIB Software, Autodesk, Trimble, Hexagon, Dassault & Oracle) hovering up competitors at often hefty premiums.

 Together this has created a ‘virtuous circle’ for ELCO shareholders of improving results, rapid growth, robust visibility and future ‘take-out’ possibilities, as the firm becomes one of the few remaining sizeable, pure-play BIM experts left standing.

 In terms of results, ELCO posted 2017 turnover up 12.4% to £20.0m (split 4% LFL, 4% forex & 4% acquisitions), EBIT margins of 13.9% (12.4% 2016), 102% cash conversion and a 50% hike in the dividend to 0.6p (yield 0.8%). The balance sheet is ship-shape too, closing December 2017 with £1.0m of net cash.

 For 2018, we expect more of the same on the back of 8% higher revenues (£21.6m) – split 7% H1 & 9% H2. Leading to a 21.4% jump in adjusted EPS (20.2% LY) to 3.5p, as the benefits of operating leverage and 30%+ EBITDA drop-through rates kick in.

 A view consistent with today's trading update: like-for-like top line growth accelerated from 4% in 2017 to 7% (constant currency) during the 1st 4 months. Translating into “significantly higher PBT than last year, and [being] comfortably in line with market expectations”.

Even after its recent appreciation, the stock is still not expensive. Trading on EV/sales and PEG ratios of 2.5x (vs peers on 5x) and 1.0x (1.6x) respectively, whilst being 15% below our 85p/share valuation.

Foreign buyers gorging on UK stocks

Document can be downloaded here: UK plc ‘going for a song’

Being a shareholder in a company that receives a juicy takeover offer is a marvellous feeling. Something that many fortunate investors have experienced over the past 3 years. Thanks to a spate of M&A bids by deep pocketed overseas buyers – partly triggered by the June 2016 Brexit result, which sent the £ tumbling and adversely affected the FTSE.

Consequently today, given this trend is unlikely to end anytime soon, we’ve highlighted 30 possible acquisition ideas in the attached research paper. Spilt equally between large and smallcap stocks – covering a broad selection of industries.

What’s more we believe most of these businesses are underpinned by strong fundamentals and substantial upside in the event of predatory interest.

According to Factset Mergerstat/BVR, the average bid premium paid for such deals between 2004-14 was 30% – with the figure trending upwards since the global financial crisis.

Happy investing. Published 27th August 2019