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Prodware — Update 13 December 2016

Prodware — Update 13 December 2016

Prodware

Katherine Thompson

Written by

Katherine Thompson

Director

Prodware

Reshaping the business

H116 results

Software & comp services

13 December 2016

Price

€6.9

Market cap

€57m

Net debt (€m) at end H116

53.2

Shares in issue

8.2m

Free float

70.2%

Code

ALPRO

Primary exchange

Alternext Paris

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.2)

(5.1)

(4.7)

Rel (local)

(7.6)

(10.6)

(8.8)

52-week high/low

€7.92

€5.64

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 events

Q4 revenues

14 February 2017

Analyst

Katherine Thompson

+44 (0)20 3077 5730

Prodware Prodwareis a research client of Edison Investment Research Limited

Prodware is making progress with its strategy to refocus the company on profitable business lines and cloud-based solutions. This is reducing revenues in the short term but should ultimately result in higher recurring revenues and more sustainable profitability. We have revised our forecasts to reflect current trading and the transition to subscription-based revenues. On our reduced forecasts, Prodware continues to trade at a discount to peers; growth in recurring revenues combined with margin expansion should start to narrow this discount.

Year end

Revenue (€m)

PBT*
(€m)

Diluted EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/14

174.8

9.9

1.14

0.0

6.1

N/A

12/15

181.8

11.8

1.31

0.0

5.3

N/A

12/16e

170.0

6.9

0.73

0.0

9.5

N/A

12/17e

175.2

6.8

0.71

0.0

9.8

N/A

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

H116 results show weaker demand and restructuring

Prodware reported H116 revenues 7.2% lower than a year ago (5.3% in constant currency), reflecting the disposal of a business, weaker bookings in France and the transition to SaaS-based business. Lower staff costs helped maintain the EBITDA margin, although higher amortisation resulted in a 29% decline in EBIT y-o-y. The Q3 revenue update confirms that while 9M16 revenues declined 7.3% y-o-y, SaaS-based revenues continue to show strong growth.

Estimate changes reflect transition

With the logistical problems that negatively affected demand in France in H116 substantially resolved, the company expects to see better order intake in H216. We have reduced our FY16 and FY17 revenue forecasts to reflect H116 trading as well as the company’s conscious effort to move away from unprofitable business lines. We have also lowered our staff cost assumptions, which reduce the impact of lower revenues on profitability. After factoring in higher net interest expense on the restructured debt, we reduce our normalised EPS forecasts by 51% in FY16 and 63% in FY17.

Valuation: Trading at a discount on all measures

Even after our reduction in estimates, Prodware trades at a discount to peers on all metrics. In our view this reflects its higher gearing and the impact of its transition to a subscription-based business model. While this transition is likely to weigh on profitability in the short to medium term, it should result in a business with a higher level of recurring revenues and more sustainable profitability, and in time should enable Prodware to trade at multiples closer to its peer group.

Review of H116 results

Exhibit 1: Half-yearly results highlights

€m

H116

H115

y-o-y

Revenues

84.5

91.1

-7.2%

EBITDA*

17.1

18.3

-6.8%

EBITDA margin

20.2%

20.1%

0.1pp

EBIT*

7.4

10.4

-29.2%

EBIT margin

8.7%

11.4%

-2.7pp

Reported basic EPS (€)

0.55

0.78

-29.3%

Reported diluted EPS (€)

0.48

0.72

-33.1%

Net debt

53.2

32.7

63%

Source: Prodware. Note: *Excludes restructuring costs.

Prodware reported a 7.2% decline in revenues in H116 (a 5.3% decline on a like-for-like basis). Despite the revenue decline, EBITDA only fell 6.8% and the margin was maintained at 20%. While external purchases and goods consumed were higher than a year ago, staff costs were lower. Headcount has reduced over the last 18 months, from 1,424 at the end of 2014, to 1,275 by the end of 2015 and 1,236 by the end of H116. The company expects to maintain headcount at a similar level through H216 and FY17.

