DATAGROUP — Path to 9%+ EBIT margins

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 — Path to 9%+ EBIT margins

DATAGROUP’s earnings recovered strongly in FY21, driven by top-line growth and margin expansion as a result of the ongoing turnaround at its BIT Düsseldorf and DG Ulm units and better utilisation. Revenue growth was generated through both significant M&A and strong organic growth. The M&A-driven business model is intact, with a well filled pipeline, and DATAGROUP’s target of an EBIT margin of more than 9% should be within reach in the medium term. Trading at 28.4x FY22e P/E on consensus estimates, DATAGROUP is valued at a 14% premium to peers.

Edwin de Jong

Written by

Edwin De Jong

Analyst

TMT

DATAGROUP

Path to 9%+ EBIT margins

IT services

Scale research report - Update

27 January 2022

Price

€85.6

Market cap

€713m

Share price graph

Share details

Code

D6H

Listing

Deutsche Börse Scale

Shares in issue

8.3m

Last reported net debt at 30 September 2021

€87.5m

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

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.

Analyst

Edwin de Jong

+31 (0)6 5122 5490

DATAGROUP’s earnings recovered strongly in FY21, driven by top-line growth and margin expansion as a result of the ongoing turnaround at its BIT Düsseldorf and DG Ulm units and better utilisation. Revenue growth was generated through both significant M&A and strong organic growth. The M&A-driven business model is intact, with a well filled pipeline, and DATAGROUP’s target of an EBIT margin of more than 9% should be within reach in the medium term. Trading at 28.4x FY22e P/E on consensus estimates, DATAGROUP is valued at a 14% premium to peers.

Strong recovery from FY20

DATAGROUP confirmed the preliminary results reported on 23 November 2021. Revenues were up 24.1% to €444.7m, mostly driven by M&A (acquisitions URANO and dna), accounting for 16.4% of revenue growth but with 7.7% coming from organic growth, mostly due to higher capacity utilisation. This is a significant step up compared with the 2.0–4.9% organic growth over the last three years. As staff costs increased only modestly, EBITDA grew 25.1% to €67.3m. EBIT, adjusted for the one-off provision in FY20 for the Portavis acquisition and one-offs of €3.2m in FY21, was 53.4% higher at €32.2m and the net result increased to €21.0m from €0.2m in 2020.

Clear trajectory to 9%+ EBIT margin

DATAGROUP’s mid-term EBIT margin target of more than 9% is unlikely to be reached this year. The adjusted EBIT margin improved from 5.9% to 7.2% in FY21 and consensus estimates indicate an improvement towards 7.8% this year. DATAGROUP has set out a clear plan to achieve the 9% target by the ongoing turnaround of the loss-making DG BIT Düsseldorf (previously DG FIS) and DG Ulm units, and lowering rental expenses and depreciation by reducing office space. In the three years before FY20, DATAGROUP achieved EBIT margins of 7.6% on average and the business proposition has improved in terms of scale, recurring business and product development. With clear steps to margin improvement, we believe this aspiration is within reach. In addition to the margin target, DATAGROUP aims to achieve revenue of €750 by 2025/26.

Valued at a premium compared to peers

DATAGROUP’s share price almost doubled in 2021 to €97, but has fallen back somewhat in 2022. At current consensus estimates, the shares are trading at a 14% premium to peers on an FY22e P/E of 28.4x, a premium that has been rising over the last few months.

Consensus estimates

Year
end

Revenue
(€m)

EBITDA
(€m)

EPS (adjusted)
(€)

DPS
(€)

P/E
(x)

Yield
(%)

09/20

358.2

53.8

1.47

0.70

58.2

0.8

09/21

444.7

67.3

2.52

N/A

34.0

N/A

09/22e

493.9

75.0

3.01

1.04

28.4

1.2

09/23e

523.3

82.0

3.45

1.14

24.8

1.3

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.

