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SNP Schneider-Neureither & Partner — Q1 organic growth was 9%

SNP Schneider-Neureither & Partner — Q1 organic growth was 9%

Growth slowed in Q1, as the group focused its attention on delivering its strong backlog. Nevertheless, business remains healthy and management affirmed its guidance. Activity remained busy in Q1, including the issuing of €40m of loan notes, repayment of a corporate bond, a reshaping of the group structure and the creation of a third training academy in Berlin. Separately, SNP said it is close to acquiring a European SAP consulting and IT company. Given SNP’s strong market position in software-based transformation projects and assuming a sustained high level of activity, we believe the shares remain attractive on c 21x our FY19 earnings.

Katherine Thompson

Written by

Katherine Thompson

Director

SNP Schneider-Neureither & Partner

Q1 organic growth was 9%

Q1 results

Software & comp services

2 May 2017

Price

€39.90

Market cap

€199m

Net cash (€m) as at 31 March 2017

12.2

Shares in issue

4.98m

Free float

65.9%

Code

SHF

Primary exchange

Frankfurt (Xetra)

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.2)

(4.4)

35.1

Rel (local)

(8.6)

(9.2)

11.8

52-week high/low

€49.09

€26.06

Business description

SNP Schneider-Neureither & Partner (SNP) is a software and consulting business focused on supporting customers in implementing change, and rapidly and economically tailoring IT landscapes to new situations. It has developed a proprietary software product called SNP Transformation Backbone with SAP Landscape Transformation software (T-B).

Next events

AGM

31 May

Q2 results

28 July

Q3 results

27 October

Analysts

Richard Jeans

+44 (0)20 3077 5700

Katherine Thompson

+44 (0)20 3077 5730

SNP Schneider-Neureither & Partner is a research client of Edison Investment Research Limited

Growth slowed in Q1, as the group focused its attention on delivering its strong backlog. Nevertheless, business remains healthy and management affirmed its guidance. Activity remained busy in Q1, including the issuing of €40m of loan notes, repayment of a corporate bond, a reshaping of the group structure and the creation of a third training academy in Berlin. Separately, SNP said it is close to acquiring a European SAP consulting and IT company. Given SNP’s strong market position in software-based transformation projects and assuming a sustained high level of activity, we believe the shares remain attractive on c 21x our FY19 earnings.

Year end

Revenue
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/15

56.2

3.4

58.8

34.0

67.9

0.9

12/16

80.7

5.7

94.4

39.0

42.3

1.0

12/17e

97.5

9.0

121.3

45.0

32.9

1.1

12/18e

110.5

11.5

155.8

52.0

25.6

1.3

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

Q1 results: Book-to-bill ratio remained healthy at 1.13

Group revenue grew by 17% to €21.6m, representing 9% organic growth and c €1.5m from Harlex, which was acquired in late 2016. Professional services revenues rose 23%, including 13% organic growth. This figure is probably a better guide to the group’s underlying growth, as lumpier, higher-margin, licence revenue fell by 22%. While incoming orders dipped 7% to €24.4m, the book-to-bill ratio remained healthy at 1.13. The EBITDA loss was €1.8m and the EBIT loss was €2.4m. After taking into account one-off costs the EBITDA margin was c 4% and the EBIT margin was c 1%. The group ended the period with €53.9m in cash and €41.7m debt, of which €39.6m is long-term, for net cash of €12.2m. Outstanding acquisition liabilities and a pension deficit take adjusted net cash to €2.3m.

Possible acquisition

SNP said that it is pursuing the acquisition of a European SAP consulting and IT company. SNP said the target operates globally, specialising in the areas of SAP services, software development and cloud provisioning. SNP says the discussions are ongoing between the two parties and are very close to being concluded.

Guidance and forecasts: Maintained all round

Management maintained its guidance for FY17 revenue of €96-100m, organic growth of 10-15% and EBIT margins of 9-11%. After including acquisitions, the EBIT margin could range from 7-12%. We have maintained all of our forecasts.

Valuation: Strong growth play in the ERP space

The stock trades on c 33x our FY17 earnings, which falls to c 26x in FY18 and to c 21x in FY19. Our discounted cash-flow (DCF) model values the shares at €46, c 15% above the current share price. However, our model is based on conservative assumptions and takes no account of any acquisitions.

