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Don’t miss handsome little Elecosoft: its earnings are set to soar
This is a small cap investment story we have watched for ages and now feel confident it has developed the scale and market positioning to really move the earnings needle.
Incredibly, Elecosoft (ELCO:AIM) has been in business for more than 100 years but turned itself into a construction industry technology supplier when it sold its physical building operations about five years ago.
These days it provides specialist software solutions that cover the core elements of a construction project, such as computer-aided design and visualisation, engineering resource planning, cost estimation and tracking. It sells primarily in the UK, Sweden, and Germany although also to the Benelux region and US through reseller partners.
Companies using Elecosoft tools include international building firms Skanska and Mace plus global wood flooring supplier Boen.
Financial performance since its technology focus rejig has been very decent if not spectacular. Revenues have increased about 45% since 2015 while operating profit has tripled, assuming forecasts are correct for £22.3m revenue and £3.76m operating profit for the year to 31 December 2018.
Most of that growth has been generated organically, barring the £2.4m purchase of industry data management firm ICON in October 2016.
The potential to accelerate growth rates has now been harnessed after striking a £6.3m deal to buy Shire Systems in July. Shire supplies post-construction tools to the facilities management space, effectively giving Elecosoft a cradle-to-grave set of building information management solutions.
Shire’s kit should dovetail neatly with Elecosoft’s own flagship Powerproject and ICON applications but it also offers the tantalising opportunity to cross-sell a range of products to an enlarged 800-strong customer base. It means landlords can manage their property assets more efficiently, having already captured most of the structural data during design and build phases.
There is also a bulging pipeline of in-house developed new tools or upgrades in visualisation and site management, for example.
Shire’s largely recurring revenue model will also speed up Elecosoft’s own direction of travel towards cloud-based recurring revenues, now up to 55% of all sales.
First half results showed adjusted operating profit up 33.5% to £1.76m on a 7% rise in revenue to £10.6m (on a constant currency basis).
Earnings per share (EPS) jumped 38% to 1.8p, demonstrating the excellent control management has on costs.
The dividend was hiked 40% to 0.28p, albeit still offering a limited income yield of just 0.85%.
Analysts are confident Elecosoft in the future should achieve double-digit sales growth, 20%-plus adjusted operating margins and strong cash conversion (90%-plus of operating profits). (SF)