Electronic Data Processing LSE: EDP
December 11, 2012 - 5:02pm EST by
golfer23
2012 2013
Price: 55.00 EPS $0.00 $0.00
Shares Out. (in M): 13 P/E NA 0.0x
Market Cap (in $M): 11 P/FCF 9.4x 0.0x
Net Debt (in $M): -9 EBIT 1 0
TEV ($): 2 TEV/EBIT 2.0x 0.0x

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  • UK based
  • Software
  • Real Estate
  • Nano Cap

Description

Electronic Data Processing (LSE: EDP)

EDP is a micro-cap UK software company with two core product groups, Quantum VS and Vecta, which focuses on servicing mainly distribution oriented businesses.  It operates predominantly in its home country and tends to sell to smaller businesses.  Quantum VS is a software suite that includes product catalogue, sales management & order processing, eBusiness, inventory & purchasing management, financials, business document & data exchange, business intelligence and sales intelligence.  Vecta is a sales intelligence product. 

Despite being a UK micro-cap with limited liquidity, the company appears to be grossly undervalued.  Below are a few summary financial figures and trading statistics:

 

Market Cap:                              £ 7.0 mm

Net Cash:                                 £ 5.6 mm

Underfunded Pension:               £ 1.1 mm

Real Estate for Sale:                   £ 1.9 mm

 

   Adjusted EV:                         £ 0.6 mm

 

EBITDA:                                  £ 1.1 mm

FCF:                                         £ 0.73 mm

 

Adjusted EV/EBITDA:             0.54 x

Adjusted EV/FCF:                    0.82 x

 

Financials

 

  30-Sep-05 30-Sep-06 30-Sep-07 30-Sep-08 30-Sep-09 30-Sep-10 30-Sep-11 30-Sep-12
                 
Revenue 6,964 6,325 6,618 6,850 5,844 5,580 5,600 5,805
   Change   -9.18% 4.63% 3.51% -14.69% -4.52% 0.36% 3.66%
                 
Cost of Goods Sold (626) (563) (529) (551) (410) (322) (328) (471)
   % of Sales 8.99% 8.90% 7.99% 8.04% 7.02% 5.77% 5.86% 8.11%
                 
   Gross Profit 6,338 5,762 6,089 6,299 5,434 5,258 5,272 5,334
   Change   -9.09% 5.68% 3.45% -13.73% -3.24% 0.27% 1.18%
      % of Sales 91.01% 91.10% 92.01% 91.96% 92.98% 94.23% 94.14% 91.89%
                 
Administrative Expenses (6,185) (5,596) (5,678) (5,609) (5,087) (4,705) (4,766) (4,646)
   % of Sales 88.81% 88.47% 85.80% 81.88% 87.05% 84.32% 85.11% 80.03%
                 
   Operating Income 153 166 411 690 347 553 506 688
   Change   8.50% 147.59% 67.88% -49.71% 59.37% -8.50% 35.97%
      % of Sales 2.20% 2.62% 6.21% 10.07% 5.94% 9.91% 9.04% 11.85%
                 
Finance Revenues 278 280 289 375 109 31 55 78
Profit on Disposal of Property 0 420 0 1,157 0 0 335 (849)
                 
  Earnings before Taxes 431 866 700 2,222 456 584 896 (83)
   Change   100.93% -19.17% 217.43% -79.48% 28.07% 53.42% -109.26%
      % of Sales 6.19% 13.69% 10.58% 32.44% 7.80% 10.47% 16.00% -1.43%
                 
Provision for Income Tax (143) (29) (222) (390) (129) (160) (158) 26
   Effective Tax Rate 33.18% 3.35% 31.71% 17.55% 28.29% 27.40% 17.63% 31.33%
                 
  Net Income (Loss) 288 837 478 1,832 327 424 738 (57)
   Change   190.63% -42.89% 283.26% -82.15% 29.66% 74.06% -107.72%
      % of Sales 4.14% 13.23% 7.22% 26.74% 5.60% 7.60% 13.18% -0.98%

 

 

Historical Notes

Real Estate

The company has owned a significant amount of real estate over the years, which it has been slowly selling.  Prior to the company’s recently released results, it owned four properties, three of which it was marketing for sale.  The company took a write-down of £ 0.85 mm and has agreed to sell two of the three properties it had been marketing for £ 1.86 mm.  £ 1.7 mm worth of real estate will remain on the balance sheet.  I have not factored any additional value from real estate sales into the thesis, though I will note the following:

  • The company sold real estate in 2006, 2008 and 2011 recording gains on sales of 47.7%, 64.5% and 17.0% in those years.

