EUR 20.00 For Business Accounts Only

Asseco Business Solutions – 4Q18 results’ forecast

To maintain brisk growth in mid-2017 the management of the Company decided to supplement the organic growth by a non-organic component via takeover of Macrologic (local mid-sized ERP competitor). The rationale for the transaction did not rise the eye-brows; it allowed for acquisition of new client base that otherwise would prove very hard to reach (low propensity to switch ERP vendors among local companies) and removed the bottle-necks in HR sourcing area – an impediment that Asseco BS has been facing. The price paid in the transaction was, however, in our view quite high (>14x/ almost 7x trailing P/E/ EV/EBITDA) – minding the fact that Macrologic was a no-growth company (practically flat revenues and profits during preceding few years). Hence, in our view, it rests with the potential synergies following the takeover whether this deal proves value-accretive for Asseco BS’s shareholders or not. Whereas we do not see much scope for revenue synergies, the room for cost synergies does exist: Macrologic’s operating costs seemed bloated compared to Asseco BS’s ((i) general administration costs at 14% of sales versus mere 4.3% in case of Asseco BS, (ii) revenue per employee almost 40% lower than at Asseco BS). Whereas the management of Asseco BS has not revealed to the public the size of the expected synergies on Macrologic takeover (albeit confirmed that (i) they are clearly attainable due to elimination of doubling back-offices, rationalization of the two companies branch networks, optimization of business processes and boosts to efficiency, and (ii) their emergence in the Company’s P&L may take c. two years from the moment of the takeover in mid-2017), we believe that assuming them (on a recurring basis) in the vicinity of Macrologic’s general administration costs prior the takeover (c. PLN 7 million per annum) constitutes a reasonable assumption; in such case, the takeover of Macrologic would prove marginally value-accretive for shareholders of Asseco BS (the breakeven point on transaction dwells, according to our estimates, at c. PLN 6 million of recurring OPEX synergies per annum – with the deal value-accretive/ value-dilutive above/ below that level). In mid-2019 two years from the Macrologic takeover will pass; hence, the coming few quarters will show whether the expected synergies on the takeover are attained or not. Whereas the key appealing features of Asseco BS as a business concept and investment exposure (almost pure (multiple-monetizations-based) proprietary ERP software house with large recurring revenue component (multi-year subscription-based sales), robust OCFs & low capex needs translating into strong (and recurring) cash conversion and uninterruptedly growing dividend capacity, lack of meaningful exposure to capricious and risky public sector, healthy growth profile going forward, etc.) remain intact, past month’s hike of the Company’s share market price closed the perceived (by us) undervaluation gap (since December 9 – the date when we upgraded our LT fundamental rating for the Company’s equities to a Buy – the share market price of Asseco BS advanced by 16%, outperforming the WIG index by 14 pp). In consequence, we cut our LT fundamental recommendation for equities of Asseco Business Solutions to a Hold (from Buy). Lastly, seeing no clear-cut positive catalysts on the near-term horizon, in ST market-relative terms we stay neutral on the shares of the Company.