Vectron Systems — Evolving the business

TMT

Vectron Systems

Evolving the business

IT hardware

Scale research report - Update

16 May 2018

Price	€26.40
Market cap	€174m

Share price graph

Share details

Code	V3S
Listing	Deutsche Börse Scale
Shares in issue	6.6m
Net cash as at 31 December 2017		€1.7m

Business description

Vectron Systems produces high-end, proprietary POS systems for the hospitality sector. Vectron is also diversifying into providing systems designed for online marketing services, which has been given impetus recently through a partnership with Coca-Cola.

Bull

■

Flexible, comprehensive POS systems.

■

Regulatory tailwinds.

■

Partnership with Coca-Cola.

Bear

■

Dependent on the German economy.

■

Management owns more than 50% of Vectron.

■

GetHappy launch pushed out.

Analysts

Katherine Thompson	+44 (0)20 3077 5730
Alasdair Young	+44 (0)20 3077 5758

tech@edisongroup.com

Edison profile page

FY17 results reflected the declining impact of regulatory changes on demand in Germany. International sales continued to grow in FY17 and the company saw good demand for its Duratec product line. Vectron’s push into marketing services is progressing well: bonVito is close to profitability and the new GetHappy app is currently being trialled in Leipzig. We view the full launch and then uptake of the app as the key drivers of the share price.

Boost from regulatory changes recedes

Vectron continued to see strong demand for its products in H117 after a very strong H216, supported by changes in regulations for cash registers in Germany. This effect waned in H217, resulting in a small revenue decline for FY17. Combined with a small increase in costs, the company reported FY17 EBITDA €1.4m lower than a year ago. Despite more than 30% of customers not having upgraded to compliant systems, management does not expect a strong uptick in demand for its POS systems in FY18, instead suggesting that this is more likely to happen in FY19 ahead of further regulations coming into force in FY20.

Increased focus on cloud services

The original founders have instigated changes to the management structure to ensure the company is well positioned to grow to the next level. The new CEO, Oliver Kaltner, has confirmed that he expects to increase the business’s focus on software and cloud services to deliver full solutions that enable customers to make the best use of the data generated by their POS systems. Several modules of the new GetHappy app are currently being trialled by c 60 restaurants in Leipzig. The date of the full launch has not yet been confirmed, and will be decided in collaboration with Coca-Cola.

Valuation: Factoring online marketing success

Consensus forecasts for FY18 have reduced, factoring in a revenue and EBITDA decline, before the company is forecast to return to growth in FY19. The stock is trading at a significant premium to peers, in our view factoring in a level of success for GetHappy that has not yet been incorporated into forecasts. We view the full launch and then uptake of the app as the key drivers of the share price.

Consensus estimates

Year end	Revenue (€m)	PBT (€m)	EPS (€)	DPS (€)	P/E (x)	Yield (%)
12/16	33.7	3.0	0.30	0.25	88.7	0.9
12/17*	32.4	1.7	0.16	0.06	165.0	0.2
12/18e	31.0	0.4	0.03	0.06	N/A	0.2
12/19e	39.9	3.2	0.32	0.09	82.5	0.3

Source: Bloomberg (as at 10 May). Note: *FY17 DPS not yet announced.

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.

Review of FY17 results

Exhibit 1: Results highlights

€m	2016	2017	Y-o-y
Revenues	33.72	32.38	-4.0%
EBITDA	3.61	2.25	-37.6%
EBITDA margin	10.7%	7.0%
EBIT	3.08	1.74	-43.4%
EBIT margin	9.1%	5.4%
PAT	1.97	1.08	-45.3%
EPS	0.30	0.16	-46.2%
Net cash	7.2	1.7	-76.0%

Source: Vectron Systems

Exhibit 2: Half-yearly divisional revenues

€m							Y-o-y change
€m	H116	H216	FY16	H117	H217	FY17	H117	H217	FY17
POS systems	9.76	12.71	22.47	12.81	7.41	20.22	31.3%	-41.7%	-10.0%
Germany	7.03	10.30	17.33	9.47	5.30	14.77	34.6%	-48.6%	-14.8%
Other EU	2.58	2.23	4.81	3.21	1.97	5.18	24.1%	-11.5%	7.7%
International	0.14	0.18	0.32	0.14	0.14	0.28	-4.2%	-22.1%	-14.2%
Software	1.00	1.33	2.33	1.69	1.03	2.72	68.9%	-22.5%	16.8%
Germany	0.67	1.01	1.68	1.16	0.68	1.84	73.8%	-32.4%	9.9%
Other EU	0.32	0.30	0.61	0.52	0.33	0.85	64.4%	9.8%	38.0%
International	0.02	0.02	0.04	0.01	0.02	0.03	-41.2%	-4.3%	-20.0%
Good for resale/service	4.56	4.36	8.92	4.81	4.64	9.44	5.3%	6.4%	5.8%
Germany	3.20	3.65	6.85	3.48	3.64	7.12	8.7%	-0.2%	4.0%
Other EU	1.31	0.66	1.97	1.28	0.92	2.21	-2.0%	39.4%	11.9%
International	0.05	0.05	0.10	0.04	0.07	0.11	-19.6%	52.1%	15.2%
Total revenues	15.33	18.39	33.72	19.31	13.07	32.38	26.0%	-28.9%	-4.0%

