Prodware — Update 26 May 2016

Prodware — Update 26 May 2016

Prodware

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Prodware

Solid foundations for growth

Company update

Software & comp services

26 May 2016

Price

€6.3

Market cap

€52m

Net debt (€m) at December 2015

46.5

Shares in issue

8.2m

Free float

70.2%

Code

ALPRO

Primary exchange

Alternext

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.9)

(18.0)

(6.4)

Rel (local)

(2.9)

(22.5)

6.3

52-week high/low

€7.92

€5.11

Business description

Prodware sells and integrates its own and third-party software to SMEs across Europe. Its software products mainly sit on top of ERP and CRM platforms from Microsoft. Prodware also has networks, hosting and security operations.

Next event

H1 results

20 July 2016

Analysts

Ian Robertson

+44 (0)20 3681 2523

Katherine Thompson

+44 (0)20 3077 5730

Prodware is a research client of Edison Investment Research Limited

The Q1 revenues release shows that with revenues of €42.5m in Q1 Prodware continues to make solid progress (+2.6% Q1 on Q1 underlying growth) and that there are also signs of a turnaround in the Benelux and all important German markets. The €79m debt restructuring post year-end leaves Prodware well financed to achieve its ambitious medium-term growth objectives. The shares, however, continue to trade on substantial and undeserved multiple discounts to comparators.

Year end

Revenue (€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

174.8

9.9

118.4

0.0

5.3

N/A

12/15

181.8

11.8

140.4

0.0

4.5

N/A

12/16e

191.2

14.2

153.7

0.0

4.1

N/A

12/17e

206.1

18.1

196.5

0.0

3.2

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Trading solid and encouraging signs

Q1 revenues of €42.5m show that Prodware remains on course, with underlying top-line growth of 2.5% Q1 on Q1. In Q1 the geographical sales mix shift towards the Francophone zone seen in FY15 was reversed, with strong performances in Spain and Israel. There were also signs of turnarounds in Germany and Benelux, confirming our view that the restructuring is complete and the foundations of growth across all geographies are in place. We are adjusting our forecasts slightly following this announcement and the release of the full FY15 report and accounts in April. Our revenue and earnings forecasts are not substantially changed and certainly not by enough to alter our view that Prodware’s shares are undervalued. Our debt figures are significantly changed (up by €12m FY16e) following the one-off heavy investment in new product development in FY15. Details of the changes are shown overleaf.

Balance sheet set up for growth

Following the year end the company has completed the restructuring of its debt and it is perhaps only now that the commitment to the 2016-21 drive for growth has become clear. With nearly €80m of restructured debt in place, Prodware has the resources to finance the organic and acquisition driven growth that management has discussed (see our November 2015 note Drive for growth). We suspect that until the delivery of the promised growth becomes more evident, this debt may weigh upon the share price.

Valuation: Discount remains

Prodware’s shares continue to trade at a substantial discount to those of its closest listed comparators (see Exhibit 2). While the acquisition of Qurius and its integration and turnaround have proved more problematic than may have been anticipated, the restructuring and repositioning process now appears complete and the business is well placed to drive growth in both margins and revenues.

Forecasts: Revisions mainly investment in product

We have made little change to our revenues and EBITDA forecasts and the main driver to the change in the EBIT figure has been the increase in the amortisation charge following the heavy investment in capitalised development in FY15. Our forecast for development spend capitalised for FY15 was €18.5m, but the actual spend was substantially ahead of this at €35.7m, following management’s decision to accelerate the development of the new product platforms using outsourced developers/programmers. The difference between our year end debt estimate and the actual result (€45.6m vs €46.5m) was, however, significantly lower because of a considerable reduction in working capital. The increase in spend on product in FY15 and a forecast expansion in working capital for FY16e (back to more normal levels) have led to a higher forecast debt figure and, as a result, to a higher interest charge. Management has stated that the investment in this area will now revert to more normal levels and we have a capitalised development spend estimate of €18.5m for FY16.

Exhibit 1: Forecast revisions

Revenues (new) €m

Revenues (old) €m

EBIT (new) €m

EBIT (old) €m

EPS (new)

EPS (old)

Net debt (new) €m

Net debt (old) €m

FY16e

191.2

190.6

17.2

18.1

1.5

1.8

40.5

28.7

FY17e

206.1

207.7

20.9

22.2

2.0

2.2

28.3

22.7

Source: Edison Investment Research

Valuation: Discount excessive in our view

The table below shows that Prodware continues to trade at significant discounts in both EV/EBITDA and P/E multiples terms to its main listed European comparators. Although the frustrating newsflow relating to the turnaround of Qurius and the ongoing debt levels suggest that some discount is justifiable, we regard the level of discount as excessive. Placing the shares on the average CY16 P/E multiples of Prodware’s closest comparators in margin and business model terms (K3 and Sword, 14.5x) suggests a share price of €22.2.