Q1 results: Book-to-bill ratio remains healthy at 1.13

Group revenue grew by 17% to €21.6m, representing 9% organic growth and c €1.5m from Harlex Consulting, which was acquired in late 2016. Incoming orders dipped 7% to €24.4m, partly reflecting the focus on delivering the strong backlog. Nevertheless, the book-to-bill ratio remained healthy at 1.13. Professional services revenues grew by 23% to €19.1m, including organic growth of 13%. However, licence revenue fell by 22% to €1.7m, as a result of orders that had been expected to be booked in Q1 having been brought forward into Q4 due to incentives for sales people. Maintenance revenue strengthened by 5% to €0.8m, reflecting the addition from perpetual licence sales made last year. Employee numbers grew by 10 over the quarter (134 or 23% over 12 months) to 722. Operating costs grew by 42% to €23.4m, or by c 26% to €20.8m when excluding one-off costs. Within that figure, personnel costs rose by 38% to €14.7m. The EBITDA loss was €1.8m (negative 8.4% margin), while the EBIT loss was €2.4m (negative 11.1% margin). After taking into account various one-off costs, outlined below, the EBITDA margin was c 4% and the EBIT margin was c 1%. This implies that the one-off costs were c €2.65m. Utilisation rates remain strong, particularly in the DACH countries and in the UK (the acquired Harlex). However, utilisation rates are lower in Asia and management is taking action to resolve this. While Q1 interest looks high at €0.6m, it includes a €0.4m premium paid on the corporate bond that was redeemed.

Exhibit 1: Quarterly analysis

€000s

2016

2016

2016

2016

2016

2017

2017

2017

2018

Q1

Q2

Q3

Q4

FY

Q1

Q2-Q4e

FYe

FYe

Professional services

15,516

16,558

15,953

18,613

66,640

19,089

61,411

80,500

91,652

Licences

2,216

2,425

3,258

4,101

12,000

1,733

12,267

14,000

15,000

Maintenance

742

457

416

430

2,045

776

2,224

3,000

3,850

Total revenue

18,474

19,440

19,627

23,144

80,685

21,598

75,902

97,500

110,502

Other operating income*

200

148

150

730

1,228

235

 

 

 

Cost of materials

(1,928)

(2,037)

(1,965)

(2,346)

(8,276)

(2,260)

 

 

 

Personnel costs

(10,604)

(11,382)

(11,399)

(13,822)

(47,207)

(14,657)

 

 

 

Other operating expenses

(4,174)

(3,986)

(4,209)

(5,442)

(17,811)

(6,692)

 

 

 

Other taxes

(22)

(27)

(21)

(25)

(95)

(28)

 

 

 

Op costs (before depreciation)

(16,528)

(17,284)

(17,444)

(20,905)

(72,161)

(23,402)

(62,242)

(85,644)

(95,899)

Adjusted EBITDA

1,946

2,156

2,183

2,239

8,524

(1,804)

13,660

11,856

14,603

Depreciation

(323)

(372)

(399)

(573)

(1,667)

(594)

(1,483)

(2,077)

(2,393)

Adjusted operating profit (EBIT)

1,623

1,784

1,784

1,666

6,857

(2,398)

12,177

9,779

12,209

Operating Margin

8.8%

9.2%

9.1%

7.2%

8.5%

(11.1%)

16.0%

10.0%

11.0%

Net interest

(191)

(268)

(141)

(537)

(1,137)

(577)

(223)

(800)

(750)

Edison profit before tax (norm)

1,432

1,516

1,643

1,129

5,720

(2,975)

11,954

8,979

11,459

Associates

0

(1)

0

9

8

0

0

0

0

Profit before tax (FRS 3)

1,432

1,515

1,643

1,138

5,728

(2,975)

11,954

8,979

11,459

New orders and backlog

2016

2016

2016

2016

2016

2017

 

 

 

€000s

Q1

Q2

Q3

Q4

FY

Q1

 

 

 

Incoming orders

26,200

19,900

26,200

23,300

95,600

24,400

 

 

 

Quarterly revenues

18,474

19,440

19,627

23,144

80,685

21,598

 

 

 

Book-to-bill ratio

1.42

1.02

1.33

1.01

1.18

1.13

 

 

 

Backlog

28,700

29,300

36,200

39,300

 

40,800

 

 

 

Source: SNP (historicals), Edison Investment Research (forecasts)

SNP highlighted several Q1 one-off costs, which we estimate totalled c €2.65m:

1.

