Strong organic growth with acquisition upside |
Expert Systems has announced encouraging order growth, with US orders up 82% and annual subscription licensing up 92% y-o-y. In addition, the formation of the CY4Gate JV and acquisition of iSOCO assets are important steps forward in the implementation of the internationalisation and product expansion strategy. It is difficult to quantify the impact of these acquisitions at this stage and therefore we have not changed our earnings estimates, but the strategic benefits appear to be substantial. The €3m licensing agreement signed as part of the CY4Gate formation should also contribute significantly to short-term forecasts.
Growth in annual licensing key to shareholder return
Recurring licensing revenue is important in realising the high-margin revenue growth on which our valuation is reliant, so it is particularly encouraging to see such strong growth in annual subscriptions. It is still early days in terms of building a material, high-margin recurring revenue stream, but this high-order growth is an encouraging early indicator. Strong growth in the US is also positive as it is a significant potential market and it is therefore important for Expert System to demonstrate strong demand there.
Acquisitions used to accelerate growth
The acquisition of iSOCO assets and the formation of CY4Gate are strategically important transactions and should help to accelerate growth and strengthen Expert's position in the Spanish-speaking world and the defence market respectively. The iSOCO assets were acquired for c €2m and Expert's 30% share of CY4Gate was granted in exchange for technical services and licensing rights. CY4Gate also purchased €3m worth of licensing and services that will predominantly be recognised in FY14. We treat this as a contribution rather than incremental to existing forecasts, and therefore our revenue forecasts are unchanged.
Valuation: Licensing growth key catalyst
The costs of the iSOCO asset acquisition and formation of the CY4Gate JV have been incorporated into our model, but revenue and earnings forecasts remain unchanged. The DCF has also been brought out a year and therefore the base case DCF valuation increases from €3.23 (excluding ADmantX) to €3.43. However, the DCF sensitivity analysis (see page 3) is the most important valuation tool. The key catalysts for share price upside include growth in recurring licence revenue, normalisation of the tax rate, further acquisitions and an increase in indirect sales.
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