A strong FY21

Exhibit 1: Key FY21 figures

€000s

FY20

FY21

Change %

Revenues

358,211

444,708

24.1%

Services & maintenance

304,717

375,241

23.1%

Trade

52,899

69,027

30.5%

Other

595

440

(26.1%)

Own work capitalised

1,743

1,720

(1.3%)

Changes in capitalized contract costs

7,274

(1,938)

(126.6%)

Total revenues

367,228

444,490

21.0%

Material expenses/purchased services

119,143

149,495

25.5%

Gross profit

248,085

294,995

18.9%

Personnel expenses

187,991

213,038

13.3%

Other income

19,811

12,140

(38.7%)

Other expenses

26,098

26,811

2.7%

EBITDA

53,807

67,286

25.1%

Depreciation and amortisation

32,819

38,228

16.5%

EBIT*

8,988

29,058

223.3%

Financial result

(2,375)

(1,927)

(18.9%)

EBT

6,613

27,131

310.3%

Taxation

6,364

6,118

(3.9%)

Net income

249

21,013

8,339.0%

EPS (€)

0.03

2.52

8,300.0%

Source: Company data. Note: *Reported EBIT including €12m charge for Portavis in FY20 and €3.2m in one-off charges in FY21.

DATAGROUP confirmed the preliminary results reported on 23 November of revenues of €444.7m (up 24.1% y-o-y), EBITDA of €67.3m (up 25.1%) and net profit of €21m (compared to €0.2m in FY20). The steep increase is mostly driven by M&A (acquisitions URANO and dna), accounting for 16.4% of revenue growth and 7.7% organic growth, mostly due to higher utilisation (more revenue per employee). This is a significant step up compared with the 2–4.9% organic growth levels in the last three years.

DATAGROUP recorded 18 new customers, while 42 contracts were renewed and 27 contracts expanded in FY21. Recurring revenues were stable at 74.0% (FY20: 74.0%) of revenues, mostly consisting of recurring cloud services (DATAGROUP has its own datacentres).

Gross profit increased 18.9% to €295.0m, but gross margin decreased almost 300bp to 66.3%, driven by a disproportionate increase in retail client revenues in the mix. EBITDA grew 25.1% to €67.3m, mostly driven by higher utilisation, as billing capacity increased. Depreciation and amortisation charges went up from €32.8m to €38.2m (+16.5%) of which €5.6m purchase price allocation (PPA) depreciation and €11.7m depreciation related to leases. EBIT, adjusted for the one-off provision in FY20 for the Portavis acquisition and one-offs of €3.2m in FY21, was 53.4% higher at €32.2m and the net result increased to €21.0m from €0.2m in 2020.

As a result of acquisitions in FY21 (€35.7m) and the repayment of a promissory note of €12m, net debt increased to €87.5m at 30 September 2021 from €63.0m in September 2020. This represents an equity ratio of 21.8%.

DATAGROUP intends to propose a dividend of €1 per share, to be approved at the AGM on 10 March. At the meeting, the changes in management that were announced in September last year will also come into effect and the outlook for the full year will be provided.

CEO and major shareholder Max Schaber (54% of shares) will step down, to be succeeded by current board member Andreas Baresel. Dr Sabine Laukemann will be appointed chief officer of human resources and organisation from 1 April, a new position on the board. Mr Schaber will stand for election to the supervisory board at the AGM.

Driven by M&A and structural changes

DATAGROUP’s longer-term ambition is to reach €750m revenues by 2025/26, implying a CAGR of 11–14%. Growth should be partly generated organically (around one-third), with the majority generated by M&A (around two-thirds). DATAGROUP makes two to three acquisitions every year and integrates its CORBOX IT outsourcing services solution at the acquired companies with cloud support from (co-located) datacentres. Last year, DATAGROUP acquired dna (104 employees) and 70% of URANO (300 employees).

In FY21, DATAGROUP exceeded its ambitions on both acquisitive and organic growth. For FY22, M&A potential also seems strong. In the conference call after the FY21 results, DATAGROUP’s new CFO Oliver Thome (who is taking over M&A responsibility from Max Schaber) stated that there is a full pipeline of acquisitions, with both potential volume additions and technological expansion.

