Softline - Taking EMs to the Cloud

We initiate coverage of Softline with a BUY rating and a target price of $10.79 (R794) per share, which implies 50% upside. The shares have lost 4% since the IPO on October 27. We see the company as a leading IT solutions and services provider with a wide offering that covers a broad range of client needs. Its strategy envisages further international expansion using the IPO proceeds ($373 mln net) to fuel both organic and non-organic growth in fast-growing EMs.> Global solutions and services provider with EM focus. Softline generated more than half of its turnover outside Russia in 1H21. Its clear focus on EMs provides access to a $350 bln addressable market, which is expected to grow at a 9% CAGR over the next four years.> Ambitious strategy, supported by relationship with Microsoft and access to talent at lower cost. We see Softline's turnover, gross profit and adjusted EBITDA growing at 2021-25 CAGRs of 17%, 18% and 25%. Meanwhile, its EM exposure provides clear opportunities for further geographic expansion, as well as cross-selling and up-selling customers. The company has reiterated its guidance of mid-twenties turnover growth in 2021 and high-teens CAGRs afterward, with a 13-14% gross margin and an EBITDA margin (as a percentage of gross profit) in the low thirties. The company's strategy is predicated on its strong relationship with Microsoft (Softline being a top 10 global Microsoft managed partner), which could help it open doors to established companies across EMs. Softline also sources its talent from EMs (e.g. Russia and India), giving it lower personnel costs than peers.> M&A to support further growth. With the IPO proceeds the company intends to continue M&A (there are more than 30 targets in the pipeline) as the market further consolidates. This should support growth going forward, though this is not in our model yet. > Valuation. Using an equally weighted DCF and multiples approach, we have set a 12-month target price for Softline of $10.79 per share (R794). We use a two-stage DCF model with 3% terminal growth and an 11% WACC, while for multiples we conservatively apply SoftwareOne's 2022E P/E (16.6), which is the lowest in the IT solutions and services provider peer group. Our blended valuation gives a 2022E EV/EBITDA of 11.4 and a P/E of 23.0 versus a 2022E EV/EBITDA of 17.2 for IT solutions and services providers and 14.0 for the broader group including traditional VARs. The 2022E P/E for IT solutions and services providers is 27.5 (24.0 for the broader peer group). All in all, we see Softline offering 50% upside.