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Entersoft | In a secular sweet spot - initiation of coverage

Software leader with broad offering, 55-60% recurring revenues and multi-sector exposure – Entersoft is one of the leading Greek IT software companies involved in the development and distribution of its own IP-based software and the provision of aftersales services to businesses. The company has a broad product offering ranging from fully integrated ERP to niche solutions and enjoys a diversified portfolio of active clients spanning across many industries. Entersoft operates both a licensing & maintenance (L&M) and software-as-a-service (SaaS) model, thereby combining the agility of SaaS with the front-loaded nature of the profitability of on-premise solutions. This balanced contract portfolio is manifested in a significant recurring revenue base, which is close to c55-60% of group revenues.

… facing a confluence of supportive trends and secular drivers – The software industry is in secular growth as companies focus on improving their productivity and agility through digital solutions. In Greece’s case, demand is further underpinned by idiosyncratic factors such as the low adoption levels of CRM/warehouse mgt systems (WMS), the fragmented enterprise population and the need for upgrades to outdated legacy systems. These trends are coupled with a significant upcoming boost from €7bn of projects to be financed by the Recovery Fund (RRF) till 2026. We believe the latter could expand Entersoft’s addressable market by €700-800m by 2026, effectively tripling the size of the current market (€350m).

Doubling of revenues over 2021e-2025e looks hardly overambitious, with further optionality from faster organic growth… – Entersoft has delivered 12% sales CAGR over 2015-20 (mostly organic). Looking ahead, following 47% growth in 2021e (mostly organic) we project c20% CAGR through to 2025e (purely organic), more than feasible in our view given the digitization push, new products (e.g. HR/payroll) and the solid track record. In fact, we see significant upside risk to these numbers, as our estimates effectively assume Entersoft will capture solely c4% share of the incremental market resulting from RRF-financed projects. The growth in revenues will filter through to c27% 5-year EBITDA CAGR, quite compelling growth profile among EU peers.

… and from balance sheet optionality – The combination of high recurring revenues and renewal rates (>90%) renders the business model quite cash generative and profitable, with Entersoft enjoying the highest margin among its Greek peers and at the high-end within the global software space. Given the strong financial position (€8.1m net cash in Sep’21), there is also great optionality from capital allocation, which could be manifested either via incremental M&A-driven growth (not included in our numbers) or heftier returns to shareholders.

Valuation – Despite the 88% rally ytd, we think Entersoft is an attractive play to gain exposure to the digitization theme, given the more palatable valuation vs EU software companies (which trade at EV/EBITDA multiples in the mid-teens) and the stronger growth profile. Our valuation is based on a DCF (8% WACC) and yields a baseline value of €7.6/share, effectively valuing the stock at c16x 2023e EV/EBITDA, broadly in line with current valuation of the EU sector. Flexing our WACC and perpetuity growth inputs yields a fair value range between €6.4 and €9.3 per share.

* This report is freely available to investors in the context of our issuer-sponsored research program.