Beta Systems — Positive outlook

Beta Systems Software (DB: BSS)

Last close As at 21/11/2024

38.40

−0.20 (−0.52%)

Market capitalisation

184m

More on this equity

Research: TMT

Beta Systems — Positive outlook

Beta’s H118 results reflect the anticipated lull in the DCI licence renewal cycle, with EBITDA down 54% y-o-y. Despite the decrease, management believes it is on track to deliver to the top end of its guided range for the full year. With an anticipated pick-up in performance over the next two years, combined with the recent uptick in M&A activity, we feel that the FY18 EV/EBITDA premium to peers is justified.

Analyst avatar placeholder

Written by

TMT

Beta Systems

Positive outlook

Technology

Scale research report - Update

31 May 2018

Price

€22.40

Market cap

€119m

Share price graph

Share details

Code

BSS

Listing

Deutsche Börse Scale

Shares in issue

5.3m

Last reported net cash at 31 March 2018, including €25m deposits

€47.8m

Business description

Beta Systems provides data centre intelligence (DCI) solutions that enable efficient and secure bulk processing of data and identity access management (IAM) solutions. The company’s headquarters are in Berlin, and it has sales and support offices in 18 markets globally. Approximately 70% of sales are derived in the DACH region.

Bull

Market leader in mainframe environments and DCI in Europe.

FY19 and FY20 should be more typical renewal years in DCI.

Strong balance sheet.

Bear

Mature mainframe market backdrop.

Subscale IAM business.

FY18 outlook affected by down-cycle in licence renewals.

Analysts

Alasdair Young

+44 (0)20 3077 5758

Bridie Barrett

+44 (0)20 3077 5700

Beta’s H118 results reflect the anticipated lull in the DCI licence renewal cycle, with EBITDA down 54% y-o-y. Despite the decrease, management believes it is on track to deliver to the top end of its guided range for the full year. With an anticipated pick-up in performance over the next two years, combined with the recent uptick in M&A activity, we feel that the FY18 EV/EBITDA premium to peers is justified.

H118 results – low point in renewals cycle

As expected, fewer DCI licences were up for renewal in the period, and against a very strong basis of comparison, H118 saw revenues down 23% to €25.1m, and EBITDA and net profits roughly half the previous year’s level. Cash generation remained strong and, despite €5m acquisition expenditure over the period, the balance sheet strengthened further to a net cash position of €47.8m at period end.

Guidance and outlook

Despite the y-o-y declines, H1 EBITDA of €6.1m is already at the top end of management’s full year guidance for EBITDA of €4.3-6.3m, and while H1 is typically the more significant half, management has indicated that it expects to deliver to the upper half of its guidance range. Visibility in DCI is fairly strong and, given the historical renewal cycles, we would expect FY19 and FY20 to show a return to growth.

Operating update – continued M&A

Beta is actively diversifying its revenue base away from the mature mainframe environment. Evidence of this can be seen in the two recent acquisitions – an internet agency (LYNET) and a software provider (AUCONET), both of which are expected to smooth the somewhat volatile licensing revenues from DCI. In aggregate, management expects these acquisitions to be performance neutral in FY18, but earnings enhancing from FY19 onwards.

Valuation: Justified premium rating

Delivery towards the top end of management’s FY18 guidance implies an EV/EBITDA multiple of 12.8x, compared with the peer group average of 10x. Given the likelihood of stronger performance in FY19 and FY20 as the renewals cycle becomes more favourable, coupled with the M&A strategy, and with cash accounting for 40% of the market cap, we believe the premium is justified.

Historical financials

Year
end

Revenue
(€m)

EBIT
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

09/15

41.6

(0.5)

(0.3)

0.71

0.0

31.5

09/16

46.4

5.3

5.7

0.99

0.0

22.6

09/17

49.8

9.0

9.3

1.51

0.0

14.8

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.

Review of H118 results

Smaller year for licence renewals: against a very strong basis of comparison (H117 +28%) and as previously guided by management, the H118 results reflect a significantly lower period for licence renewals. The 23% (c €7m) reduction in y-o-y revenues to €25.1m translated to PBT, which decreased by 57%. The newly acquired businesses contributed €0.9m to revenues during the period.

Ongoing efficiency efforts: total operating costs (including depreciation and amortisation) were slightly reduced at €20.5m vs €20.8m in H117, despite the inclusion of €0.3m one-off, acquisition-related costs following the acquisition of LYNET and AUCONET, which completed during the half year. Management’s ongoing efforts to improve efficiency resulted in savings of €0.6m, and further reductions in the use of external contractors led to an additional €0.4m saving.

Expected full-year EBITDA achieved at the half year: H1 tends to be the stronger period for licence renewals at Beta Systems, and last year this seasonality was even more pronounced. H1 EBITDA of €6.1m (-54% y-o-y) is on a 24% EBITDA margin. While it is down from 41% in H117 (where H1 represented 124% of FY17 EBITDA), the H118 result is already within the guidance range for the full year of €4.3-6.3m.

