EUR 100.00 For Business Accounts Only

Sirma Research Sep 2020

FUNDAMENTALLY-UNDERVALUED TARGET IN A WORLD OF SKYROCKETING TECH STOCKS VALUATIONSFUNDAMENTALLY-UNDERVALUED TARGET IN A WORLD OF SKYROCKETING TECH STOCKS VALUATIONS

• We updated our 2018 research of Sirma Group Holding (Sirma, SGH), confirming the fundamental attractiveness of the stock. We move the target price slightly down to a conservative BGN 1.27 per share and confirm the Buy recommendation on an 86% upside potential. 

• We base our valuation on sum-of-the-parts valuation model using individual peer selection for core subsidiaries and adjusted NAV for the holding company. We conservatively increase holding discount to 30%.

• We also note improved attractiveness of the stock on growing profitability at the start of 2020. Q1 2020 TTM EBITDA margin exceeded 2018 level, on higher share of sales in the segment, combining AI, big data and other digital transformation solutions. 

• Sirma’s re-entry in SOFIX in end-September, while not being as important as before, due to the lower size of the Sofix-tracking ETF, is also another catalyst for institutional investors.

• Sirma is one of the few BSE-listed companies that might emerge stronger after the crisis as long-term demand perspectives for graph DB, AI and consumer intelligence products has improved globally. Based on Q1 performance and management guidance we expect to see all these growing in 2020.

• Geographical diversification improved in recent years and the share of Bulgarian market, to some extent dependent on public procurements, has positively declined to 35% in Q1 2020 TTM from 60% in 2016. Sirma’s focus on the US market seems to be paying off as its revenue share increased, while profitability of US-based subsidiaries improved.

• Key risks to Sirma performance, except on larger than expected global crisis, is the possible re-emergence of selling pressure by BoD members and founders, especially after the sharp 63% price increase over last three months. Positively, the shares overhang by institutionals seems absorbed, while other selling shareholders have lower stakes now.

• We also note that the group structure remains complex and interlaced, which makes it difficult to assess the value of Sirma’s ability to offer combined multitask IT solutions. The latter yields the most significant upside to subsidiaries’ 2020 forecasts used in the target price calculation.