The adjustment of the group structure in the US and Germany.

2.

The development of a second training academy in Berlin, Germany.

3.

Preparations for the planned legal conversion of SNP AG into a European stock corporation (SE).

4.

Investment expenses and start-up losses resulting from the intensified international sales strategy with a twin emphasis on the US and SNP Applications.

5.

The ongoing integration of corporate acquisitions in the past two years and related expenses.

6.

Expenses related to the issuance of the borrower’s note loan.

7.

Legal and consulting expenses related to the group’s acquisition strategy.

8.

Expenses related to the recruitment of senior employees.

9.

Increased research and development expenses to increase the degree of automation, including through the use of artificial intelligence in transformation projects.

10.

Additional extraordinary restructuring expenses.

There was a Q1 operating cash out flow of €6.3m. This reflected the €2.3m after-tax loss, with €0.6m depreciation added back, less €1.3m from other non-cash items and a €3.2m outflow from working capital. After net investment of €0.8m, the free cash outflow was €7.1m. As with many software and IT services businesses, Q1 is typically SNP’s weakest quarter. During Q1, SNP issued a €40m multi-tranche loan note with investors, with a blended average initial yield of 1.41% pa. Due to the strong investor demand, the amount was increased by €10m to €40m. Additionally, SNP redeemed its outstanding 6.25% €10m bearer bond at 103% plus accrued interest.

Exhibit 2: Balance sheet financial development

€m

31-Dec-15

31-Mar-16

30-Jun-16

30-Sep-16

31-Dec-16

31-Mar-17

Cash

(13.8)

(9.2)

(7.1)

(36.0)

(31.9)

(53.9)

Short-term debt

2.6

2.1

2.3

2.4

12.8

2.1

Long-term debt

12.3

11.8

11.3

10.8

0.4

39.6

Net debt/(cash)

1.2

4.8

6.4

(22.8)

(18.7)

(12.2)

RSP acquisition liabilities

2.5

2.5

2.5

2.5

2.5

2.5

Astrums/Hartungs acquisition liabilities

1.9

1.9

1.9

1.9

1.9

Harlex acquisition liabilities

4.0

4.0

Corporate bond fair value premium

0.5

0.5

0.5

0.6

0.0

0.0

Pension deficit

1.2

1.3

1.4

1.4

1.5

1.5

Adjusted net debt/(cash)

5.4

11.0

12.7

(16.4)

(8.7)

(2.3)

Source: SNP accounts

Conversion to a stock corporation under EU Law (Societas Europaea/SE)

In order to further promote the internationalisation of the SNP group, the company will propose the legal conversion of SNP Schneider-Neureither & Partner AG into a stock corporation under EU law (Societas Europaea/SE) as its annual general meeting on 31 May 2017. The corporate structure, corporate governance of the company and the listing of the share on the stock exchange remains unchanged.

Possible acquisition

SNP said that it is pursuing the acquisition of a European SAP consulting and IT company. The target is a global business, specialising in the areas of SAP services, software development and cloud provisioning. It generated revenue in the lower end of the double-digit million range in the past fiscal year and has more than 200 employees.

SNP says the discussions between the two parties are ongoing and are very close to being concluded. The acquisition is subject to the completion of a final purchase agreement and approval from the relevant bodies. The transaction will be financed from the group’s existing cash resources and management’ goal is to conclude the transaction shortly.

Exhibit 3: Financial summary

€000s

2014

2015

2016

2017e

2018e

2019e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

30,480

56,236

80,685

97,500

110,502

120,745

Cost of sales

0

0

0

0

0

0

Gross Profit

30,480

56,236

80,685

97,500

110,502

120,745

EBITDA

 

 

862

5,484

8,524

11,856

14,603

17,066

Adjusted Operating Profit

 

 

(66)

4,222

6,857

9,779

12,209

14,529

Amortisation of acquired intangibles

0

0

0

0

0

0

Exceptionals

1,505

356

0

0

0

0

Associates

0

(3)

8

0

0

0

Operating Profit

1,439

4,575

6,865

9,779

12,209

14,529

Net Interest

(66)

(828)

(1,137)

(800)

(750)

(700)

Profit Before Tax (norm)

 

 

(132)

3,394

5,720

8,979

11,459

13,829

Profit Before Tax (FRS 3)

 

 

1,373

3,747

5,728

8,979

11,459

13,829

Tax

(344)

