FREE

Entersoft | Unfettered secular momentum, multi-tiered exposure; Initiating coverage with Buy

Greek software leader with extensive offering, c60% recurring revenues and diversified exposure – Entersoft is a leading Greek software company involved in the development and distribution of business software and the provision of aftersales. The group boasts an extensive portfolio of solutions, ranging from fully integrated ERP systems to niche standalone modules, and a diversified pool of clients, with no significant exposure in any specific sector. It operates both a license & maintenance and SaaS model, combining the agility of SaaS with the superior margins initially enjoyed by on-premise solutions. This balanced contract portfolio is manifested in a significant recurring base, at c60% of group revenue.

Strong demand tailwinds and secular growth in Greek business software, reinforced by RRF/EU funding – The domestic business software market has shown no signs of slowdown since the onset of the pandemic, buoyed by widespread demand for digitization and c€3bn in available funding for such projects (i.e. RRF, EU structural funds). We expect strong domestic demand to persist in the mid-term, underpinned by idiosyncratic factors such as the need for upgrades of legacy ERP systems and the low adoption levels of cloud-based SaaS solutions. We anticipate top line growth to be supplemented by the Romanian market, where the recent acquisition of BIT Software provides exposure to a software industry estimated at c70% the size of that in Greece.

17% revenue CAGR over 2023-26e; profitability to almost double by 2026e vs 2022 levels – Entersoft saw its revenues get rebased to €29.6m in 2022, at levels >90% higher than 2019, mostly driven by organic growth (i.e. client base expansion, cross-selling/upselling). Looking ahead, we envisage c17% 3-year revenue CAGR through to 2026e (vs 2023e) reflecting our expectations for increased traction in newly acquired solutions, rising appetite for IT sophistication in Greece and continued positive momentum for niche solutions. We see this filtering through to c19% EBITDA CAGR over the same period, notably among the strongest growth profiles in the EU software space.

Balance sheet offers flexibility in capital allocation – Thanks to its strong cash generative capacity, the group remains comfortably cash positive and is projected to end 2023e with a net cash position of €2m, despite historically high M&A activity over the past 2 years. Although our model does not assume any further acquisition-driven growth, Entersoft’s solid balance sheet provides ample room for accretive transactions, which could alternatively be manifested into heftier returns to shareholders than those embedded in our estimates (we assume 40-43% payout).

Valuation – Despite a +70% bounce in 2023, Entersoft shares have not re-rated markedly as the >30% EBITDA growth during the year (on our estimate) was accompanied by healthy cash generation, leaving the stock at c12x 2024e EV/EBITDA. We reckon the shares offer a compelling proposition as the current valuation remains below that of best-in-class peers (which are trading in the mid-to-high teens). Our valuation is based on a DCF (8.9% WACC) and yields a 12m PT of €8.20 per share, effectively valuing the group at c16x 2024e EV/EBITDA, still discount vs. higher valued peers in EU software. We place Entersoft in our top picks among Greek small caps, expecting it to benefit from the secular theme of digitization.