During 2015, €14.8m of development costs were capitalised – this higher level resulted in higher amortisation during H116 (+€1.9m y-o-y), which resulted in adjusted EBIT 29% lower than a year ago. The restructuring of the ex-Qurius activities is substantially complete, with only €0.1m charged in one-off expenses in H116 compared to €2.7m in H115.

The refinancing of debt in January 2016 resulted in net finance charges €0.9m higher than a year ago. The tax rate was 7% for H116, lower than our 11% rate for FY16.

The company ended H116 with a net debt position of €53.2m, up from €46.5m at the end of 2015.

Q316 revenue update

On 15 November, the company released Q316 revenue data: revenues declined 7.8% y-o-y to €32.3m (-4.4% in constant currency), with 9M16 revenues of €116.8m (-7.3% y-o-y, -5.1% constant currency).

Business update

Mixed regional performance

Exhibit 2: Revenues by geography

€m

H116

H115

y-o-y

Benelux

11.87

14.65

-18.9%

France & Maghreb

46.76

51.24

-8.7%

Germany

5.48

6.30

-13.0%

Israel

6.34

5.04

25.9%

Spain

11.65

10.28

13.3%

UK

2.45

3.56

-31.1%

Total

84.55

91.06

-7.2%

Source: Prodware

■

France – the company struggled to sign contracts in H116, hampered by the floods and strikes across France. The situation has since improved and new business should be stronger in H216.

■

UK – revenues declined 31% y-o-y. The Waste Management business was sold to NAVISION in March 2016. While the Waste Management solution was sold across Europe, 80% of the revenues were generated in the UK.

■

Benelux – as the business saw lower demand, staff in this region were used in other countries in order to maintain utilisation rates.

■

Spain and Israel – both countries saw good demand for SaaS solutions.

Microsoft cloud-based solution launches

Prodware launched its Microsoft 123 solution in September. This is a Microsoft Dynamics NAV-based solution designed for SMEs, which integrates ERP with CRM, Outlook, telephony, business intelligence and back office functions. It has been designed to be simple to implement and therefore we would not expect adoption of this solution to drive material service revenues. However, it is a SaaS-based solution so could provide an easy way for SMEs to access ERP software and provide a growing level of recurring revenues for Prodware.

Microsoft Dynamics 365 was launched on 1 November. This is a Microsoft Dynamics AX-based solution also designed on a SaaS basis and integrated with Microsoft Office 365. Prodware expects initially to see demand for this in the regions that have typically been interested in SaaS solutions, ie Spain and Israel, and expects a slower uptake in France.

Currently c 87% of revenues are generated from Microsoft-based solutions. The company wants to increase its focus on its Microsoft product range, so we would expect this proportion to increase over time.

Strategy: Focus on profitability and recurring revenues

The company has intentionally walked away from or disposed of business that is not profitable enough, including some hardware contracts and the waste management business. This has resulted in a large drop in revenues, but should have a smaller impact on profits. As Microsoft is heavily promoting its SaaS-based solutions, Prodware is seeing strong growth in its SaaS-based revenues (+31% y-o-y in H116, +44% y-o-y 9M16). As we have highlighted before, this results in lower initial licence revenues but stronger recurring revenues.

To improve the flexibility of the cost base, management plans to keep headcount at the current level, using sub-contractors during busy periods where necessary. The company is centralising purchasing in order to manage administrative costs more efficiently.

Outlook and changes to forecasts

The company sees a stronger order book for H2. We have reduced our revenue forecasts for FY16 and FY17 by 11% and 15%, respectively, to reflect the impact of lower H116 revenues. At the same time, we have reduced our staff expense forecasts to reflect the lower than expected headcount. Overall, this results in a reduction to our EBITDA forecast of 15% in FY16 and 26% in FY17. We have factored in higher net interest expense for both years and reduced the tax rate for FY16 from 11% to 8% to reflect the lower rate in H116. Overall, this results in a 51% cut to FY16e normalised EPS and a 63% cut to FY17e EPS.