Exhibit 1: Summary of H118 results

€m

H117

H118

Y-o-y change (%)

Revenues

32.5

25.1

(23)

Operating profit

12.4

5.2

(58)

Margin

38%

21%

Normalised operating profit

12.5

5.5

(56)

EBITDA

13.4

6.1

(54)

Margin

41%

24%

PBT

12.5

5.4

(57)

Net profit

11.1

4.9

(56)

Margin

34%

19%

EPS

2.1

0.9

(56)

Operating cash flow

8.6

8.8

2

Investing cash flow

0.1

(5.0)

N/A

Financing cash flow

(0.1)

0.0

(99)

Net cash flow

8.7

3.7

(57)

Source: Company accounts

Cash conversion improved significantly, with operating cash flow representing 143% of EBITDA (H117: 64%). This was largely driven by Beta’s revenue recognition policy, which frequently results in a greater proportion of revenues being recognized upfront than payment terms require. This is also in line with the new revenue recognition guidelines according to IFRS 15 (which will be adopted from FY19).The strong cash conversion meant that, despite the €5m payments for the two acquisitions, gross of the €25m deposit with majority shareholder Deutsche Balaton, Beta reported end-March 2018 net cash of €47.8m, up from €44.1m at the year end.

Outlook: Guidance reiterated

Management has not altered its guidance, but expects to achieve the top end of the range provided. Furthermore, the guidance excludes the contributions from acquisitions made during the year, which management expects to provide €3m revenues, zero EBITDA and a €0.5-1m loss at the operating profit level in 2018. These companies are expected to make positive contributions from 2019 onwards.

Exhibit 2: Management’s FY18e guidance

€m

FY14

FY15

FY16

FY17

FY18e*

Revenues

33.8

41.6

46.4

49.8

41-44

Licences

7.6

10.4

14.5

18.3

11-12

Maintenance

19.8

23

23.8

24.1

23-24

Other

6.4

8.1

8.0

7.4

7-8

EBITDA

-1.3

3.5

6.9

10.8

4.3-6.3

EBITDA margin

N/A

8%

15%

22%

12%

Liquidity

21.8

27.4

39.0

44.1

47.2-49.2

Source: Company accounts. Note: *Exclusive of contributions and cash costs from acquisitions. Inclusive of the c €5m cash costs for the two acquisitions, liquidity is expected to be correspondingly lower.

AUCONET acquisition

Further to the €2.5m acquisition of LYNET in December 2017, Beta completed the acquisition of AUCONET on 31 January 2018. The company was acquired from administration for total costs of c €3.1m. It contributed negative EBITDA of €0.1m over the period, and management expects this loss to worsen over H218 (EBITDA losses of €0.5m for FY18). However, a positive contribution to group EBITDA is expected from 2019 onwards, as the company recovers from the significant turmoil during the bankruptcy and subsequent acquisition process. AUCONET will complement Beta’s Data Centre Intelligence (DCI) division through its ‘BICS’ IT Operations Management software. The recent hire of an M&A director indicates that the company is open to further utilisation of its balance sheet.

Valuation

The shares are trading at lower levels than 12 months ago, and have seen little movement since the FY17 results.

Exhibit 3: Recent share price performance

Source: Bloomberg

Peer valuation

We benchmark Beta’s valuation against a basket of comparable mainframe-related companies. Given management’s expectation of delivering towards the top end of its guidance, we are assuming the higher end (75th percentile of range) of Beta’s revenue and EBITDA guidance (€43.25m and €5.8m respectively) when calculating multiples. Furthermore, we adjust our calculation of EV to account for the €25m cash deposits with Deutsche Balaton which, due to its accessibility, we see as a cash equivalent.

This would imply FY18e EV/Sales multiples of 1.7x and EV/EBITDA of 12.8x, which compare with peer averages of 3.2x and 10.0x.

We believe an element of EV/EBITDA premium is justified and the shares should be well supported at these levels:

FY18 is anticipated to be a low point in Beta’s three- to four-year renewals cycle which, together with management’s goal of keeping EBITDA margins in the 15-20% range longer term (FY18e: 12%), points to a recovery in profitability in FY19 and FY20.

Furthermore, the two recent acquisitions should become earnings enhancing from FY19 and the strategy to continue to make bolt-on acquisitions could enhance earnings further.

However, until there is better visibility regarding FY19 revenues, we would like to see evidence that the initiatives to stabilise the revenue base in IAM and the group’s strategy to move beyond its core mainframe customer base are delivering to plan, for the shares to justify further ratings expansion.

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

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

More on Beta Systems Software

View All

Latest from the TMT sector

View All TMT content

Research: TMT

1Spatial — Knowing where it is going

1Spatial’s return to growth and cash break-even in FY18 reflect the initial success of management’s turnaround plan. Supportive market dynamics and a strong pipeline give us confidence that the business can return to sustainable growth and profitability. We believe the renewed focus on its solution strategy and goals to grow its offerings that master, define and maintain accurate geospatial information from multiple data sets in key target verticals could provide the potential for an acceleration of growth.

Continue Reading

Subscribe to Edison

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

Sign up for free