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

• ShireSystem Product: The Company made accelerated progress and achieved record sales growth for the ShireSystem product during FY21. Moreover, it became the Group's second-largest product by revenue. The Irish-based international building materials manufacturer is now making use of the software in six of its factories located in Europe.
• 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.
• Business Development Opportunities: The Company had strengthened its growth platform with the successful merger of German visualisation operations and UK building lifecycle businesses.

Key Risks

• Central Bank Meeting: The Bank of England and ECB meetings lined up on 03 February 2022 may result in an interest rate hike announcement. Thus, it may put pressure on UK equities.
• SaaS Model: 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.
• Wrong Strategic Choices: The failure of partner relationships could adversely impact the business in the near term.
  

Key Fundamental Statistics & Shareholding Pattern of Eleco PLC.

Allen (H A) is the most significant shareholder as it holds nearly 11.88 million shares as of 31 December 2021. 

Year-End Trading Update (as of 25 January 2022)

• Top-Line Business: ELCO expects FY21 revenue to grow by around 8% when compared with FY20.
• Solid Balance Sheet: The Company has no bank debt and £0.1 million of other borrowings as of 31 December 2021. Moreover, the Company has shown a significant increase in net cash from £6.2 million as of 31 December 2020 to £10 million as of 31 December 2021.
• Profitability: ELCO expected EBITDA to remain around £7 million during FY21.

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

(Source: Company Filings)

• 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.
• 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 February 2022 at 10:15 AM GMT, ELCO’s shares were trading at GBX 95.00, down by around 5.00% from the previous day closing price. Stock 52-week High and Low were GBX 147.00 and GBX 90.00, respectively.

From a technical perspective, the stock price is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. Moreover, the 14-days RSI stood at ~45.65 levels.

On a YTD basis, ELCO’s stock price has delivered a positive return of ~8.70%, and it has outperformed the FTSE AIM All-Share index (benchmark index) with a return of negative 9.16% and FTSE All-Share Software & Computer Services (benchmark sector) with a return of negative 10.38%.

Valuation Methodology: Price/Earnings Approach (FY21E) (Illustrative)

Business Outlook

The Company had delivered a decent financial performance in FY21 with growth in all regions. Moreover, the Company would invest further in business development as well as software development in the core markets to secure the market-leading positions. Meanwhile, the Company had resumed paying interim dividend during H1 FY21, illustrating rising confidence levels in the growth prospects. Considering the penny nature of the stock, ELCO may undergo sizeable corrections because of an interest rate hike by the Bank of England, global inflation, and sluggish UK macroeconomic indicators. 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 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 current market price of GBX 95.00 (as on 03 February 2022 at 10:15 AM GMT), with lower-double digit upside potential based on 26.25x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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