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Entersoft | Double digit earnings momentum sustained

M&A mode ‘ON’ further expanding the client base… – Entersoft recently announced the acquisition of 75% in Romanian BIT Software. This is expected to broaden Entersoft’s addressable market by some €200m, while adding a client base of c270 ERP installations in Romania, with minimal penetration in niche products. With some €3m of sales, BIT Software, will initially add some 7-9% on our group sales estimates, expanding to c12% by 2025. In the meantime, the announced acquisition of Greek LogOn (early January), should add another c€1.5m on our 2022 sales and a base of more than 150 clients that will be handled directly.

Mild changes to our forecasts; still eyeing robust growth in 2022 – We have recalibrated our current year forecasts, fine tuning our sales estimates by activity for higher services and maintenance recurring revenues plus the addition of new licenses and SaaS from the expanding client base driven by acquisitions, albeit assuming a slower pace for new projects on the back of a challenging environment in the near term. These translate into a c2% sale upgrade to our 2022e (€31.4m, +31% yoy). On the profitability front, we have adjusted for elevated costs, driven by the add-on personnel and inflationary pressures. With these in mind, we anticipate a margin erosion in 2022 EBIT (-2.6pps yoy) but still envisage quite robust EBIT growth (+19% at €8.2m), some €1m below our earlier forecast.

Organic and inorganic growth feed in; profitability to double by 2025 – Looking ahead, we believe the increasing operational leverage owing to both organic and M&A driven growth will gradually feed in the numbers. Following c17% sales CAGR over 2015-21 (mostly organic), we model c23% CAGR through to 2025e, which looks more than feasible in our view given the digitization push, new products (e.g. HR/payroll), an increase in the addressable market and the solid track record. The growth in revenues will filter through to c24% EBIT CAGR in the same period, quite a compelling growth profile among EU peers, despite the tough comparative (55% EBIT growth in 2021).

Strong cash generation ability and balance sheet optionality – Entersoft is highly cash generative thanks to its solid organic growth and high margins (at the high-end within the global software space). Given its strong financial position (€9m net cash in end-2021) it is well-placed to fund new potential acquisitions while, at the same time, capturing the growth spree coming from RRF in Greece and Romania (digitization for businesses funds at c€1.1-1.3bn in both countries). Overall, we see plenty of balance sheet optionality which could be manifested through new M&A or potentially heftier returns to shareholders.

Valuation – We see Entersoft as an attractive way to gain exposure to the digitization theme, especially given attractive valuation relative to EU tech companies. Our DCF-based valuation (predicated at a higher 8.7% WACC) yields a valuation range between €6.1 and €8.4 per share on our updated forecasts and a baseline intrinsic value of €7.0/share (from €7.4 previously). Our valuation indicates a 2023e EV/EBITDA multiple of c16x, warranted in our view by the merits of the thesis and the ample scope for sustainable growth.