All in all, the pandemic has had a positive effect on DATAGROUP’s top line, with most of the effects of a structural nature. COVID-19 has affected the company in four ways:

Direct positive effects (albeit short term), eg providing an IT infrastructure platform and IT support for the vaccination centres in Baden-Württemberg and Hesse.

Renewal and expansion of workplace infrastructure for existing customers as part of mobile working initiatives.

The digitisation trend significantly improves the performance of Almato in the areas of robotic process automation (RPA) and digital assistants.

Increased need for IT security based on a strongly growing number of cyber threats and attacks.

Of the points, IT Security deserves extra attention, as this will also drive the outsourcing trend and new CORBOX customers. The availability of IT services, infrastructure and data, confidentiality (protection from unauthorised access), the integrity of IT systems and data, and compliance with legal requirements and other rules make more organisations outsource their IT, which is beneficial for players such as DATAGROUP.

FY22 looks strong

DATAGROUP did not provide explicit FY22 guidance (that will be provided at the AGM), but stated that it had a good start to the new financial year and a strong order intake. Its stated aim is to reach a 9%+ EBIT margin on the mid-term and an EBITDA margin of more than 15% in the same year. Its underlying EBIT margin improved from 5.9% to 7.2% last year and consensus forecasts are for a further improvement in FY22 (7.8%) towards the 9%+ target.

DATAGROUP plans to reach the 9% margin target by: 1) a turnaround of the loss-making DG BIT Düsseldorf and DG Ulm units, which should be able to break even this year; 2) a reduction in capex and depreciation; 3) a reduction in rental expenses and depreciation by reducing office space; and 4) a growing degree of digitalisation and automation of its services.

In the three years before FY20, DATAGROUP reached EBIT margins of 7.6% on average and the business proposition has improved since in terms of scale, recurring business and product development. Together with the ongoing recovery at DG BIT Düsseldorf and DG Ulm, we believe its margin aspiration is within reach.

Premium valuation

DATAGROUP is trading at a 14% premium on consensus FY22e P/E at 28.4x and 16% on FY22e EV/EBITDA of 11.1x versus peers. DATAGROUP has been trading at a discount on EV/EBITDA multiples but, given the strong share price performance last year and higher net debt (due to its acquisitions), this has changed into a premium. The average forward multiples of peers have been largely stable in the last few years. DATAGROUP’s P/E-based premium is somewhat higher compared to our June update, when it was 11%.

Compared to peers, which are more dependent on selling time or projects, like Atos, All for One Group and GFT, DATAGROUP has a more resilient business model. The recurring revenue base amounts to 74% of total revenues, of which the vast majority is cloud services. Furthermore, DATAGROUP 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. We believe all of this could justify a premium compared to peers.

Exhibit 2: Peer group comparison

Market cap

P/E (x)

EV/EBITDA (x)

Company

(local CCY m)

2020

2021e

2022e

2020

2021e

2022e

Allgeier

€507

N/A

64.9

30.5

6.5

13.0

7.9

ATOS

€3491

4.7

11.5

8.0

3.6

5.5

4.5

Bechtle

€6550

33.9

28.0

26.3

17.9

15.7

14.8

Cancom

€1979

30.8

36.1

30.9

13.8

14.0

12.4

CENIT

€113

48.0

33.6

22.3

10.3

8.6

7.1

GFT

€1101

64.0

33.0

27.1

27.7

18.5

15.4

q.Beyond

€217

N/A

22.6

47.2

N/A

6.1

10.1

S&T

US$1084

19.5

18.6

14.3

8.7

8.4

7.0

SNP Schneider

€225

N/A

57.9

22.4

27.0

14.2

9.1

All for One Group

€346

27.2

25.9

21.3

8.7

8.6

7.3

Peer average

 

32.6

33.2

25.0

13.8

11.3

9.6

DATAGROUP

€713

58.2

33.8

28.4

15.5

13.0

11.1

Premium/(discount)

 

79%

2%

14%

12%

15%

16%

Source: Refinitiv. Note: Priced at 27 January 2022. Valuation multiples for DATAGROUP are not calendarised.

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