Exhibit 3: Changes to forecasts

€m

FY16e

FY16e

Change

FY17e

FY17e

Change

Old

New

Old

New

Revenues

191.22

169.89

-11.2%

206.12

175.22

-15.0%

EBITDA

35.16

29.93

-14.9%

40.65

30.04

-26.1%

EBITDA margin

18.4%

17.6%

-0.8pp

19.7%

17.1%

-2.6pp

Normalised EBIT

17.16

11.49

-33.0%

20.85

11.24

-46.1%

Normalised EBIT margin

9.0%

6.8%

-2.2pp

10.1%

6.4%

-3.7pp

Reported EBIT

17.16

11.40

-33.6%

20.85

11.24

-46.1%

Reported EBIT margin

9.0%

6.7%

-2.3pp

10.1%

6.4%

-3.7pp

Normalised net income

12.60

6.23

-50.6%

16.11

6.04

-62.5%

Reported net income

12.60

5.99

-52.5%

16.11

6.04

-62.5%

Normalised diluted EPS (€)

1.47

0.73

-50.6%

1.88

0.71

-62.5%

Reported basic EPS (€)

1.54

0.73

-52.5%

1.96

0.74

-62.5%

Net debt

40.49

41.61

2.8%

28.31

36.16

27.7%

Source: Edison Investment Research

Valuation

On our revised forecasts, Prodware is trading on a modest 9.8x FY17e EPS, at a discount to peers, in our view reflecting its higher gearing and the impact of the business model transition. The revenue decline in FY16 reflects the shift from upfront licensing to subscription licensing, and over time should result in a higher level of recurring revenues. We note that Prodware’s EBITDA margins are within the range of the peer group but EBIT margins are lower, affected by the high level of amortisation relating to recently capitalised development costs. As the company works through its restructuring plan, reshapes the business and starts to pay down debt, we would expect the share price to start to reflect its stronger position.

Exhibit 4: Peer group operating performance

CCY

Market cap

Year end

Revenue growth

EBITDA margin

EBIT margin

FY15

FY16e

FY17e

FY15

FY16e

FY17e

FY15

FY16e

FY17e

Prodware

€

56.6

31-Dec

4.0%

-6.6%

3.1%

15.1%

17.6%

17.1%

8.5%

6.8%

6.4%

Cegid Group

€

556.5

31-Dec

5.8%

10.6%

5.0%

27.2%

27.8%

28.4%

13.3%

15.3%

15.8%

K3 Business Technology*

£

111.2

30-Jun

7.0%

9.0%

3.9%

14.4%

16.4%

17.0%

10.7%

12.1%

12.4%

Linedata Services

€

326.3

31-Dec

9.1%

-1.7%

2.0%

28.3%

29.9%

29.9%

22.0%

24.6%

24.5%

Sword Group

€

264.9

31-Dec

17.5%

17.2%

10.9%

17.8%

15.2%

15.6%

14.1%

11.7%

12.5%

Source: Bloomberg, Edison Investment Research. Note: Priced as at 12 December. *FY15 = year ended 30 June 2016.

Exhibit 5: Peer group valuation metrics

EV/sales (x)

EV/EBITDA (x)

EV/EBIT (x)

P/E (x)

Dividend yield

FY15

FY16e

FY17e

FY15

FY16e

FY17e

FY15

FY16e

FY17e

FY15

FY16e

FY17e

FY15

FY16e

FY17e

Prodware

0.6

0.6

0.6

3.8

3.4

3.4

6.7

9.0

9.2

5.3

9.5

9.8

0.0%

0.0%

0.0%

Cegid Group

2.2

2.0

1.9

8.1

7.2

6.7

16.6

13.0

12.1

23.8

20.0

18.0

2.0%

2.2%

2.5%

K3 Business Technology*

1.3

0.9

0.9

9.4

7.5

7.0

12.6

10.2

9.6

13.4

12.2

11.3

0.6%

0.6%

0.7%

Linedata Services

2.0

0.9

1.0

7.1

6.8

6.7

9.1

8.3

8.1

13.0

12.9

13.0

3.1%

3.5%

3.4%

Sword Group

1.6

0.7

0.8

9.1

9.1

8.0

11.5

11.8

10.0

16.3

16.6

14.3

4.3%

4.2%

4.4%

Source: Bloomberg, Edison Investment Research. Note: Priced as at 12 December. *FY15 = year ended 30 June 2016.

