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 will pay a final dividend of 0.4 pence per share on 20 June 2022, while the ex-dividend date will be 01 June 2022. It has taken full-year FY21 dividend to 0.6 pence per share. In comparison, the Company had paid a total dividend of 0.4 pence per share for FY20.

(Source: LSE website; Analysis done by Kalkine Group)

Growth Prospects

• Significant Operational Progress: 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.

• Decent Trading Update: ELCO had shown a decent 8% year-on-year growth in recurring revenue during the first four months of 2022. Now, it represented 60% of the total revenue.

Key Risks 

• Record UK Inflation: The rise in regulated household energy bills led to UK inflation leaping to 9% in April 2022, the highest level since 1982. It may adversely impact UK equities.
• Slow Revenue Growth: ELCO had warned of a slow revenue growth because of the transition towards higher value and predictable recurring revenue.
• Bank of England Warning: The Bank of England had trimmed its economic growth forecast for 2023 and is expected to show a contraction of 0.25% from a previously estimated growth of 1.25%. Moreover, it had also warned of UK inflation reaching around 10% very soon.

Key Fundamental and Shareholders Statistics of Eleco PLC. 

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

Financial Highlights (for year ending 31 December 2021, as of 31 March 2022)

(Source: Company Website)

• Revenue Growth: Revenue grew by ~8% to £27.3 million in FY21, compared to £25.2 million in FY20.
• Improved EBITDA: The Group clocked EBITDA of £7.2 million in FY21, compared to £6.7 million in FY20. 

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 25 May 2022, ELCO’s shares were closed at GBX 88.50, down by around 0.56% from the previous day closing price. Stock 52-week High and Low were GBX 147.00 and GBX 82.39, respectively.

On a daily chart, the stock price is sustained between the lower Bollinger band and the middle Bollinger band. Hence, there could be an uptick in the stock price in the near term. Also, the 14-days RSI of ~37.83 approaches an oversold territory.

Valuation Methodology: Price/Earnings Approach (FY22E) (Illustrative)

Business Outlook

The Company has carried the positive business momentum of FY21 into the first four months of 2022 despite the challenging market conditions Moreover, the underlying demand for ELCO’s products will improve further as the construction industry moves towards a more sustainable future. Meanwhile, ELCO would seek acquisition opportunities that aligned with the strategic initiatives and enhance value through a transition to SaaS. In a nutshell, ELCO remained optimistic about the prospects as the major markets would normalise following the diminishing influence of COVID-19.

Please note markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Considering the decent top-line business, several key acquisitions, decent dividend growth, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Eleco PLC at the closing market price of GBX 88.50 (as of 25 May 2022), with lower-double digit upside potential based on 35.94x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). The stock has not started trading as of 26 May 2022 at 01:03 PM GMT+1.

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

Note 2: Investment decisions should be made depending on the investors’ appetite for 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 is subject to the factors discussed above.

Note 3: Target Price refers to a price level that 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.

Note 4:  Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.

Note 5: Dividend Yield may vary as per the stock price movement.

 

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 the 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 unfavourable movement in the stock prices.

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