VAR acceleration boosts profitability

Mensch und Maschine Software 25 July 2019 Update
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Mensch und Maschine Software

VAR acceleration boosts profitability

Software

Scale research report - Update

25 July 2019

Price

€33.7

Market cap

€567m

Share price graph

Share details

Code

MUM

Listing

Deutsche Börse Scale

Shares in issue (excluding treasury shares)

16.8m

Net debt as at end H119

€21.4m

Business description

Mensch und Maschine Software (M+M) sells proprietary and Autodesk CAD/CAM software. It reports across two business lines: M+M Software (H119 31% of revenues, 66% of EBIT) and VAR (H119 69% of revenues, 34% of EBIT). The company has operations in Europe, the US and Asia-Pacific.

Bull

Largest European Autodesk value-added reseller.

High-margin, internally developed software.

Loyal workforce.

Bear

Reliant on Autodesk’s technology development and channel strategy.

Management owns more than 50% of the company.

Large exposure to DACH economies.

Analyst

Katherine Thompson

+44 203 077 5730

Mensch und Maschine (M+M) reported H119 revenue growth of 27% year-on-year, of which 20% was organic, and EPS growth of 27%. The Software business revenue growth of 34% benefited from the first-time consolidation of SOFiSTiK in addition to organic growth of 10%. The VAR business saw strong organic revenue growth in H1 resulting in EBIT margin expansion at a divisional and group level.

Software organic growth boosted by SOFiSTiK

The Software business reported 34.2% year-on-year revenue growth in H119 (Q1: +31.2%, Q2: +37.3%) of which 9.7% was organic growth and the remainder was the €6.9m contribution from the consolidation of SOFiSTiK (which made up 18% of H119 revenues). EBIT grew 28.8% year-on-year resulting in a margin of 24.6%, 1pp lower than in H118, mainly due to slightly lower margins in the original M+M Software business. The SOFiSTiK EBIT margin for H119 was 24.0% compared to 24.7% for the original M+M Software business.

VAR business performance accelerates

The VAR business reported H119 revenue growth of 24.4% year-on-year (Q1: +29.6%, Q2: +18.7%) and 52.4% growth in EBIT, resulting in margin expansion from 4.7% in H118 to 5.7% in H119. This is an acceleration in growth from FY18 (H1 +13.9%, H2 +21.0%). Management has raised guidance for FY19 group revenues (from €215–220m to €220–230m) with EPS and DPS guidance unchanged. Consensus forecasts reflect company guidance for FY19 and FY20.

Valuation: Reflects growth and strong execution

The stock has gained 26% over the last 12 months and 32% year-to-date. M+M is trading at a discount to its peer group on an EV/sales and EV/EBITDA basis, and on a P/E basis it trades at a discount in FY19 and in line in FY20. Its EBITDA profitability is lower than the peer group average, mainly due to the higher level of software reselling compared to peers. As the proportion of proprietary software sold increases, both through the growth of the Software business and through the development of software that works with Autodesk solutions within the VAR business, this margin should increase over time.

Consensus estimates

Year
end

Revenue
(€m)

PBT

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/17

160.9

13.6

0.53

0.50

64.2

1.5

12/18

185.4

18.2

0.71

0.65

47.5

1.9

12/19e

223.5

24.5

0.92

0.81

36.8

2.4

12/20e

247.3

27.2

1.02

0.92

33.2

2.7

Source: Analyst estimates as provided on Mensch und Maschine’s investor relations site.

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Review of H119 results

Exhibit 1: H1 results highlights

€m

H119

H118

y-o-y

Revenues

120.22

94.46

27.3%

Gross profit

64.12

52.39

22.4%

EBITDA

17.53

11.81

48.4%

EBIT

13.98

10.28

36.0%

Net income after minority interest

8.32

6.34

31.2%

EPS (€)

0.495

0.388

27.4%

Net debt

21.39

14.66

45.9%

Source: Mensch und Maschine

Exhibit 2: Divisional results

€m

H119

H118

y-o-y

Revenues

Software

37.5

28.0

34.2%

VAR

82.7

66.5

24.4%

Total

120.2

94.5

27.3%

Gross profit

Software

35.2

27.4

28.8%

VAR

28.9

25.0

15.4%

Total

64.1

52.4

22.4%

Gross margin

Software

93.9%

97.8%

-3.9%

VAR

34.9%

37.6%

-2.7%

Total

53.3%

55.5%

-2.1%

EBITDA

Software

11.4

7.9

43.8%

VAR

6.2

3.9

57.7%

Total

17.5

11.8

48.4%

EBITDA margin

Software

30.3%

28.3%

2.0%

VAR

7.5%

5.9%

1.6%

Total

14.6%

12.5%

2.1%

EBIT

Software

9.2

7.2

28.8%

VAR

4.8

3.1

52.4%

Total

14.0

10.3

36.0%

EBIT margin

Software

24.6%

25.6%

-1.0%

VAR

5.7%

4.7%

1.1%

Total

11.6%

10.9%

0.7%

Source: Mensch und Maschine

M+M reported year-on-year revenue growth of 27.3% for H119 whereas EBIT increased 36.0% and net income after minority interest 31.2% over the same period. Reflecting dilution from the shares issued to acquire the majority stake in SOFiSTiK at the beginning of the year, diluted EPS increased 27.4% year-on-year. Net debt was significantly higher, with €6.2m of the €6.7m increase due to the application of IFRS 16 from the beginning of this year. As a reminder, M+M applied IFRS 16 from the beginning of FY19 and now focuses on EBIT rather than EBITDA as this incorporates the lease-related depreciation charges.