 

  • Prior to the recent sale and write-down, 50.6% of the deemed cost of property related to a 1988 valuation that was conducted.  The company has not disclosed which properties it sold, but I suspect it was not the properties which have a cost basis determined by a 25 year old valuation.

Tender Offer

In 2008 just before the world changed, the chairman, Michael Heller, who now owns over 25% of the company, was planning a buyout.  Instead, the financing world collapsed and the company repurchased 48.9% of the outstanding shares at 50p.  This appears to have been a superb use of capital and followed the sale of real estate in that year.  While there is a risk of a take-under, I believe a buyout by this large owner is a potential catalyst.

Business Exit

In 2007, the company finally exited a computer maintenance business that it owned.  Financials through that period reflect the exit.

 

Additional Notes:

 

  • Contracted recurring revenue was 76% of total revenue in FY 2012 and 79% of total revenue in FY 2011.

 

  • Hosted revenue was 43% of total revenue in FY 2012 and 34% of total revenue in FY 2011.

 

  • Deferred revenue has not been strong as of late.  The most recent results show a year over year decline 1.5% and a seasonal 16.4% sequential growth (which is the best H2 growth since 2007).

 

  • The company has indicated that the recent property sales will save approximately £ 0.1 mm in costs a year.  It is unclear how much this will benefit cash flow.

 

  • The improvement in the earnings profile of the business over the last several years has been primarily related to cost controls.  The company has eliminated over £ 1.0 mm in administrative expenses since 2007, primarily related to property disposals and improved labor efficiency.  Further improvements in the earnings profile is less likely to come from cost cutting going forward.

 

  • The core business generates strong returns on equity, which I estimate to be approximately 50%.  This is calculated by using NOPAT on required equity, which I estimated to be net of surplus cash and for sale real estate.  If you were to exclude the assets that support the underfunded pension the core return on the business itself would be far in excess of this estimate.

 

  • The company pays a dividend at the current rate of 2.713p which equates to 5.0% yield at 55p.

 

Valuation:

Using a 10x FCF multiple plus excess cash results in a total value of approximately £ 13 mm or 104p per share.  This would be an increase of 89% from the current share price of 55p.

Based on the median EV/EBITDA of UK public software companies of 8.58x the total value would be approximately £ 15.8 mm or 126p per share.  The constituents are provided below and include companies in the UK that are below $100 mm in market cap and produce at least $1 mm in EBITDA.  This would be an increase of 129% from the current share price of 55p.

 

Company Name Ticker Market Cap EBITDA EV/EBITDA
         
K3 Business Technology Group plc (AIM:KBT) AIM:KBT                     67.9                     18.3 4.97887
Ebiquity plc (AIM:EBQ) AIM:EBQ                     82.7                     13.8 7.56556
Allocate Software plc. (AIM:ALL) AIM:ALL                     81.8                     8.01 8.94111
OMG plc (AIM:OMG) AIM:OMG                     37.5                     5.27 6.00167
Tracsis Plc (AIM:TRCS) AIM:TRCS                     63.1                     5.06 9.75665
MAM Software Group, Inc. (OTCBB:MAMS) OTCBB:MAMS                     40.7                     5.02 7.76496
Netcall plc (AIM:NET) AIM:NET                     56.6                     4.89 8.57908
Etherstack plc (ASX:ESK) ASX:ESK                     55.0                       4.8 10.73259
dotDigital Group Plc (AIM:DOTD) AIM:DOTD                     62.6                     4.74 11.56328
Lombard Risk Management plc (AIM:LRM) AIM:LRM                     41.0                     4.47 9.59191
Bond International Software plc (AIM:BDI) AIM:BDI                     35.5                     4.19 9.00852
Tangent Communications PLC (AIM:TNG) AIM:TNG                     35.1                       3.6 9.19005
Dillistone Group Plc (AIM:DSG) AIM:DSG                     20.9                     2.82 6.45739
Assima PLC (ENXTPA:ALSIM) ENXTPA:ALSIM                     34.4                     2.79 9.45071
Gresham Computing plc (LSE:GHT) LSE:GHT                     63.5                     2.68 21.52849
Pilat Media Global plc (AIM:PGB) AIM:PGB                     30.6                     2.17 8.361
Pennant International Group plc (AIM:PEN) AIM:PEN                     17.6                     2.11 6.59726
Electronic Data Processing plc (LSE:EDP) LSE:EDP                     10.6                     1.72 1.71841
Sopheon plc (AIM:SPE) AIM:SPE                     14.0                     1.68 8.29014
         
      Mean 8.74 x
      Median 8.58 x

 

Ownership:

 

Michael Heller   28.50%
Herald Investment Trust   13.81%
S Crookes   6.94%
Henderson Fledgling Trust   4.99%

 

If you are looking for shares, Herald, Henderson and Schroder own shares that represent substantially less than 1% of their NAV’s in the funds that own the shares and they might be a place to start for larger blocks.

