Eleco PLC (LON: ELCO)

Eleco PLC is an FTSE AIM All-Share index listed international specialist provider of world-class software and related services. Moreover, the Company supports the built environment through operating brands such as Elecosoft, ActiveOnline and ESIGN, from centres of excellence in the UK, Sweden, Germany, Netherlands, and the USA.

Recent trend of dividend payments

The Company had paid an interim dividend of 0.2 pence per share on 22 October 2021, while the ex-dividend date was 23 September 2021. ELCO had not paid any interim dividend during H1 FY20. Moreover, the interim dividend remained around 10.8% of the unaudited earnings of 2.2 pence per share for the period.

Growth Prospects

• Increased Expenditure towards Software Development: The Company had increased software offerings to the market as total software expenditure remained around £1.62 million for H1 FY21.
• Powerproject Vision: ELCO had shown accelerated progress towards the SaaS portal, Powerproject Vision, through the collaboration on construction schedules. Moreover, it will support the digital transformation of VINCI Construction's planning process.
• Substantial Operational Progress: ELCO will focus upon the merger of three UK Building Lifecycle businesses and two German visualisation businesses. Meanwhile, the Company will create Northern Europe Building Lifecycle operation to enhance all building lifecycle businesses in Germany and the Netherlands. Also, ELCO will focus on the expansion of Swedish Building Lifecycle operation to the Nordics region.

Key Risks

• Shift Towards SaaS Model: The Company’s top-line and bottom-line business may get adversely impacted because of the transition towards a SaaS subscription model for many new customers.
• Wrong Strategic Choices: The failure of partner relationships could adversely impact the business in the near term.
• Rise in Interest Rates: The recent hawkish comments made by several central governments regarding a hike in the interest rates could make fundraising difficult for the Company.

Now, we will analyse the Key Fundamental Statistics & Shareholding Pattern of Eleco PLC.

Allen (H A) is the most significant shareholder as it holds nearly 21.61 million shares as of 30 September 2021.

H1 FY21 Financial & Operational Highlights (for six months ended 30 June 2021, as of 07 September 2021)

 (Source: Company result)

• Decent Increase in Revenue: The top-line revenue increased by around 13% from £12.21 million during H1 FY20 to £13.83 million for H1 FY21 boosted by recurring maintenance, support contracts, and other subscription-based contracts in the period. Moreover, it accounted for almost 55% of the total revenues during the period.
• Strong Profitability: On the profitability front, the Company’s net profit increased by around 19%, and operating profit rose by about 14% during H1 FY21.
• Improvement in Cash Balance: ELCO had strengthened the net cash by showing improvements in the cash balance from £4.43 million for H1 FY20 to £8.47 million during H1 FY21.

Financial Ratios (H1 FY21)

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 03 November 2021, ELCO’s shares were closed at GBX 110.00. Stock’s 52-week High and Low were 147.00 and GBX 73.00, respectively.

From a technical perspective, the stock price is hovering around the lower Bollinger band, indicating an upside potential in the stock price. Moreover, the 14-days RSI of ~33.57 approaches oversold territory, which may cause an upside momentum in the stock price.

Over the last one year, ELCO’s stock price has delivered a positive return of ~44.97%, and it has outperformed the FTSE AIM All-Share index (benchmark index) with a return of approximately 27.95% and FTSE All-Share Software & Computer Services (benchmark sector) with a return of about 15.31%.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook

The Company had delivered an outstanding H1 FY21 period with growth in all regions. In addition, ELCO focuses on business expansion by launching a direct business in Texas in the USA and taking the maintenance management portfolio into the German market. Moreover, the Company would invest further in business development as well as software development in the core markets to secure the market-leading positions. ELCO is also shifting towards a SaaS subscription model for many new customers. However, it will hamper the top-line revenue and bottom-line profitability over the medium term as revenues are spread over a longer period, and costs are added to drive growth. Considering the penny nature of the stock, ELCO may undergo adverse corrections because of the rising interest rates prospect, global inflation, and Evergrande fiasco. Overall, the Company aimed to deliver long-term growth by focusing more on customer needs, and clients can take a reasonable position based on their risk appetite.

Considering the decent revenue growth during H1 FY21, robust profitability, improved cash balance, resumption of interim dividend, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Eleco PLC at the closing price of GBX 110.00 (as on 03 November 2021), with lower-double digit upside potential based on 31.23x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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