Based on the organic growth figures reported by M+M (revenues +20%, gross margin +12%, EBIT +20%), in H119 we calculate the split of organic and acquired Software results in Exhibit 3. The original M+M software business grew revenues 10% y-o-y while EBIT only increased 6% y-o-y, resulting in a small decline in the underlying EBIT margin. The acquired business (consolidated from 1 January 2019) contributed the remaining 24.5% growth in Software revenues y-o-y. We had assumed that SOFiSTiK would add c €10m revenues in FY19, but based on the revenues contributed in H119, we believe the contribution for the full year could be higher. We note that at the EBIT level, SOFiSTiK generates a similar level of profitability to the original M+M software business.

The VAR business saw revenue growth accelerate to 24.4% year-on-year (H118 +13.9%, H218 +21.0%) and EBIT growth of 52% year-on-year, with a 1.1pp increase in the EBIT margin year-on-year.

Exhibit 3: Organic and acquired financial results for the Software segment

€m

H119

H118

y-o-y

M+M revenues

30.7

28.0

9.7%

SOFiSTiK revenues

6.9

0

N/A

Total Software revenues

37.5

28.0

34.2%

M+M gross profit

29.8

27.4

8.9%

SOFiSTiK gross profit

5.4

0

N/A

Total Software gross profit

35.2

27.4

28.8%

M+M gross margin

97.2%

97.8%

-0.7%

SOFiSTiK gross margin

79.3%

N/A

N/A

Total Software gross margin

93.9%

97.8%

-3.9%

M+M EBIT

7.6

7.2

5.8%

SOFiSTiK EBIT

1.6

0

N/A

Total Software EBIT

9.2

7.2

28.8%

M+M EBIT margin

24.7%

25.6%

-0.9%

SOFiSTiK EBIT margin

24.0%

N/A

N/A

Total Software EBIT margin

24.6%

25.6%

-1.0%

Source: Edison Investment Research

Outlook and consensus forecasts

Management has increased guidance for FY19 revenues from €215–220m to €220–230m. All other guidance is unchanged (EBIT €24–26m, EPS €0.89–0.95, DPS €0.77–0.83). The table below summarises consensus forecasts; these are in line with company guidance.

Exhibit 4: Consensus forecasts

€m

FY19e

FY20e

Revenues

223.5

247.3

Revenue growth

20.5%

10.7%

EBITDA

32.6

36.4

EBITDA margin

14.6%

14.7%

EBIT

25.6

28.1

EBIT margin

11.5%

11.4%

EPS

0.92

1.02

DPS

0.81

0.92

Source: Analyst notes on M+M website

Valuation

The stock has gained 26% over the last 12 months and 32% year-to-date. M+M is trading at a discount to its peer group on an EV/sales and EV/EBITDA basis, and on a P/E basis, it trades at a discount in FY19 and in line in FY20. Its EBITDA profitability is lower than the peer group average, mainly due to the higher level of software reselling compared to peers. As the proportion of proprietary software sales increases, both through the growth of the Software business and through the development of software that works with Autodesk solutions within the VAR business, this margin should increase over time.

Exhibit 5: Peer group valuation metrics

Company

Quoted ccy

Share price

Market cap (m)

EV (m – rep. ccy)

EV/Sales

EV/EBITDA

P/E

Div yield

EBITDA margin

CY

NY

CY

NY

CY

NY

CY

NY

CY

NY

Mensch und Maschine

EUR

33.7

567

588

2.6

2.4

18.1

16.2

36.8

33.2

2.4%

2.7%

14.6%

14.7%

Aveva Group

GBp

4002

6479

6,351

7.7

7.4

29.3

25.7

38.4

34.1

1.1%

1.3%

26.4%

28.6%

Cenit

EUR

12.7

106

80

0.5

0.4

5.0

4.5

15.2

13.1

5.5%

6.3%

9.3%

9.7%

Nemetschek

EUR

53.4

6192

6,284

11.3

10.0

40.0

34.8

64.8

54.8

0.6%

0.7%

28.3%

28.6%

RIB Software

EUR

17.1

885

669

3.7

3.2

14.5

12.2

48.9

37.2

1.2%

1.3%

25.5%

25.9%

Autodesk

USD

169.3

37,184

38,175

11.6

9.5

42.5

27.5

59.9

35.6

0.0%

0.0%

27.3%

34.6%

Dassault Systemes

EUR

135.9

35,907

33,897

8.6

7.9

24.4

21.7

38.7

35.0

0.5%

0.6%

35.2%

36.3%

Hexagon AB-B Shs

SEK

482.1

168,682

18,068

4.5

4.3

13.7

12.7

21.7

19.7

1.3%

1.5%

33.1%

34.1%

PTC

USD

88.0

10,123

10,542

8.0

7.1

28.8

22.3

49.2

34.3

0.0%

0.0%

27.8%

31.8%

Average

7.0

6.2

24.8

20.2

39.6

32.6

1.3%

1.5%

26.6%

28.7%

Median

7.9

7.2

26.6

22.0

43.8

34.6

0.9%

1.0%

27.6%

30.2%

Source: Refinitiv. Note: Prices at 22 July 2019.


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