Source: Vectron Systems

Revenues reflect impact of regulation

Vectron reported a small revenue decline of 4% for FY17. The half-yearly breakdown in Exhibit 2 demonstrates the progression of half-yearly revenues, which clearly shows the uptick in demand in H216 and H117, which fell back in H217. German regulations relating to cash registers came into force from the end of 2016 and this drove the increase in sales in H216, with continued strong demand in H117 as companies ensured compliance with the regulations. The company estimates that c 30% of its customer base is not yet compliant, but it is not clear at what point customers will feed the need to upgrade their equipment. Additional regulations will come into force in 2020 which, while likely to drive demand in 2019, could result in a hiatus in 2018. We note that while German revenues declined 8% y-o-y, international revenues increased 10% y-o-y. The Duratec product line showed further growth, generating revenues of €1.74 in FY17 (H1: €1.0m, H2: €0.7m) compared to €1.01m in FY16 (H1: €0.4m, H2: €0.6m).

EBITDA fall: Revenues decline while costs increase

In FY17, the company increased headcount from 167 to 180. Operating costs excluding depreciation and amortisation increased 2% y-o-y to €31.3m, reflecting the increase in headcount, partially offset by a reduction in raw materials, consumables and supplies. The cost increase, combined with lower revenues, resulted in a €1.4m decrease in EBITDA y-o-y. We note that a large proportion of the costs relating to the development of the GetHappy app have been capitalised.

Cash flow reflects investment in new ventures

In FY17, the business consumed €1.5m in cash from operating activities compared to a cash inflow of €0.8m in FY16. EBITDA was €1.4m lower than a year ago; in addition, the business increased its stock of parts and completed POS systems to ensure rapid delivery of orders. It also paid out significantly more in tax (€1.7m vs €0.2m a year ago) and reduced the level of accruals.

The company spent €0.25m on tangible assets, €1.28m on capitalised development costs (vs zero in FY16), and paid €0.75m for the Posmatic acquisition at the start of the year.

Financed for growth

The company closed FY17 with a net cash position of €1.7m, made up of gross cash of €5.5m and loans totalling €3.8m. In April 2018, the company announced that it had received a €10m loan from DZ Bank. The loan is repayable in December 2020 and will be used to support the company’s growth plans.

Q118 update

The company announced that it generated revenues of €7.4m in Q118. This is 30.3% lower than a year ago but 6.3% higher than in Q417. EBITDA for the quarter was -€0.18m, compared to €1.97m a year ago and -€0.12m in Q417.

Business update

Management changes to drive business to next level

In January, the company announced that the original founders of the business, Jens Reckendorf and Thomas Stümmler, would be making changes to the management structure to drive the business forward, as they are keen for the company to grow on an international basis and to maximise the opportunity with GetHappy. Oliver Kaltner joined as CEO with effect from 1 February 2018; Mr Reckendorf remains on the executive board as CTO, while Mr Stümmler has moved to the supervisory board. Related to this, the company brand was revamped.

Business evolution

The business is currently evolving from being a POS system provider to becoming a full system solution provider. The focus of development is to produce solutions that help hospitality businesses maximise the use of their POS data. This can serve several purposes: to enhance customer retention, to improve the efficiency of customers’ businesses and to help customers to market effectively to new consumers. Hardware product cycles are shortening, more in line with consumer electronics products, and the business is responding to this by adjusting development and procurement processes. Software development, however, is the main focus, in order to support POS system software and cloud services.

The main group activities are grouped into two business areas:

■

Hardware – this includes the Vectron and Duratec POS terminals as well as related peripherals.

■

Cloud services – this includes the bonVito online marketing services, Posmatic mobile POS software, the myVectron reporting app and GetHappy activities.

The bonVito business is not consolidated; instead, it is reported through the associate line. While this was loss-making in FY16, the company expects that it was profitable in FY17. It stated that the take-up of bonVito by existing customers has increased over the course of FY17 (from 2,671 at the end of FY16), but no metrics were disclosed. The Posmatic business was acquired at the start of FY17 – no specific metrics were disclosed but the company noted that it was loss-making in FY17.

GetHappy – currently being trialled in Leipzig

From November 2017, Vectron started trialling three modules within the GetHappy app (which will have six modules) with 62 businesses in Leipzig. Management had previously targeted a roll-out of the GetHappy app to hospitality businesses in January 2018 and customers from April 2018. It has now said that timings will be worked out in collaboration with Coca-Cola. The company capitalised development costs totalling €1.28m in FY17 relating to the work involved in building the GetHappy app. We would expect the company to start amortising this once the app is fully launched.

