When a business enjoys a strong position in an expanding (+10% pa) and highly profitable (20%+ EBITDA margins) market, then strategically it makes sense to go on the front foot and invest both organically (eg new products) and by acquisition.
Eleco (ELCO) , a specialist SaaS Buildtech software developer (re project management, property-related digital twins, asset maintenance and visualisation), is doing this in spades.
Indeed, I first purchased the shares way back in 2015 and have never sold. What particularly attracts me is ELCO's secular tailwinds (re digitisation of global infrastructure/construction spend), blue chip customer base, 90%+ retention rates, 74% recurring revenues, and resilience - even in the face of major dislocations such as Brexit and Covid. All hallmarks of a high-quality firm.
Better still, I can also now add double-digit organic sales growth and complementary M&A to the mix.
In fact, today Eleco announced the €8.4m acquisition (split €6m upfront + €2.4m earnout) of Ireland-based PEMAC, a provider of SaaS asset maintenance and management software (CMMS) and associated services, that generated Nov FY'24 turnover and adjusted EBITDA of €2.7m and €0.6m respectively. Its applications are used by >100 international manufacturing organisations, such as Coca Cola, Gyproc, Heineken, Wyke Farms, Keppel Data Centres, Stryker, SteriPack Group, LumiraDx, and Amgen - across highly regulated areas too, including life sciences and healthcare.
To me, this transaction is a smart, synergistic, earnings-enhancing, and importantly value-accretive bolt-on deal for Eleco, accelerating its growth (re Shire) in the CMMS sector at an attractive price (re 2.2x – 3.1x trailing EV/sales, or 10x-14x EBITDA).
CEO Jonathan Hunter, commenting: "I am delighted to welcome PEMAC to the group, which will enhance Eleco's asset and maintenance management capabilities. Eleco's asset maintenance customers have shown substantial growth in recent years and together [we're] even better positioned to enhance productivity, safety and compliance for its customers through digital transformation of their processes. ... In addition, we are pleased that PEMAC's operational management team will remain with the business and is committed to supporting our joint growth ambitions."
The acquisition is being funded entirely from Eleco's own cash resources, which stood at a net £12m in Jun'24.
Looking ahead, indicatively I'm forecasting 2025 turnover, adjusted EBITDA and EPS to come in at £39.5m, £9.0m and 6.4p/share respectively - meaning if one hypothetically put the stock on 3x-5x EV/revs multiple, then this would generate an intrinsic worth of between 145p-240p/share. In comparison, larger listed peers Autodesk, Nemetschek and Bentley Systems trade on c. 9x multiples or almost triple Eleco's current rating. Elsewhere, house broker Cavendish has a target price of 200p/share.
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