 

 

Risks:

  • Acquisitions – While I suspect one potential catalyst is an acquisition of the entire company, the company has indicated it has an interest in making acquisitions with its cash.  These transactions could be executed poorly or consummated at silly valuations.  The most recent transaction the company executed was the acquisition of the Vecta business in FY 2007.  It has been difficult to determine the success of the business because there are no segment results.

 

  • Pension Scheme – The company recently restated its pension liability by £ 0.691 mm net of deferred taxes.  While the full details will not be known until the annual report is filed, the restatement relates to the estimated discount rate on liabilities.  The defined benefit scheme is not open to new entrants and the company is conducting a review of the scheme.

 

  • Customer Base – While I take some comfort in the fact that its customers are distribution businesses, the fact remains their customers are generally small businesses and likely more vulnerable to competitive forces and the business cycle.  The company has generally performed well during the difficulties in the UK economy, but this could continue to strain the business or impede growth.

 

  • Technology – Despite spending 15.5% of revenues on R&D, the company may not be able to adequately maintain or further develop its technology offering in the face of stiff competition.

 

  • Liquidity – EDP is an illiquid micro-cap company.  There are days when it doesn’t trade.  Additionally, it trades on the SETSqx which is not the main market of the LSE.
I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

- going private transaction by 28% shareholder
- ongoing dividend payments and potential increases in such payments
- tender offer for significant number of shares
- market recognition of the strength of the business
    sort by    

    Description

    Electronic Data Processing (LSE: EDP)

    EDP is a micro-cap UK software company with two core product groups, Quantum VS and Vecta, which focuses on servicing mainly distribution oriented businesses.  It operates predominantly in its home country and tends to sell to smaller businesses.  Quantum VS is a software suite that includes product catalogue, sales management & order processing, eBusiness, inventory & purchasing management, financials, business document & data exchange, business intelligence and sales intelligence.  Vecta is a sales intelligence product. 

    Despite being a UK micro-cap with limited liquidity, the company appears to be grossly undervalued.  Below are a few summary financial figures and trading statistics:

     

    Market Cap:                              £ 7.0 mm

    Net Cash:                                 £ 5.6 mm

    Underfunded Pension:               £ 1.1 mm

    Real Estate for Sale:                   £ 1.9 mm

     

       Adjusted EV:                         £ 0.6 mm

     

    EBITDA:                                  £ 1.1 mm

    FCF:                                         £ 0.73 mm

     

    Adjusted EV/EBITDA:             0.54 x

    Adjusted EV/FCF:                    0.82 x

     

    Financials

     

      30-Sep-05 30-Sep-06 30-Sep-07 30-Sep-08 30-Sep-09 30-Sep-10 30-Sep-11 30-Sep-12
                     
    Revenue 6,964 6,325 6,618 6,850 5,844 5,580 5,600 5,805
       Change   -9.18% 4.63% 3.51% -14.69% -4.52% 0.36% 3.66%
                     
    Cost of Goods Sold (626) (563) (529) (551) (410) (322) (328) (471)
       % of Sales 8.99% 8.90% 7.99% 8.04% 7.02% 5.77% 5.86% 8.11%
                     
       Gross Profit 6,338 5,762 6,089 6,299 5,434 5,258 5,272 5,334
       Change   -9.09% 5.68% 3.45% -13.73% -3.24% 0.27% 1.18%
          % of Sales 91.01% 91.10% 92.01% 91.96% 92.98% 94.23% 94.14% 91.89%
                     
    Administrative Expenses (6,185) (5,596) (5,678) (5,609) (5,087) (4,705) (4,766) (4,646)
       % of Sales 88.81% 88.47% 85.80% 81.88% 87.05% 84.32% 85.11% 80.03%
                     
       Operating Income 153 166 411 690 347 553 506 688
       Change   8.50% 147.59% 67.88% -49.71% 59.37% -8.50% 35.97%
          % of Sales 2.20% 2.62% 6.21% 10.07% 5.94% 9.91% 9.04% 11.85%
                     
    Finance Revenues 278 280 289 375 109 31 55 78
    Profit on Disposal of Property 0 420 0 1,157 0 0 335 (849)
                     
      Earnings before Taxes 431 866 700 2,222 456 584 896 (83)
       Change   100.93% -19.17% 217.43% -79.48% 28.07% 53.42% -109.26%
          % of Sales 6.19% 13.69% 10.58% 32.44% 7.80% 10.47% 16.00% -1.43%
                     