Forecasts and valuation

Consensus forecasts for FY18 have reduced since our last note in September 2017. Forecast revenues have declined 24% to €31.0m and EBITDA from €4.7m to €1.1m (3.5% margin). FY19 forecasts assume 29% revenue growth and EBITDA of €4.0m (10% margin).

The share price peaked in June 2017 at close to €40, in our view due to optimism about the GetHappy collaboration with Coca-Cola. As demand for Vectron’s core POS systems has waned (regulatory reasons for this explained above) and the timeline for launching the GetHappy app has extended, the share has fallen back to a trading range of €20-28. We see the key near-term trigger for the share price being full launch of the GetHappy app and, in the medium term, the pace at which the app is adopted will influence forecasts and the share price.

Exhibit 3: Vectron share price – January 2017 to May 2018

Source: Bloomberg

Trading at a premium to peers

In Exhibit 4, Vectron is clearly trading at a significant premium to peers on all valuation metrics. We believe that this is because the share price is factoring in upside from the launch of the GetHappy app, which is not yet evident in consensus forecasts.

Exhibit 4: Peer valuation multiples

Company	Quoted ccy	Share price	Market cap (m)	EV (m)	EV/Sales (x)		EV/EBITDA (x)		P/E (x)		Dividend yield (%)		EBITDA margin (%)
Company					CY	NY	CY	NY	CY	NY	CY	NY	CY	NY
Vectron Systems	EUR	25.85	171	166	5.3	4.2	155.5	41.6	861.7	80.8	0.2	0.3	3.4	10.0
Ingenico Group	EUR	74.26	4,631	6,148	2.2	2.1	11.3	10.3	15.1	13.5	2.1	2.4	19.8	20.3
NCR Corporation	USD	29.9	3,544	7,123	1.1	1.0	6.3	6.1	9.0	8.2			17.0	17.1
Verifone Systems	USD	22.9	2,534	3,253	1.8	1.7	11.0	10.5	15.4	13.4	0.0		16.5	16.6
Aures Technologies	EUR	50.7	203	199	1.8	1.4	13.2	11.3	21.2	17.2	0.9	1.1	13.4	12.7
Paypoint	GBp	870.0	593	566	4.7	4.0	9.2	9.0	14.1	13.9	8.5	8.7	51.1	44.4
Universe Group	GBp	5.9	14	12	0.6	0.5	3.4	2.9	8.4	7.3			17.1	18.1
Pax Global Technology	HKD	3.5	3,851	1,674	0.4	0.4	2.9	2.4	8.0	6.6	2.6	3.1	14.3	15.2
Square INC - A	USD	54.3	21,742	21,172	14.9	11.3	83.9	49.2	116.9	70.2	0.0	0.0	17.8	23.0
Just Eat	GBp	801.2	5,451	5,195	7.3	6.0	27.3	21.0	42.6	32.2	0.0	0.0	26.8	28.8
Grubhub	USD	103.5	9,334	9,193	9.6	7.6	35.8	27.5	58.9	46.2	0.0	0.0	26.8	27.7
Takeaway.com	EUR	48.4	2,088	1,998	8.6	6.7		68.0					(3.7)	9.8
Eagle Eye Solutions Group	GBp	206.5	53	52	3.4	2.5							(13.6)	4.5
Average					4.7	3.8	20.4	19.8	31.0	22.9	1.8	2.2	16.9	19.9
Median					2.8	2.3	11.1	10.5	15.3	13.7	0.5	1.1	17.0	17.6

Source: Bloomberg. Note: Prices as at 10 May.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
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.

Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Equities

Equities by Sector

Sectors

Thematics

Latest

Inside the mind of investors: International Biotechnology Trust

Borussia Dortmund – executive interviews

UK equities: A generational opportunity?

Audiovisual

Latest

Vantage: Gresham House Energy Storage Fund – Navigating challenges in energy storage

IP Group – executive interview

Georgia Capital in 60 seconds

About Edison

About Edison

Careers

Vectron Systems (DB: V3S)

Vectron Systems — Evolving the business

TMT

TMT

Latest

OPAP — Winning strategy

Patria Private Equity Trust — High liquidity and solid long-term track record

MoneyHero — Emphasis on driving margin

Intralot — Continuing improvement in Q324

Picton Property Income — Delivering on key initiatives

More on Vectron Systems

Vectron Systems — Return to profitability in H121

Vectron Systems — Growth in a tough market

Vectron Systems — Positive outlook

Vectron Systems — Funded to cope with lower demand

Latest from the TMT sector

MoneyHero — Emphasis on driving margin

1Spatial — Wins in the utilities sector for AI-supported apps

Filtronic — Upgrading on stronger H225 expectations

Verve Group — ID-less targeting solutions

Centrale del Latte d’Italia — Solid performance

Subscribe to Edison