EUR 150.00 For Business Accounts Only

LSI Software – High potential of POSitive Cinema

In our initiating report for LSI Software (from May 16, 2016) we underlined a high potential of the Company’s new software product for cinemas – POSitive Cinema. At that time the product was just launched and it has taken around two years for the first reference contracts to settle. Now, it seems that the ‘go to the market’ stage is behind us and POSitive Cinema may generate significant revenues for the Company in the future.

We expect that thanks to the recognition of high margin cinema contracts the Company will book PLN 2.1 million net profit in 3Q19 (+50% yoy). Moreover, we expect more contracts to come in the future, as LSI has been already negotiating further Arabian, Israeli and American contracts. We also expect that the sale of Positive Cinema will become a strong trigger for the Company’s growth in the upcoming years.

Currently, LSI software trades at 2019E P/E and EV/EBITDA multiples of 7.3x and 3.4x, respectively, which implies an over 50% discount vs local peers. We cannot see a viable argument for such a big discount and we uphold our LT fundamental and ST market relative recommendations for the Company at Buy and Overweight, respectively. We also upgrade our 12M EFV of LSI’s equities to PLN 23.5 per share (from PLN 16.5; up 42%) thanks to increasing forecasts (related to POSitive Cinema) and valuation horizon forward shift.

We expect that LSI’s capitalization growth should stem from two sources: (i) firstly, we count on a dynamic growth of profits in 2020/2021, and (ii) finally we expect LSI’s valuation re-rating to at least 10x leading P/E multiple, which would still imply a 30% discount vs larger local peers. At our TP of PLN 23.5 per share LSI would trade at P/E multiples of 10x/9x in 2020E/ 2021E which seems very attractive for a dividend company with a dynamic growth profile.