Exhibit 2: Comparator multiples

Company name

Share price

Currency

Market cap
(m)

EV
(m)

FY1 year end

Revenue Y1
(m)

Revenue Y2
(m)

EBITDA Y1
(m)

EBITDA Y2
(m)

EPS Y1

EPS Y2

EV/
EBITDA Y1
(x)

EV/
EBITDA Y2
(x)

P/E Y1
(x)

P/E Y2
(x)

Linedata Services

40.6

299.2

314.9

Dec-16

176.0

180.2

46.6

48.4

3.0

3.1

6.8

6.5

13.7

13.0

Cegid Group

61.4

570.3

631.8

Dec-16

310.3

323.1

85.7

92.5

3.1

3.5

7.4

6.8

19.6

17.7

Sword Group

22.6

214.2

177.4

Dec-16

162.8

179.7

24.6

28.0

1.5

1.7

7.2

6.3

14.5

13.0

K3

346

£

123.3

135.0

Jun-16

88.3

94.7

13.6

15.8

0.2

0.3

9.9

8.5

14.6

13.1

Prodware

6.3

51.7

98.2

Dec-16

191.2

206.1

35.2

40.7

1.5

2.0

3.0

2.7

4.1

3.2

Source: Thomson, Edison Investment Research. Note: Prices as at 25 May 2016.

Exhibit 3: Financial summary

Year end December

€000s

2013

2014

2015

2016e

2017e

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

176,397

174,824

181,828

191,219

206,115

EBITDA

 

 

28,520

27,718

27,443

35,163

40,652

Operating Profit (before amort. and except.)

17,710

13,518

15,372

17,163

20,852

Intangible Amortisation

0

0

0

0

0

Exceptionals

(5,503)

(4,589)

(5,579)

0

0

Other

0

0

0

0

0

Operating Profit

12,207

8,929

9,793

17,163

20,852

Net Interest

(3,492)

(3,635)

(3,548)

(3,000)

(2,750)

Profit Before Tax (norm)

 

 

14,218

9,883

11,824

14,163

18,102

Profit Before Tax (FRS 3)

 

 

8,715

5,294

6,245

14,163

18,102

Tax

(47)

(183)

(397)

(1,558)

(1,991)

Profit After Tax (norm)

14,171

9,700

11,427

12,605

16,110

Profit After Tax (FRS 3)

8,668

5,111

5,848

12,605

16,110

Average Number of Shares Outstanding (m)

7.3

8.2

8.2

8.2

8.2

EPS - normalised (c)

 

 

195.0

118.4

140.4

153.7

196.5

EPS - normalised fully diluted (c)

 

 

178.7

112.1

130.8

147.4

188.4

EPS - (IFRS) (c)

 

 

119.2

62.2

72.4

153.7

196.5

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

16.2

15.9

15.1

18.4

19.7

Operating Margin (before GW and except.) (%)

10.0

7.7

8.5

9.0

10.1

BALANCE SHEET

Fixed Assets

 

 

117,640

125,549

145,231

147,531

148,781

Intangible Assets

95,794

102,667

124,206

127,706

129,956

Tangible Assets

8,722

9,279

7,645

6,445

5,445

Investments

13,124

13,603

13,380

13,380

13,380

Current Assets

 

 

92,192

98,356

81,834

127,993

142,511

Stocks

1,698

2,021

135

0

0

Debtors

81,579

90,894

72,637

80,400

90,740

Cash

8,915

5,441

9,062

47,593

51,771

Other

0

0

0

0

0

Current Liabilities

 

 

(86,198)

(85,242)

(75,162)

(78,517)

(86,175)

Creditors

(67,715)

(68,389)

(56,872)

(60,227)

(67,885)

Short term borrowings

(18,483)

(16,853)

(18,290)

(18,290)

(18,290)

Long Term Liabilities

 

 

(28,100)

(33,877)

(41,423)

(73,923)

(65,923)

Long term borrowings

(24,505)

(29,760)

(37,295)

(69,795)

(61,795)

Other long term liabilities

(3,595)

(4,117)

(4,128)

(4,128)

(4,128)

Net Assets

 

 

95,534

104,786

110,480

123,084

139,194

CASH FLOW

Operating Cash Flow

 

 

22,611

13,485

34,889

26,332

33,228

Net Interest

(3,132)

(2,895)

(2,768)

0

0

Tax

0

0

397

0

0

Capex

(20,550)

(20,951)

(37,391)

(20,300)

(21,050)

Acquisitions/disposals

(597)

0

0

0

0

Financing

9,598

4,130

(57)

0

0

Dividends

0

0

0

0

0

Net Cash Flow

7,930

(6,231)

(4,930)

6,032

12,178

Opening net debt/(cash)

 

 

42,001

34,071

41,172

46,523

40,492

HP finance leases initiated

0

0

0

0

0

Other

0

(870)

(421)

(0)

0

Closing net debt/(cash)

 

 

34,071

41,172

46,523

40,491

28,314

Source: Prodware accounts, Edison Investment Research

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