Datagroup — Absorbing acquisitions with a robust model

DATAGROUP (DB: D6H)

Last close As at 21/12/2024

84.10

−0.70 (−0.83%)

Market capitalisation

703m

More on this equity

Research: TMT

Datagroup — Absorbing acquisitions with a robust model

DATAGROUP’s business model is relatively resilient to the COVID-19 crisis with a recurring revenue base of over 75%, mostly from its service-as-a-product contracts with German SMEs. In its reported H120 results to April 2020, the company announced organic revenue growth of 4%. COVID-19 has affected the acquisition of new projects and the integration of recently acquired companies, which prompted DATAGROUP to withdraw guidance in April. However, as mentioned during the results call, management does not expect a year-on-year decrease in EBITDA in FY20. Trading at 30.8x FY20e P/E and 22.9x FY21e P/E on consensus estimates, DATAGROUP is trading at a premium to peers.

Edwin de Jong

Written by

Edwin De Jong

Analyst

TMT

DATAGROUP

Absorbing acquisitions with a robust model

IT services

Scale research report - Update

29 May 2020

Price

€53.6

Market cap

€447m

Share price graph

Share details

Code

D6H

Listing

Deutsche Börse Scale

Shares in issue

8.3m

Last reported net debt at 31 March

€61m

Business description

DATAGROUP is an IT outsourcing provider, focused on the German Mittelstand market. It offers the full range of IT services on a modular basis, through its CORBOX ‘cloud enabling platform’. Services include service desk, end-user services, data centre services, application management and SAP services.

Bull

A compelling growth strategy, scaling the business across the Mittelstand sector.

Cloud services business model gives it an advantage over competitors.

Centralised SLA-based approach with a focus on customer satisfaction puts company in a strong position to consolidate a fragmented market.

Bear

Highly exposed to the German economy.

Acquisitions bring risks, but DATAGROUP has a proven track record in integrating acquisitions.

Increased debt levels, although the group is still well within its covenants.

Analyst

Edwin de Jong

+31 (0)6 5122 5490

DATAGROUP’s business model is relatively resilient to the COVID-19 crisis with a recurring revenue base of over 75%, mostly from its service-as-a-product contracts with German SMEs. In its reported H120 results to April 2020, the company announced organic revenue growth of 4%. COVID-19 has affected the acquisition of new projects and the integration of recently acquired companies, which prompted DATAGROUP to withdraw guidance in April. However, as mentioned during the results call, management does not expect a year-on-year decrease in EBITDA in FY20. Trading at 30.8x FY20e P/E and 22.9x FY21e P/E on consensus estimates, DATAGROUP is trading at a premium to peers.

Earnings driven by M&A; business model robust

DATAGROUP reported 23% revenue growth in H120, driven by the acquisition of Portavis this year, and IT-informatik and UBL in 2019. Organic revenue growth was 4%, which demonstrates the robustness of the model with over 75% of recurring service revenues, mainly from CORBOX, its cloud-enabling platform targeted at German SMEs. Acquisition-related P&L items had a large influence on results. EBITDA increased by almost 16% to €23.6m, driven by negative goodwill (badwill) from Portavis, partly offset by €5.5m in risk provisions for possible restructuring. EBIT decreased by 6%, while net profit increased 45% to €8.9m due to a one-off low tax rate as a result of limited taxation on badwill.

Absorbing acquisitions takes longer

DATAGROUP’s business model is to acquire companies with a low valuation or in insolvency proceedings (IT-informatik), which it subsequently integrates into its efficient service platform. COVID-19 made it more difficult to transfer contracts from acquired companies and to win additional business, prompting it to withdraw guidance of EBITDA of at least €55m in FY20 provided at the March AGM. However, CEO Max Schaber indicated during the results conference call that he does not expect EBITDA to decline in FY20, implying a figure of at least €47m.