(1,195)

(1,517)

(2,694)

(3,438)

(4,149)

Profit After Tax (norm)

(477)

2,198

4,203

6,285

8,022

9,680

Profit After Tax (FRS 3)

1,028

2,552

4,211

6,285

8,022

9,680

Minority interest

(40)

0

(147)

(248)

(267)

(289)

Adjustments for normalised earnings

0

0

0

0

0

0

Net income (norm)

(517)

2,198

4,056

6,038

7,754

9,391

Net income (FRS 3)

988

2,552

4,064

6,038

7,754

9,391

Average Number of Shares Outstanding (m)

3.7

3.7

4.3

5.0

5.0

5.0

EPS - normalised (c)

 

 

(13.9)

58.8

94.4

121.3

155.8

188.7

EPS - normalised & fully diluted (c)

 

 

(13.9)

58.8

94.4

121.3

155.8

188.7

EPS - FRS 3 (c)

 

 

26.6

68.3

94.6

121.3

155.8

188.7

Dividend per share (c)

13.00

34.00

39.00

45.00

52.00

60.00

Gross Margin (%)

100.0

100.0

100.0

100.0

100.0

100.0

EBITDA Margin (%)

2.8

9.8

10.6

12.2

13.2

14.1

Adjusted Operating Margin (%)

-0.2

7.5

8.5

10.0

11.0

12.0

BALANCE SHEET

Fixed Assets

 

 

8,291

15,243

29,054

28,927

28,744

28,622

Intangible Assets

5,190

11,675

24,179

24,179

24,179

24,179

Tangible Assets

1,231

1,999

3,161

3,034

2,851

2,728

Other

1,871

1,570

1,714

1,714

1,714

1,714

Current Assets

 

 

17,882

29,996

59,478

58,876

59,775

70,115

Stocks

0

0

0

0

0

0

Debtors

11,286

16,084

27,201

32,870

37,253

40,706

Cash

5,681

13,769

31,914

25,644

22,158

29,045

Current Liabilities

 

 

(9,782)

(13,703)

(34,382)

(28,934)

(32,819)

(35,710)

Creditors

(9,182)

(11,101)

(21,583)

(26,834)

(30,719)

(33,610)

Short term borrowings

(600)

(2,602)

(12,799)

(2,100)

(2,100)

(2,100)

Long Term Liabilities

 

 

(2,501)

(15,513)

(5,576)

(5,576)

(1,076)

3,424

Long term borrowings

(1,650)

(12,344)

(434)

(434)

(434)

(434)

Other long term liabilities

(851)

(3,169)

(5,141)

(5,141)

(641)

3,859

Net Assets

 

 

13,890

16,024

48,575

53,294

54,625

66,451

CASH FLOW

Operating Cash Flow

 

 

2,579

1,879

1,005

11,369

14,050

16,462

Net Interest

(66)

(167)

53

(800)

(750)

(700)

Tax

(1,102)

(554)

(412)

(2,514)

(3,209)

(3,872)

Capex

(701)

(1,779)

(3,451)

(1,950)

(2,210)

(2,415)

Acquisitions/disposals

(500)

(3,228)

(5,923)

0

(9,127)

0

Shares issued

0

0

30,129

0

0

0

Dividends

(335)

(483)

(1,264)

(1,676)

(2,240)

(2,588)

Net Cash Flow

(124)

(4,332)

20,137

4,428

(3,485)

6,887

Opening net debt/(cash)

 

 

(3,505)

(3,431)

1,176

(18,681)

(23,109)

(19,624)

HP finance leases initiated

0

0

0

0

0

0

Other

51

(275)

(281)

0

0

0

Closing net debt/(cash)

 

 

(3,431)

1,176

(18,681)

(23,109)

(19,624)

(26,511)

Source: SNP Schneider-Neureither & Partner accounts, Edison Investment Research

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 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
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by SNP Schneider-Neureither & Partner 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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. 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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

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NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

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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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Real Estate

Palace Capital — Net asset value growth

Palace Capital (Palace) has released a positive portfolio and trading update detailing disposals made in FY17, significant ongoing projects at ten properties and the possible acquisition of a fully let office building for c £20m, which would more than replace rents at properties sold in the year. These developments demonstrate Palace’s ability to add shareholder value through active management and to recycle capital efficiently. We have revised our estimates and note that management expects the March 2017 NAV to beat market expectations.

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