Exhibit 6: Financial summary

€000s

2013

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

176,397

174,824

181,828

169,893

175,223

EBITDA

 

 

28,520

27,718

27,443

29,933

30,038

Operating Profit (before amort. and except.)

17,710

13,518

15,372

11,492

11,238

Intangible Amortisation

0

0

0

0

0

Exceptionals

(5,503)

(4,589)

(5,579)

(89)

0

Other

0

172

31

39

0

Operating Profit

12,207

9,101

9,824

11,442

11,238

Net Interest

(3,492)

(3,635)

(3,548)

(4,623)

(4,457)

Profit Before Tax (norm)

 

 

14,218

9,883

11,824

6,869

6,781

Profit Before Tax (FRS 3)

 

 

8,715

5,466

6,276

6,819

6,781

Tax

(47)

(183)

(397)

(546)

(746)

Profit After Tax (norm)

14,171

9,872

11,458

6,363

6,035

Profit After Tax (FRS 3)

8,668

5,283

5,879

6,274

6,035

Average Number of Shares Outstanding (m)

7.3

8.2

8.2

8.2

8.2

EPS - normalised (€)

 

 

1.95

1.20

1.41

0.76

0.74

EPS - normalised fully diluted (€)

 

 

1.79

1.14

1.31

0.73

0.71

EPS - (IFRS) (€)

 

 

1.19

0.64

0.73

0.75

0.74

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

EBITDA Margin (%)

16.2

15.9

15.1

17.6

17.1

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

10.0

7.7

8.5

6.8

6.4

BALANCE SHEET

Fixed Assets

 

 

117,640

125,549

145,231

147,090

148,590

Intangible Assets

95,794

102,667

124,206

127,146

129,646

Tangible Assets

8,722

9,279

7,645

6,564

5,564

Investments

13,124

13,603

13,380

13,380

13,380

Current Assets

 

 

92,192

98,356

81,834

126,507

127,637

Stocks

1,698

2,021

135

0

0

Debtors

81,579

90,894

72,637

73,681

75,360

Cash

8,915

5,441

9,062

52,826

52,276

Other

0

0

0

0

0

Current Liabilities

 

 

(86,198)

(85,242)

(75,162)

(80,776)

(83,371)

Creditors

(67,715)

(68,389)

(56,872)

(57,182)

(59,777)

Short term borrowings

(18,483)

(16,853)

(18,290)

(23,594)

(23,594)

Long Term Liabilities

 

 

(28,100)

(33,877)

(41,423)

(74,966)

(68,966)

Long term borrowings

(24,505)

(29,760)

(37,295)

(70,838)

(64,838)

Other long term liabilities

(3,595)

(4,117)

(4,128)

(4,128)

(4,128)

Net Assets

 

 

95,534

104,786

110,480

117,855

123,890

CASH FLOW

Operating Cash Flow

 

 

22,611

13,485

34,889

29,565

29,408

Net Interest

(3,132)

(2,895)

(2,768)

(3,662)

(3,657)

Tax

0

0

0

0

0

Capex

(20,552)

(20,951)

(37,390)

(20,314)

(20,300)

Acquisitions/disposals

(597)

0

0

0

0

Financing

9,598

4,130

(57)

(450)

0

Dividends

0

0

0

(245)

0

Net Cash Flow

7,928

(6,231)

(5,326)

4,895

5,451

Opening net debt/(cash)

 

 

42,001

34,073

41,172

46,523

41,606

HP finance leases initiated

0

0

0

0

0

Other

0

(868)

(25)

22

0

Closing net debt/(cash)

 

 

34,073

41,172

46,523

41,606

36,156

Source: Prodware accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
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New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Research: Industrials

China Water Affairs Group Limited — Update 13 December 2016

China Water Affairs Group Limited

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