Datagroup — EBITDA margins lift to 10.6% as acquisitions drive growth

DATAGROUP (DB: D6H)

Last close As at 21/11/2024

84.10

−0.70 (−0.83%)

Market capitalisation

703m

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Research: TMT

Datagroup — EBITDA margins lift to 10.6% as acquisitions drive growth

DATAGROUP performed in line with expectations in H1, with revenue growing by 24%, including 1.5% organic growth, or 5–6% when adjusting for discontinued activities from acquisitions. Management conservatively maintained revenue guidance, despite 50% of this already being generated in H1, with ALMATO only contributing for one month in the period. While the rating looks fairly priced at c 10x EBITDA, DATAGROUP offers an excellent track record, high recurring revenues, a clear focus on the large German Mittelstand sector and an increasing number of key differentiators following the acquisitions of ikb Data and ALMATO.

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TMT

DATAGROUP

EBITDA margins lift to 10.6% as acquisitions drive growth

IT services

Scale research report - Update

23 May 2018

Price

€38.3

Market cap

€320m

Share price graph

Share details

Code

D6H

Listing

Deutsche Börse Scale

Shares in issue

8.349m

Last reported net debt at 31 March 2018

€14.5m

Business description

DATAGROUP is a full IT outsourcing provider, focused on the German Mittelstand market. The company 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 a clear 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

The group’s valuation metrics are more expensive than they have been.

Highly exposed to the German economy.

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

Analyst

Richard Jeans

+44 (0)20 3077 5700

DATAGROUP performed in line with expectations in H1, with revenue growing by 24%, including 1.5% organic growth, or 5–6% when adjusting for discontinued activities from acquisitions. Management conservatively maintained revenue guidance, despite 50% of this already being generated in H1, with ALMATO only contributing for one month in the period. While the rating looks fairly priced at c 10x EBITDA, DATAGROUP offers an excellent track record, high recurring revenues, a clear focus on the large German Mittelstand sector and an increasing number of key differentiators following the acquisitions of ikb Data and ALMATO.

H1 results: Organic growth was 1.5%

Revenue grew by 23.6% to €133.5m and EBITDA rose 35% as margins expanded from 10.6% to 11.6%. The company signed 12 new CORBOX customers during the period and significantly extended business with nine existing customers. The group ended the period with net debt of €14.5m, up from €10.6m at end-September.

New contracts

After the period-end, DATAGROUP won a contract to develop and run a software solution for the Federal Waterways and Shipping Administration to document the technical inspection and calibration of inland water vessels. After the initial €1.8m 16-month development phase, the customer is expected to become a Corbox customer, in the form of a maintenance contract over 10 years.

Guidance maintained at more than €265m revenues

Management maintained guidance with revenues of at least €265m and EBITDA of more than €30m. This looks conservative, given the group has generated 50% of this revenue target in H1, and with ALMATO only contributing for one month (c €0.5m) in the H1 period. The company needs to sign 8–10 new customers in H2 to meet the guidance, which includes the Federal Waterways contract.

Valuation: Premium reflects strong business drivers

While the shares look fairly priced at c 20x FY19e earnings and 9.7x EBITDA, the outlook remains underpinned by a favourable business model supported by attractive business drivers, which also provide a compelling case for acquisitions.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

09/16

174.9

19.1

0.75

0.30

51.1

0.8

09/17

223.1

27.0

1.41

0.45

27.2

1.2

09/18e

272.5

32.1

1.50

0.53

25.5

1.4

09/19e

287.7

34.3

1.95

0.60

19.6

1.6

Source: Bloomberg.

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.

H1 results: Organic growth was 5–6%, excluding acquisition impacts

Group revenue grew by 23.6% to €133.5m, boosted by the acquisitions of ikb Data, HanseCom and ALMATO. Organic growth was 1.5%, or 5–6% when excluding the impact of discontinued businesses from acquisitions – ie DATAGROUP sheds unprofitable business after making acquisitions, and there is an ongoing managed decline in business from Hewlett Packard Enterprise relating to the acquisition of SAP and application management services from 2016. Services revenues rose to 81.7% of the total, up from 81.5% in the corresponding period, and 84% of gross profit was recurring in nature. EBITDA jumped by 35.4% to €15.6m, with the margin rising by 100bp to 11.6%.

ALMATO performed well during its one-month period of consolidation. ALMATO offers robotics process automation solutions for the purpose of optimising standard business processes. ALMATO uses various software, including from Nice Systems technologies, hence acting as a reseller. The main purpose of the ALMATO acquisition was to provide DATAGROUP with the ability to offer customers solutions that will enable them to automate their business processes. DATAGROUP has already been making upsells of the solutions to its existing customers.

Operating cash flow dipped by 23% to €10.5m. Capex rose by 59% to €7.6m, reflecting the investment in infrastructure for cloud services. Additionally, the company shifted to new premises in Cologne while the new SAP staff had to be equipped. DATAGROUP is still in the process of combining offices in Hamburg following the acquisition of HanseCom. After a small amount of fixed asset disposals and net interest paid, free cash flow fell to €2.4m from €8.2m.

Exhibit 1: Key figures

€000s

HY to March 2017

HY to March 2018

Change (%)

Revenues

108,054

133,513

23.6

Service and maintenance

88,010

109,115

24.0

Trade

19,954

24,335

22.0

Other

90

63

(30.0)

Own work capitalised

295

350

18.6

Overall performance

108,349

133,863

23.5

Cost of materials

(30,972)

(39,260)

26.8

Gross profit

77,377

94,603

22.3

Personnel expenses

(57,707)

(66,193)

14.7

Other income

2,339

1,867

(20.2)

Other expenses

(10,508)

(14,707)

40.0

EBITDA

11,501

15,570

35.4

Depreciation from PPA

(1,568)

(1,975)

26.0

Other depreciation

(2,293)

(4,949)

115.8

EBIT

7,640

8,646

13.2

Financial result

(1,055)

(1,353)

28.2

EBT

6,585

7,293

10.8

Taxation

(2,098)

(2,277)

8.5

Net income

4,487

5,016

11.8

Average number of shares (000s)

7,572

8,331

10.0

EPS (€)

0.59

0.60

1.6

Source: DATAGROUP

Management states results to have been “exactly in line with expectations” and hence maintained its FY18 guidance along with its long-term guidance. The latter is to achieve revenues of c €500m by FY21, including c €150m from acquisitions, along with EBITDA margins of 13%.


Acquisition strategy

The group is maintaining its acquisition strategy, which is to make infill acquisitions on regions where it is underrepresented in Germany, or to increase its technological expertise. The group has plenty of capacity to make acquisitions, with net debt to EBITDA currently at c 0.3x, compared with a 3.5x limit on its promissory notes. There is also a 21% equity ratio covenant on the promissory notes, compared with the current 29%. A low equity ratio was why the group carried out its €21m capital increase last year.

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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NSW 2000, Australia

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