Valuation: Large premium to peers on FY20e P/E

DATAGROUP is trading at a premium to peers of 12% on FY20e P/E. Compared to peers that are more dependent on selling time or projects, DATAGROUP has a much more resilient business model. Furthermore, it has a solid track record of integrating acquisitions, creating cross-selling synergies from upselling additional services and a clear focus on the large German SME sector.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

09/18

272.1

34.5

1.55

0.45

34.6

0.8

09/19

306.8

46.9

1.74

0.60

30.8

1.1

09/20e

377.7

55.0

1.74

0.76

30.8

1.4

09/21e

409.0

61.7

2.34

0.89

22.9

1.7

Source: DATAGROUP, Refinitiv

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

H120 results affected by M&A

On 14 May 2020, DATAGROUP reported its H120 results, which were severely affected by the effects of the acquisition of Portavis announced in January and closed early March. In addition to a small regular business impact of the acquisition, there was a significant €10m impact on other income related to the badwill recognised as a result of the transaction. The other two acquisitions completed in 2019 (IT-informatik and UBL) also had an impact. All in all, DATAGROUP reported 23% revenue growth, of which roughly 4% was organic according to the CEO’s comment during the post-results conference call.

EBITDA increased almost 16% to €23.6m, driven by the badwill from Portavis, partly offset by €5.5m in risk provisions for possible restructuring. EBIT decreased by nearly 6% to €9.6m as a result of the negative EBIT contributions from Portavis and DATAGROUP Ulm (formerly IT-informatik). Like most technology companies, COVID-19 has only had a small impact on DATAGROUP’s results for the quarter to April, as the lockdown effects only appeared in March. However, DATAGROUP needed extra temporary holding staff to match the growing organisation, while signing contracts with large customers, especially from Portavis, were subject to delays and led to higher launch costs.

Net profit increased 45% to €8.9m, mostly because of the limited taxation of badwill. Although only 68% of Portavis was acquired, it is fully included in DATAGROUP’s net results. DATAGROUP is able to consolidate 100% of Portavis, because the sale of the participations of minority shareholders Sparkasse Bremen (holding 7% of Portavis shares) and Hamburger Sparkasse (holding 25%) to DATAGROUP is likely and it has therefore been accounted for as a purchase liability.

In the balance sheet, the acquisition of Portavis resulted in an expansion of the balance sheet by roughly €80m. This is the effect of higher cash and finance leases balanced by higher provisions, for both pensions (€30m) and the purchase obligation of the minority stakes in Portavis. The size of pension liabilities will vary with changes in interest rates and mortality tables. DATAGROUP’s net debt came down from €66m to €61m at end H120.

Exhibit 1: Key H120 figures

€000s

H119

H120

Change %

Revenues

138,722

170,010

22.6

Services & maintenance

114,674

143,039

24.7

Trade

23,977

26,794

11.7

Other

71

177

149.3

Own work capitalised

302

633

109.6

Total revenues

139,024

170,643

22.7

Material expenses/purchased services

(39,184)

(53,476)

36.5

Gross profit

99,840

117,167

17.4

Personnel expenses

(70,577)

(89,017)

26.1

Other income

2,630

15,028

471.4

Other expenses

(11,478)

(19,539)

70.2

EBITDA

20,415

23,639

15.8

Depreciation from PPA

(1,852)

(2,036)

9.9

Other depreciation

(8,335)

(11,967)

43.6

EBIT

10,228

9,636

(5.8)

Financial result

(1,122)

(1,160)

3.4

EBT

9,106

8,476

(6.9)

Taxation

(2,946)

449

(115.2)

Net income

6,160

8,925

44.9

Average number of shares (000's)

8,331

8,331

0.0

EPS (€)

0.74

1.07

44.9

Source: Company data


Guidance withdrawn, but business model is resilient

At the AGM on 3 March, DATAGROUP guided for revenue to grow to more than €375m (previous year €307m) and EBITDA to over €55m (previous year €46.9m) in FY20. However, this guidance was withdrawn on 27 April on the back of the coronavirus pandemic.

Although DATAGROUP’s existing business is relatively resilient to the COVID-19 crisis, with over 75% of revenues being contract-based recurring service contracts, there is some negative impact on winning new business. We have seen this for other companies in the sector as well.

DATAGROUP’s recurring revenue base is founded on its fully outsourced offering of cloud-enabling service-as-a-product contracts for German SMEs with 250–5,000 workstations. Its core product, CORBOX, offers companies a modular portfolio of nine groups of IT services ranging from service desk services to managed and private cloud solutions. Within CORBOX, third-party cloud solutions such as Microsoft, Amazon Web Services and SAP can be integrated with additional services and combined with DATAGROUP’s own cloud and outsourcing services. DATAGROUP has access to and owns data centres (colocation centres) in Germany with an ISO security certification.

With the COVID-19 situation, demand for these services has been stable; demand for these types of services will probably increase in the medium term due to the trend for working at home, which increases the demand for workstations and cloud solutions.