    Provision for Income Tax (143) (29) (222) (390) (129) (160) (158) 26
       Effective Tax Rate 33.18% 3.35% 31.71% 17.55% 28.29% 27.40% 17.63% 31.33%
                     
      Net Income (Loss) 288 837 478 1,832 327 424 738 (57)
       Change   190.63% -42.89% 283.26% -82.15% 29.66% 74.06% -107.72%
          % of Sales 4.14% 13.23% 7.22% 26.74% 5.60% 7.60% 13.18% -0.98%

     

     

    Historical Notes

    Real Estate

    The company has owned a significant amount of real estate over the years, which it has been slowly selling.  Prior to the company’s recently released results, it owned four properties, three of which it was marketing for sale.  The company took a write-down of £ 0.85 mm and has agreed to sell two of the three properties it had been marketing for £ 1.86 mm.  £ 1.7 mm worth of real estate will remain on the balance sheet.  I have not factored any additional value from real estate sales into the thesis, though I will note the following:

     

    Tender Offer

    In 2008 just before the world changed, the chairman, Michael Heller, who now owns over 25% of the company, was planning a buyout.  Instead, the financing world collapsed and the company repurchased 48.9% of the outstanding shares at 50p.  This appears to have been a superb use of capital and followed the sale of real estate in that year.  While there is a risk of a take-under, I believe a buyout by this large owner is a potential catalyst.

    Business Exit

    In 2007, the company finally exited a computer maintenance business that it owned.  Financials through that period reflect the exit.

     

    Additional Notes:

     

     

     

     

     

     

     

     

    Valuation:

    Using a 10x FCF multiple plus excess cash results in a total value of approximately £ 13 mm or 104p per share.  This would be an increase of 89% from the current share price of 55p.

    Based on the median EV/EBITDA of UK public software companies of 8.58x the total value would be approximately £ 15.8 mm or 126p per share.  The constituents are provided below and include companies in the UK that are below $100 mm in market cap and produce at least $1 mm in EBITDA.  This would be an increase of 129% from the current share price of 55p.

     

    Company Name Ticker Market Cap EBITDA EV/EBITDA
             
    K3 Business Technology Group plc (AIM:KBT) AIM:KBT                     67.9                     18.3 4.97887
    Ebiquity plc (AIM:EBQ) AIM:EBQ                     82.7                     13.8 7.56556
    Allocate Software plc. (AIM:ALL) AIM:ALL                     81.8                     8.01 8.94111
    OMG plc (AIM:OMG) AIM:OMG                     37.5                     5.27 6.00167
    Tracsis Plc (AIM:TRCS) AIM:TRCS                     63.1                     5.06 9.75665
    MAM Software Group, Inc. (OTCBB:MAMS) OTCBB:MAMS                     40.7                     5.02 7.76496
    Netcall plc (AIM:NET) AIM:NET                     56.6                     4.89 8.57908
    Etherstack plc (ASX:ESK) ASX:ESK                     55.0                       4.8 10.73259
    dotDigital Group Plc (AIM:DOTD) AIM:DOTD                     62.6                     4.74 11.56328
    Lombard Risk Management plc (AIM:LRM) AIM:LRM                     41.0                     4.47 9.59191
    Bond International Software plc (AIM:BDI) AIM:BDI                     35.5                     4.19 9.00852
    Tangent Communications PLC (AIM:TNG) AIM:TNG                     35.1                       3.6 9.19005
    Dillistone Group Plc (AIM:DSG) AIM:DSG                     20.9                     2.82 6.45739
    Assima PLC (ENXTPA:ALSIM) ENXTPA:ALSIM                     34.4                     2.79 9.45071
    Gresham Computing plc (LSE:GHT) LSE:GHT                     63.5                     2.68 21.52849
    Pilat Media Global plc (AIM:PGB) AIM:PGB                     30.6                     2.17 8.361
    Pennant International Group plc (AIM:PEN) AIM:PEN                     17.6                     2.11 6.59726
    Electronic Data Processing plc (LSE:EDP) LSE:EDP                     10.6                     1.72 1.71841
    Sopheon plc (AIM:SPE) AIM:SPE                     14.0                     1.68 8.29014
             
          Mean 8.74 x
          Median 8.58 x

     

    Ownership:

     

    Michael Heller   28.50%
    Herald Investment Trust   13.81%
    S Crookes   6.94%
    Henderson Fledgling Trust   4.99%

     

    If you are looking for shares, Herald, Henderson and Schroder own shares that represent substantially less than 1% of their NAV’s in the funds that own the shares and they might be a place to start for larger blocks.

     

     

    Risks:

     

     

     

     

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    - going private transaction by 28% shareholder
    - ongoing dividend payments and potential increases in such payments
    - tender offer for significant number of shares
    - market recognition of the strength of the business
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