Logo Yazilim: clearer skies in 2024E (stays BUY)

Leading Turkish enterprise application software (EAS) developer Logo Yazilim (Logo) is facing an improved business outlook in 2024E, following an unexpected margin hit from its Romanian corporate IT solutions business, TotalSoft, in 9M23. While Logo’s operating margins has also come under pressure at its core Turkish SME software business due to elevated payroll costs (the largest cost item for the company) in a hyperinflationary economic environment, we are reassured by management’s focus on pricing discipline (passing several consecutive price adjustments since late-2022). Given Logo’s highly sticky customer base (which keeps growing in all segments), we expect to see some operating margin recovery from 2024E-onwards, led by the company’s flagship Turkish business. In our view, as the leading local EAS developer in Turkey, the company should continue to benefit from a growing and highly oligopolistic EAS market, where it enjoys a strong brand name, with a diversified SME software solutions portfolio (ranging from ERP to pre-accounting and e-invoicing solutions), distributed by a highly-trained business partner network (the largest in the local industry). In our view, the low ERP software penetration and structural tailwinds, such as the Finance Ministry’s continued focus on the digital transformation of the e-fiscal services segment, remain the key structural growth drivers for Logo in its core Turkish market. Despite the challenging market conditions for TotalSoft (dependant on intermittent contract wins in the more competitive large enterprise segment in Romania), we expect a limited operating margin repair in 2024E, as the current low-margin digital transformation contract (with a government entity) fades away. Meanwhile, the mandatory introduction of electronic invoicing in Romania from January 2024-onwards may create an opportunity for Logo to copy-paste its successful e-fiscal service integration business in Turkey to Romania. We also do not rule out a potential strategic exit in Romania, but we see this as a potential wildcard in the medium term. We maintain our BUY rating on the stock, with a new price target (PT) of TRY 160.