However, organic revenue growth is limited, as winning new business is difficult in current market conditions. On the other hand, the impact of the acquisition of IT-Informatik (now DATAGROUP Ulm) and UBL Informationssysteme in 2019, and especially Portavis in FY20, will be significant. Portavis has major customers like Sparkasse Hamburg and Sparkasse Bremen, and DATAGROUP expects it to contribute c €30m to FY20 revenues and c €60m in revenues on an annualised basis (roughly 10% of group turnover).

DATAGROUP has a successful M&A track record, acquiring companies with a low valuation or even in insolvency proceedings (eg IT-informatik), which it subsequently integrates into its efficient service platform. Over the last four years, organic growth was 4–6% and inorganic growth 8–12%, while profit margins increased. All in all, consensus expectations are for 23% revenue growth to €378m for FY20, which seems realistic, given the acquisitions combined with limited organic growth.

In terms of profitability, according to the company, DATAGROUP Ulm has been loss making at the EBITDA level, but is nearing break-even now. In FY21, DATAGROUP Ulm will contribute positively to EBITDA, according to management’s comment during the analyst conference call. However, there are project postponements at the robotics software specialist Almato (acquired in 2018) and some negative effects in the very large contract with NRW Bank. Partly caused by and combined with extraordinary factors from the COVID-19 crisis, these factors could lead to delayed project start-ups, affecting both revenues and profitability. This has prompted DATAGROUP to withdraw the guidance for EBITDA of over €55m for FY20. However, during the analyst conference call, CEO Max Schaber mentioned that he does not expect a decline in EBITDA in FY20, which implies a figure of at least €47m. On the longer-term ambition of reaching an EBIT margin of 9%, he said it might take longer than previously envisaged, now likely in FY23.


Valuation

DATAGROUP is trading at a premium of 12% on FY20e P/E and a discount of 21% on FY20e EV/EBITDA vs its peers. Compared to peers that are more dependent on selling time or projects, DATAGROUP has a much more resilient business model, with a recurring revenue base of over 75%. Furthermore, it has a solid track record of integrating acquisitions, creating cross-selling synergies from upselling additional services and a clear focus on the large German SME sector.

Exhibit 2: Peer group comparison

Market cap

P/E (x)

EV/EBITDA (x)

(local CCY m)

2019

2020e

2021e

2019

2020e

2021e

Allgeier

€333

20.7

15.7

11.9

7.1

6.2

5.4

ATOS

€6896

N/A

9.4

8.3

N/A

6.5

6.1

Bechtle

€6497

38.0

37.0

31.8

20.7

20.1

17.9

Cancom

€2079

39.6

32.8

26.1

13.0

12.4

10.9

CENIT

€76

11.0

27.4

12.1

4.7

7.2

4.3

GFT

€224

11.2

16.6

12.3

7.0

8.7

7.3

QSC

€159

N/A

N/A

N/A

0.8

N/A

19.2

S&T

US$1498

30.6

32.1

23.9

13.7

13.4

11.0

SNP Schneider

€274

N/A

53.3

27.6

20.8

20.4

13.4

USU Software

€183

24.9

31.6

21.9

18.8

22.2

14.8

All for One Steeb

€182

11.1

18.0

12.9

5.6

4.9

4.2

Peer average

 

23.4

27.4

18.9

11.2

12.2

10.4

DATAGROUP

€447

30.8

30.8

23.0

11.3

9.6

8.6

Premium/(discount)

 

32%

12%

22%

1%

-21%

-17%

Source: Refinitiv. Note: Priced at 22 May 2020. Valuation multiples for Datagroup are not calendarised.

General disclaimer and copyright

Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

More on DATAGROUP

View All

Latest from the TMT sector

View All TMT content

Research: TMT

Ebiquity — Advising brands through COVID-19 uncertainty

Ebiquity’s FY19 results (delayed by the COVID-19 lockdown) were in line with expectations. The impact of the pandemic on the advertising sector is harsh, but is far from uniform, with some verticals notably more resilient than others. Ebiquity’s leading market position equips it with the data to benchmark and advise. Careful cost management should mitigate some of the COVID-19 related trading difficulties, as reflected in our tentative FY20 forecast, with the balance sheet remaining sound. Management guidance remains withdrawn. The New CEO, Nick Waters, joins on 1 July (see our April flash note).

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free